No matter what the news, our Teflon Bull market just keeps rolling along. But everywhere you look these days there appears to be persistent ranging behaviors that refuse to escape tight boundary limitations. From a technical perspective the plot thickens as symmetrical triangles proliferate the landscape, thereby suggesting that significant decision points are imminent, perhaps, weeks or months off. Yes, there are a few “known knowns” that are obvious, a U.S. Presidential Election and a December Fed meeting where interest rates may be hiked once again.
We would like to believe that two material “event risks” are enough to worry about, but pundits have been scratching their heads for months, even years in some cases, searching for the surprise “boogeyman” hidden in the shadows. Halloween is quickly approaching, but we doubt if the kind of event risks lurking over the horizon, which could wake the Bear from hibernation, would ever bother to mention the words, “Trick or treat!” It has also become an avid guessing game to find some obscure chart that guarantees that rain will fall on our parade and soon, as if anyone cares whose tea leaves are better.
The truth is that there are several concerns that litter the countryside, any one of which could spell doom with a capital “D”. No, we are not talking about a comet headed toward planet Earth or a swarm of locusts or a plague of monumental proportions. We are talking about a number of foreseeable cases that could be classified as fundamental events that could wreak havoc on our financial markets. We may be experiencing a brief period of calm, but central bank policy can only corral market forces for so long. One or two minor shocks to the nervous system could cause an unraveling to beat the band.
And so we wait, but in the meantime, here is our “Dirty Dozen” of potential buzz killers or “event risks” or “event waste”, if you prefer that term:
- U.S. Presidential Election: OK, let’s get the easy one out of the way first. Traditional wisdom, honed from previous years of experience, suggests that volatility will occur, no matter what your political leanings happen to be. If Donald Trump happens to win, however, analysts believe that markets will react negatively to the unknown unknowns to come. The Mexican peso and the Aussie will definitely gyrate in downward spirals. Plan accordingly;
- Fed Meeting in December: This event is obviously “Number 2” on the list of things to worry about, no surprise here. But, believe it or not, some people will forget all about it and wonder why the USD is strengthening once again. (It already has, if you have been following the USD Index religiously.) The futures market is already pricing in a 25 basis point rate hike. Hawkish Fed governors, in their various speaking engagements, have repeatedly claimed that an increase is a done deal, but nothing is ever certain with the Fed;
- Oil Prices Deteriorate Further: The jury is still out on which direction oil prices will head in the near term. Industry analysts claim that demand is finally catching up, as predicted, but the question is how quickly can the market adjust. Will oil spike to over $70 a barrel? Will inflation then jump off the charts? Will central bankers be compelled to ratchet up interest rates more quickly than planned? Or, will the Saudis and OPEC have difficulty pulling back on the supply throttle, thereby sending oil prices back down to the nether regions? Gradual is the name of the game at this point;
- Economic Data Takes a Turn for the Worse: If gradual is the new normal, then any little bump of bad weather or bad news could make for a round of pitiful economic data on a global basis. Recent PMI reports raised optimism that maybe the U.S. market is not the only one that is making headway, but warning signs that a recession is probable in 2017 are making even the most optimistic of the economic corps take a step backward. Comprehensive predictive models of recession, however, have yet to send a clarion call, but this is still 2016. Pessimists are pointing to the last half of the coming year;
- Corporate Earnings Go South for the Winter: Poor economic data, coupled with a stronger dollar, will undoubtedly send corporate earnings in the southerly direction. The results will most likely remain positive, but pundits have been barking of an “Earnings Recession” for a number of quarters. What will it take to shut these critics up? Falling earnings, however, will translate into lower valuations, just as the famous Shiller CAPE Index has been postulating for the past year. Central bank monetary policy has distorted market forces in such a way that credible technical patterns may not necessarily forecast what might happen this time around. Time will tell;
- Global QE Programs are Curtailed: The collective balance sheet for central banks across the planet is as bloated from QE programs as any sane banker might allow, but growth and inflation are meager at best. An expanded money supply, coupled with near-zero to negative interest rates, has forced investors into assets that bear more risk that can be prudently justified. Without more cheap money, our equity and bond markets may not be able to sustain any kind of growth dynamic. Asset bubbles already exist, and it is only an amount of time before that air begins to leak out. It is time to prepare for the eventuality that a liquidity crunch is coming, especially for high-risk assets;
- China Rushes to a Hard Landing: The last round of economic data from the Middle Kingdom did not inspire confidence. Chinese officials have been trying to achieve a soft economic landing, now defined to be in the 6 to 7% range, but this figure is an aggregate average for the entire country. There are presently as many regions in the negative as are in the positive growth side of the equation, a troubling situation that is just as confusing going forward. How can China maintain this level of growth when North America and Europe combined can barely eke out 1% GDP growth on an annual basis? The PBOC has been selling foreign exchange reserves to bolster the national currency, but at some point the selling must stop or trade arrangements may suddenly become entangled over credit disputes and delivery schedules. China remains an experiment, but officials have been right more than wrong. If there are missteps, then the decline of emerging market economies, which depend on raw commodity exports to China for life support, will hit the skids, with debt defaults following not too far afterward;
- Geopolitical Tensions Rise to New Level: Will a new round of terrorist attacks grab the headlines and freeze commerce in its tracks? The impact of isolated events does not seem to worry our markets to a large degree. As one analyst puts it, “The lesson of this bull market is that traders and investors could care less about ISIS, Al Qaeda, Afghanistan, Iraq, Syria, Russia, the Ukraine, or the Chinese expansion in the South China Sea.” But what if the attacks reach a more fevered pitch? Will investors remain aloof or choose to move capital to safe havens, as if preparing for the worst?
- More U.S. Military Troops on the Ground: Political rhetoric is already running high that something must be done about Syria and ISIS. Iraqi officials just announced, with U.S. and allied support, a new military initiative to take back Mosul, the second largest city in Iraq, from ISIS. If you begin to hear shouts from conservatives that more “feet on the ground” is the only way to defeat this enemy, then the threat of a new war may surely stop the current Bull market in its tracks. Wars come hand in hand with ballooning budget deficits. Capital flight follows, leaving the USD to twist slowly in the wind;
- More Refugees and Associated Issues: After decades of shrinking incomes and job opportunities, middle class workers in developed countries have had enough. Competitive pressures may have reshaped global wealth dynamics, but these disenfranchised workers have chosen immigration as its paramount enemy. The screams were heard loud and clear during the recent Brexit referendum campaign. They have continued in the U.S. Presidential race, as well as across Europe. As geopolitical tensions escalate in the Middle East, the Syrian refugee problem is fueling national hysteria on every front. Is there a looming breaking point where the current situation could get out of control? Will saner minds prevail? Stay tuned;
- Inflation and Interest Rates Suddenly Spike: Ever since QE programs went into play after 2008, economists the world over have warned that inflation and interest rates would skyrocket, but it never happened. Cheap money has only increased the supply side of the equation. Demand is what has been lacking. QE programs only pushed on a limp string, which did not spur global GDP growth. When demand catches up, which it will, then we could see some fireworks;
- Cyber Criminals Attack Banking Networks on a Large Scale: Our financial institutions are currently under constant attack by modern cyber warfare, at levels never before seen. Regulators and security professionals are warning that many of these attacks may only be tests in preparation for the really big hit. The Russian foreign exchange network was recently hacked for only twenty seconds, but that period was enough to disrupt values for the ruble. If and when a coordinated and widespread assault occurs, batten down the hatches. It could be a very bumpy ride.
Conclusion
If you were paying attention, you might have noticed that each of the crises listed above could actually occur in the order that they appear, producing a growing crescendo that could make 2017 a year to remember and forget, all in one gulp of a very stiff drink. The dominoes are lined up. If you are already losing sleep over any of these hypothetical prognostications, then there are medications that will help with your ongoing insomnia.
If Ambien is not a workable solution, then, while you are lying there awake, you might as well try meditating on the fact that each of the above “Dirty Dozen” of negative events does have a positive alternative. In any event, it is difficult to envision 2017 as a year without uncertainty, so do expect an undercurrent of volatility to be present in our future financial markets. Volatility equates to opportunity, so get ready, get set, trade!
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.