2016 Will Be Much Worse Than 2015

 4. Fed hikes interest rate

The Fed hikes interest rates for the first time since the financial crisis of 2008. For the past 7 years we have had an interest rate band between 0-0.25%, which essentially is “money for nothing”. With its decision, the Fed became the first large (and the leading) central bank to effectively hike interest rates. Meanwhile, on the other side of the Atlantic, the ECB cut its deposit rate (slightly) deeper into negative territory and prolonged its QE program that is now expected to continue until March 2017. Since last summer, the media continuously speculated about a rate hike and its timing. So, will interest rates start to normalize after the long-awaited change in monetary policy? We don’t think so! We believe that the main reason the Fed decided to hike rates was to regain some of its lost credibility. For the past seven years the monetary floodgates have been open with no clear positive effect on the real economy. A continuation of zero interest rate policy (ZIRP) would have been an admittance of failure. With this slight rate hike of 25bps, the Fed is trying to show the world that its policy during the financial crisis worked.

We all know that the economy in the US is not as healthy as the Fed would like us to believe. When we throw in the potential explosive impact the failing shale industry could have on the economy and the strong dollar, that is likely to increase due to this interest rate move, we doubt that this move by the Fed is the turning point and that the Fed will continue hiking rates as it has done previously in such cycles. The Fed raised interest rates because it had to, but don’t expect the monetary shenanigans to be over. There is a lot more to come!

5. Defaults surge as global debt explodes

2015 has seen the greatest number of corporate defaults since the financial crisis. Many of the companies that are defaulting are from the energy and materials sector. Why? It is the logical outcome of the excessive borrowing by corporations who were misled by close-to-zero interest rates. And, of course, we cannot forget the boom in the shale industry. With a barrel of oil costing over USD100, shale oil was a very interesting investment. Now with oil hitting rock bottom, some oil producers are operating at a loss and only continue operations to be able to make their interest payments. Standard & Poor’s rating of junk or speculative corporate bonds has gone up to 50% from a previous 40%. Unfortunately, the world did not learn its lesson after the financial crisis and instead of deleveraging, it has accumulated more and more debt, as seen in the chart below. Of course, it’s not only the corporations; governments have not learned their lesson either.

The issue of debt will continue to follow us for some time to come; the house of cards will eventually collapse, but we think that politicians and central bankers have the will to “do whatever it takes” to prolong its eventual demise. What we will likely see in 2016, however, is a massive increase in defaults. Yields for high-yield issuers are already at alarming levels. What exactly will be responsible for the next crisis is hard to foresee. It might come from the possible collapse of the shale industry, the strengthening dollar that will make it very hard for emerging market countries to repay their debts, or a completely unexpected sector (who knew what subprime was back in 2006?).

6. Oil price collapse

Crude oil prices fell to their lowest levels in nearly 11 years, as crude oil nearly reached USD35 per barrel. The price of oil has been on a continuous downward trend and has declined nearly 70% since the summer of 2014. From our perspective, the main factor that led to this decline is the US shale oil “revolution”. It was truly a revolution when one considers that the boom in shale oil production allowed the US to surpass Saudi Arabia, the world’s largest oil producer. Meanwhile, OPEC hasn’t changed its stance as it insists on maintaining its strategy to increase market share, even if this comes at the expense of oil prices plunging.

I am not an expert on oil and therefore it’s not my place to provide predictions regarding where the oil price is heading, but I would rather want to discuss the impact of the oil price movement. First, a collapse of the oil price, the commodity that is widely used in the industry, has historically always been a herald of recessionary tendencies. In my view, the oil price clearly signals that the economy is not as healthy as is portrayed by the mainstream media. Second, the continued failure of companies in the shale industry has the potential to bring on a crisis that would dwarf the previous financial crisis. Last, but definitely not least, is the question of how oil exporters, such as Saudi Arabia, will finance their budgets when oil revenues massively decrease and they are no longer able to “buy” their population’s silence with gifts.

So how can we position ourselves in such an environment?

The outlook for the future looks bleak: continuously growing debt, looming defaults on a major scale and geopolitical tensions. So, how can we best position ourselves?

In times like these, where it is almost impossible to predict even the near future, we seek security. Holding precious metals like gold and silver is a claim to wealth and value. It gives their owner independence and protection from the whims of governments. Given recent events in Greece, we learn that gold and silver are only a safe investment as long as you have full control over it and can access it at any time. Holding gold outside the banking system is therefore, in my view, essential.

Those who know me know that I am Swiss and rather biased towards my home country. To me, Switzerland strikes the perfect balance between international neutrality with a history of a safe and stable political landscape, and an environment that encourages investment and guarantees private ownership rights.

Last but not least, I wish you and your loved ones a wonderful, enriching and peaceful Christmas and New Year holidays.

Reprinted with permission from Global Gold.

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