Washington, DC -- (ReleaseWire) -- 12/28/2015 --It's the time of year when we look toward the year to come and try to find signals and signs that will help us navigate. Of course, the best way to start considering the future is by examining the current situation and the history that led us to it.
I've been saying for over a year that the so-called "recovery" being promoted by the government and mainstream media is propaganda to cover failed policy initiatives from both the White House and the Federal Reserve. Real Americans just aren't seeing the supposed benefits. A good example of this is this year's holiday retail numbers. Consumer spending is especially important to the United States, because it makes up 70 percent of our GDP, and holiday retail sales have been disappointing if not depressing. Looking at the numbers from credit card companies, Black Friday sales were down by nearly $1.2 billion, which is good neither for the retail sector nor the economy as a whole. Why? Well, aside from the obvious facts that we simply don't have the money or the job security to spend-spend-spend, there may be other reasons. AlixPartners, a consulting and research firm, took a look at consumer spending trends over the last year. They reached the conclusion that weak holiday retail numbers are partially a result of upper-middle class shoppers being scared by a fluctuating stock market and waiting until the last minute to shop. And with 300 point drop in the Dow last Friday, it seems like that volatility will remain a factor for even last-minute shopping. Reuters reported that sales growth for the holiday season is expected to be half what it was last year at this time. It seems like high income and low income families alike will be spending less on the holidays this year.
Take a look, too, at some of the internals of the stock market and the companies that make it up. (We're going to get a little technical here—hold onto your hats.) 2015 has produced an S&P 500 which remains at its highest point in history, but that incredible fact is backed up by nothing. There's a measure called the Q ratio, devised by a Yale economist named James Tobin. To find the Q ratio of a company, you divide the market value of the company by its replacement cost. Historically, the Q ratio of the market as a whole tends to average about 0.69. Currently, it stands at 1.04, an indication that the market is sorely overvalued. The Price/Earnings ratio for the S&P 500 stands at 19, when the average in a healthy market is around 15. And the market capitalization to GDP ratio of the S&P 500 is currently 1.82. Just before the crash in 2007, it was only 1.52, and you recall what happened then. Advisor Perspectives recently revised their estimate of margin debt in the New York Stock Exchange. In real terms, margin debt is now 20% higher than it was at the peak of the dot-com bubble.
This may seem a little like a firehose of bad news, but there's more, and we'll move quickly through some other facts. Revenues for individual corporations in the market are off: juggernaut IBM hasn't seen a revenue increase in five years, and even Caterpillar has not seen an increase in sales in 36 months, which is unprecedented in company history. Junk bonds are being liquidated at an increasing rate, and not at a premium. Corporations are leveraged at record rates. Public and private debt levels in the U.S. have climbed to almost 327 percent of GDP, and nearly 600% of Federal tax revenue. And of course, Janet Yellen and the FOMC raised interest rates last week, sucking up liquidity and increasing risk.
Worldwide, the Greek crisis continues to drag on Europe's economy, along with an accelerating immigration crisis. China's aggressive currency devaluation has rocked global currency markets. Geopolitical crises abound, from Syria's intractable civil war to conflict in Ukraine to Brazil's political woes. And at home, there's a resurgence in both the far-left and far-right wings of the political spectrum as voters steadily lose faith in the system.
The big boys are starting to pay attention, too: Daiwa, Japan's second largest brokerage, reports that they believe a global crash is more likely than an adjustment in 2016. And CitiGroup's chief economist, Willem Buiter, issued a report just as dire as Daiwa's, but written more carefully to keep their bullish clientele happy. If you dig, though, the bottom line is that a global recession will begin in 2016 and will begin in China. The report says, "The likelihood of a timely and effective policy solution from any central bank seems to be diminishing."
So here, given that background, and despite the fact that the fastest way to demonstrate your foolishness is to make these sorts of predictions about the stock market, are what I see for 2016. Think of most of them as landmines: dangers to plan for and steer around as you protect your hard-earned money.
Prediction 1: The Fed will continue tightening monetary policy (I believe this is not a one-and-done rate hike) until our fragile economy rolls over even more. The current Fed-controlled economy is now approximately 78 months old, making it one of the longest controlled economies in U.S. history. There have been six recessions since the rise of modern fiat currency in 1971, and those recessions have on average brought the S&P 500 down 36.5%. Given the fact of the Fed-controlled economy and the fact that the stock market continues to float at near all-time highs, when the reality of the recession sets in, the next crash could well be close to what we had in 2001 and 2008, when all major indices were almost cut in half.
Prediction 2: The junk bond asset class is going to continue to liquidate. This started in August and September of this year, but really became apparent in the last several weeks. The media hasn't given it much focus, but they should, since every major crash traditionally starts with a single asset class the first domino to fall.
Prediction 3: Corporate profits and revenues will continue to be weak, along with manufacturing and exports in general, pointing to the fact that we are already in a recession.
Prediction 4: The Fed's rate hike will prove to be very painful. It will continue to soak up liquidity for 2016, which could be as much as $800 billion in excess liquidity taken out of an already fragile and illiquid system.
Prediction 5: Worldwide, the Greek tragedy was not averted, just delayed. Greece's problems will become exponentially worse, and Europe's along with them.
Prediction 6: Gold and silver have a strong potential to rise 25 to 50%. We're in a unique economy at the moment, so even history doesn't provide certainty, but across the board, I believe more and more people will continue jumping on the precious metal train in 2016.
For over a quarter century, the experienced advisors of Bennett Group Financial Services, LLC have been successfully guiding clients through the complexities of wealth management. Bennett Group Financial Services provides individual investors, corporations and foundations with holistic investment strategies using unique portfolio solutions across a breadth of asset classes. Our unique vision and insight into market trends makes Bennett Group Financial Services a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to our highly regarded weekly talk radio program - Financial Mythbusting. Through attentive service and prudent, thoughtful advice, Bennett Group Financial Services, LLC strives to consistently provide its clients with the highest quality of guidance and personalized service available.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.