Before I tell you what my team and I think is most likely to happen in 2016 and beyond, I want to show you how soothsaying economists typically stumble and mumble their way through the next-year-forecast exercise.
Most opt for the easy way out. They look at last year’s trends.
They blindly assume those trends will continue.
And presto — they deliver a seemingly intelligent forecast for any economy, any market, any stock.
Some not-so-stellar examples from the past …
In early 1929, prognosticators using this approach told investors that the following year would be the best ever in the century for stock investors. It was the worst.
In late 1930, they warned that blue-chip gold stocks would languish or even crash in the 1930s. They tripled and quadrupled in value.
Or consider these widely believed “expert forecasts” of the last seven decades …
1945: The post-World War II era will bring another Great Depression. (Instead, we got a great postwar boom.)
1970: No president will dare devalue the dollar or take America off the gold standard. (President Richard Nixon did both on Aug. 15, 1971.)
1972: Gold prices will never exceed $200 per ounce. (It went about four times higher than that by 1980 … and then nearly 10 times higher in more recent years.)
1976: U.S. government bonds will always be the safest investments in the world. (Bond investors lost up to half their principal value in bonds before 1980, again in 1981 and still a third time in 1994.)
1999: U.S. technology stocks are the single best place for your money. (Tech stock investors lost an average of 75% of their money between 2000 and 2003 and up to 99% of their money in some of Wall Street’s darlings.)
2006: U.S. residential real estate will appreciate by an average of at least 5% per year between 2007 and 2009. (Average home prices fell 9% in 2007, 18.6% in 2008 and 3% in 2009.)
2007: America’s financial giants — including Fannie Mae, Bank of America, Merrill Lynch, Washington Mutual, AIG, Bear Sterns and Lehman Brothers — are too big to fail. (All became effectively insolvent in the 2008-2009 Debt Crisis. And whether the U.S. government bailed them out or not, investors saw their shares plunge by as much as 99%.)
2013: Oil prices will stay above $100 per barrel and then go even higher by 2020. (They plunged in half starting in late 2014 and are now close to one-third their peak prices of 2014).
Not exactly a track record to be proud of, is it?
So why do nearly all economists continue to use this disaster-prone method? Because, not surprisingly, it’s right as much as 50% of the time, which, in the fuzzy world of crystal-ball gazing, is actually considered “a big win.”
Another reason: It doesn’t require much deep thinking.
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An even “safer” approach is simply to predict no change. Economists say stocks will close the year at pretty much the same level they’re at today. Ditto for bonds, commodities, and real estate. Then they can always claim they never get any forecast completely wrong.
On the other extreme are the daredevils. Every year, they make the same shocking predictions about the future in the hope that (a) someday they’ll be right and (b) most investors will be so impressed, they’ll forget or forgive the prior years of premature calls.
All of these pitfalls are human. We are human, too. Ergo, we’re not immune to the same ones. What sets us apart is these three things:
First, a keen awareness of where we are right now in the context of major historic cycles. (This helps explain the forecasting success of our colleague Larry Edelson.)
Second is our exhaustive, daily analysis of millions of pieces of company data with intelligent computer models. This is why our Weiss Ratings were named by Barron’s as the “leader in identifying the most vulnerable companies” and how we warned investors, ahead of time, of every one of the giant 2008-09 financial failures I cited earlier.
Third, and perhaps most important: True independence. No payment whatsoever for our ratings by the companies we rate. No conflicts of interest. Complete freedom to think independently and speak out independently.
World Conflicts That Could Get a Lot Worse
Each year, the Center of Foreign Relations conducts a survey of government officials, academics, and foreign policy experts to rank each global threat by their likelihood of occurring and their potential impact on U.S. interests.
Their map, last updated on Dec. 29, tells you the story in a nutshell:
The red areas, representing conflicts that are worsening, are concentrated in Syria and Iraq, irradiating out over a wide swath to the West and the East — into North and Central Africa, South Asia and Southeast Asia.
The orange areas, representing conflicts that aren’t getting any worse or any better, include Ukraine, North Korea and the South China Sea.
Green areas (major conflicts that are improving) are virtually non-existent.
For America, the threats viewed as the highest priority include:
- Intensification of the civil war in Iraq
- Large-scale attacks on the U.S. homeland or ally
- Cyber attacks on U.S. critical infrastructure
- The escalation of the Syrian civil war, and
- Rising violence in Afghanistan.
This doesn’t necessarily mean there aren’t bigger wars and revolutions elsewhere. What it means is that the consensus of U.S. analysts sees these among the most threatening to Americans.
My view: Precisely as the map vividly illustrates, the cancer of civil war in Syria and Iraq has metastasized and spread globally. This will continue to drive massive amounts of flight capital to the United States, the one country perceived to be the safest haven, even if the United States is, itself, subject to some attacks.
Larry Edelson has dubbed it the “Global Money Tsunami.” And as I’ll detail in a moment, we continue to view it as a dominant force.
Rich Dad Poor Dad author Robert Kiyosaki is a good, consistent example of this group.
He says his forecast of a stock market crash in 2016 is based on a guess, a mathematical formula and the sheer stupidity of our government. But he also admits it could be postponed until 2020 and doesn’t deny he first made the prediction in 2002.
“If you’re sitting there hoping the market is going to keep going up,” he warns, “you better take some lap around the rosary beads and pray because you might get hammered. That is really my concern. I hope I am wrong. The job of a prophet is to be wrong so people can take action and not get hurt by this.”
My view: He’s right about the risk. But risk is one thing; a reliable forecast is another thing entirely.
Forbes contributor and economist Bill Conerly seems to be in the current-trend-is-the-future-trend school, at least with regard to his vision for 2016. He forecasts a new year that will look pretty much the same as 2015, but with a “different texture.”
He says housing will be a bit stronger (as it was in 2015). He says business spending will grow somewhat (as it did in 2015). And he says foreign trade will be the one obvious drag (also like 2015).
GDP and employment? Same growth pace as the past few years.
Inflation? Same dull, muted trend, except maybe for some stronger wages here and there.
Interest rates: Up, but gradually.
Stocks: Another year without recession means a benign environment for equities.
My view: Bah! There are simply too many potential Black Swan events that could make mincemeat of this outlook, and our colleague Mike Larson names quite a few:
- The bubble in bonds — especially corporate bonds — that’s already bursting, with potentially widespread impacts on debt and equity financing in 2016.
- A spreading global economic slowdown, already morphing into recession; and in some regions, into depression. Epicenters in Brazil, Russia, China and other emerging markets. Risk of decline in Western Europe, Japan and ultimately the United States.
- Fed rate hikes that are so late in the last cycle, they’re actually too early in the next cycle. In other words, tightening right into the global slowdown.
- All told, reminiscent of 2008, when supposedly “isolated, peripheral and contained” collapses eventually infected mainstream domestic sectors and international megabanks.
Will these roosters all come home to roost in 2016? Will they be strong enough to offset or reverse the massive flight of fear money to the United States?
All possible. And all worthy of our — and your — continued vigilance.
But Larry says the convergence of powerful historical cycles integrates — or trumps — all of the above. He sees …
A continued ramp-up of a major global war cycle through 2020.
A government debt-driven collapse of the European Union and the euro …
Followed later by a similar fate for Japan …
And finally, the ultimate nation to fall victim to collapsing debt — the United States.
Until then, however, he insists that the Global Money Tsunami will remain the dominant force that makes or breaks global stock markets.
And until then, the fear money will continue to gush from political and economic turmoil — from the Middle East, from emerging markets, from Europe and Asia — to the United States.
Follow that flow, and you should fare well.
Good luck and God bless!
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