Around the World in 5 Minutes

"A well used minimum suffices for everything." - Jules Verne, Around the World in Eighty Days

This week's blog takes a very quick look at the big picture and what headwinds the market faces.  It will have to be brief as there is so much news floating around that to make sense of it can be overwhelming so below is my summary of the main economic events that should impact the markets.

The Federal Reserve left interest rates unchanged and hinted that another hike may be off the table.  This is significant due to the fact that (as I have mentioned repeatedly throughout my blog posts) they have backed themselves into a corner and the rest of the world's weakness is now forcing their hand.  A continued downward spiral in the stock market will negate another interest rate hike particularly if the economy starts to feel the headwinds of slow global growth.

Fourth quarter GDP growth was far lower than anticipated coming in at 0.7%.  This is anemic to say the least.  Another quarter like that and you will start to see the unemployment numbers start to ratchet back up as companies try to protect their bottom lines by cutting costs.  Once again no interest rate hikes will be made if weakness continues to spread.  Furthermore, continued weakness may even lead to the reversal of the 1/4 point that they so proudly unveiled a few months ago.  Now that would be egg in the face!

Japan joined the growing throng of countries moving into negative interest rate territory.  So another country where you now have to pay to lend money to a government that is essentially broke!  NICE!  In a desperate attempt to shore up an economy teetering on the brink of recession they moved yesterday to lower interest rates below zero.  At first the Nikkei rallied but then reversed course as the Japanese equity investors finally worked out that low interest rates do not necessarily mean growth and in fact this lowering of interest rates is more a sign of weakness and a coming recession than of impending strength.

The result of the Japanese move is a burgeoning dollar which will cause further problems for the struggling emerging economies.  At around a 2.00% yield the United States 10-year treasury is looking like something of an outlier in the world of bond investing and, as interest rates trend lower around the globe, I would anticipate more and more money flowing into the United States pushing the dollar far higher.  The upshot of this is that the Federal Reserve, unlike China as you will see below, has the ability to use this influx of capital to stimulate the economy but the issue is that their preferred methods are not and will not work.

China is grappling with an outflow of money into dollars and other currencies.  This outflow is causing them problems as their foreign reserves are transferred away from government control and into the hands of investors and business owners who are moving money off shore at an alarming pace.  Welcome to the world of global currency markets.  In joining the global basket of currencies one of the mainstays of that club is that members have their currency freely available and this loss of control is moving economic control away from China's central government.  It will be interesting to see how this plays out but I would guess that currency controls will soon be put back into place and this could destroy an already weakened economy as international investors shun a country whose fiscal policies are inward looking.

Taking the above main issues and placing them in context of a central banker what are you able to really do?  Interest rates are essentially zero to negative, money printing has not worked, inflation will not be your savior as crude oil remains at depressed levels and as the world's economy sinks countries are increasingly turning inward rather than opening up their borders to trade.  Well there are a couple of prongs left.  One is to lower taxes and the other is to spend money directly on infrastructure and other projects.  These may have the necessary impact of stimulus but in an election year neither of these are on the table so I expect that the market will continue to take it on the chin in 2016.