investorpolitico

This is not my final forecast, but the start of ideas for 2017.

The analysis is quite positive, but, unfortunately, the more I analyse it the more I see that a potential return of a Bear Market is highly in the card.

There is too much euphoria in the market – a “nothing can go wrong  sentiment” as the Central Banks will save the day.

There are also quite a few positive things going around economically (the economy has improved under Obama) but I think this year the “political” side for so long ignored will take its toll.

That is why I called 2017, a dance with fire

scalaprivate_first-look-at-2017

This is a beautiful article to go a bit deeper to try to understand how Brexit, Trump and the Italian referendum it is not just populism and it is practically unstoppable.

A real outrage as the elite skewed the system towards the wealthy and the elites that, with globalization, organized a massive wealth transfer from the developed nations middle class to, on average, the nascent Asian middle class and pocketed the difference. 

When you transfer a company from Australia, Italy.. killing jobs and increase the profits for the business owner and forget that the people that had the jobs actually can vote…that is what happens.

It is quite simple indeed. People do not like change, but push them enough and they will. It took over 20  years to happen,  but now it is irreversible.

Outrage Over the Economy Doesn’t Explain Surging Global Populism http://bloom.bg/2iyJncy

President Trump tweeted he will update tge nuclear weapons in the US and the media goes beserk.

President Obama in 2015 sent new smart tactical nuclear bombs in 2015 to Germany and not a stir.

All of the main countries have started a new arm race since 2015, but only now you know it.

Specially China has  updated its tactical nuclear arsenal (as there is a treaty between US and Russia banning completely new tactical nuclear system).

Logically US and Russia are craving to leave the treaty as they do not want to fall behind China. And that is what will happen.

Iron ore surged in 2016.

Iron Ore depends on China – so that is where the attention should concentrate.

In China a series of policy mistakes (the 276 days rule, an abacus miscalculation and environmental issues) provoked a shortage of coking coal and thermal coal).

Also some speculation that was in the stock market now shifted to commodities futures.

So, similar to oil, this imbalances will be addressed in a matter of months and Iron Ore prices will reduce in time.

Also the potential of the US Trump infrastructure projects will not be enough to offset all of China demand.

So, not a collapse, but probably a return to Iron Ore USD55.

That the even the Australian Government Budget did not want to take into account of the spike in iron ore – it should give you an hint.

Oil is on the rise.

The OPEC agreements created a boost for oil.

Oil at this point as a clear trajectory targeting USD60 and could even overshoot to the mid/high USD65/70.

But the world has changed.

OPEC agreements, historically, have never been respected.

Russia (non OPEC) cannot stop production as the wells would freeze.

US, Indonesia are not part of OPEC. (Indonesia just left)

US shale gas producers are ramping up production and President Trump is “pro oil”

The rise of the electrical car.

So, aside an initial window of opportunity, oil will retrace to its USD40 baseline

Gold has been trashed and bashed after Trump. It still has a lower trend (to USD$1,020), but some important plays are coming its way.

Inflation is coming (Trump-trade, end of quantitative easing, oil prices and Chinese factory gate prices, as discussed in previous posts) – by the way it is already here but most will not notice as it is shrinkflation (the packaging of a lot of things has got smaller for the same price).

An increase of USD 5 trillion of US Debt under President Trump policies has a clear USD devaluation effect.

The election year in Europe (Netherlands, France Germany, maybe Italy and some issues within Greece) highlights political risks.

On 6 December the Islamic Law has changed and introduced Gold as a Shariah complaint asset. As Muslims represents 20% of the world population and now they can buy gold – it is a definitive positive. Arab Banks can now buy gold as reserve for the Basel III banking rules and on average and “Islamic asset classes” (all other classes where Muslims are allowed to invest in) have all under performed gold.

President Trump (first US President in a long while to do that) clearly likes Gold. Famously he accepted gold as payment from his skyscrapers tenants, he invested millions in gold and he said “bringing back the gold standard will be wonderful, we’d have a standard on which to base upon”. If he will succeed gold with skyrocket, if he fails means that the US Dollar is so much devalued that Gold will move higher anyway.

the Federal Reserve move had a really big effect in EM markets currencies.

Now all eyes are in the Yuan to see If the slide can be contained under 7, or it becomes a rout (last year I was writing that   the natural tendency of the Yuan is 7.5 if you look at various data). 

On 19 December there will be the Mid year Budget update.

Deloitte in November estimated a AUD$24 billion worse than the May forecast .

Also the Government affirmed that they do not want to put in the forecast the better commodities pricing as it could turn around very fast.

The biggest risk is actually the agency Standard and Poor that could cut the AAA Australian rating  (Moodys is not so aggressive).

A downgrade could put pressure (up) in Government bond yields and specially regional government (NSW and Victoria), but subdued as both NSW and VIC are in surplus.

But the big pressure will be in bank funding (so on your loan) which has been already increasing while the 30+ days arrears in loan repayments is already at a 3 years high.

This would mean that Australian bank will need to rise more capital, so having a subdued share market growth also in 2017.

But the most important is this: a loss of AAA could be the real end of the real estate property boom.

The Federal Reserve as widely anticipated increased of 25bps, but the major difference that the “dot plot” (forecast) for next year now predicts 3 rate increase and not two.

The speech was somewhat accommodating.

Immediately the market sold off (mildly I have to say).

The three rates increase to me seem excessive with so many question marks (strong dollar, China devaluation, European elections, Trump). Last year, when the Fed increased, they were forecasting 4 rate hikes and they did one.

They always  verge in the positive so they can always backtrack.

Now the Fed will look at the 10 years US Treasury bond that suddenly increased to 2.57 (over 2.75/3 creates problems as there is the reset in loans, mortgage rates etc) and potential dislocation in the “money flow” towards the USD (Eg now the yuan is over 6.9 – very close to the 7)

The environment is still quite bullish, but there is a potential for an unforeseen event.

I am positive, but uncomfortably so.

Aleppo is fallen to the Syrian Government. This does not signal the end of the conflict, but ends the Turkey/Saudi/Qatar/US dream to get rid of Assad

Aleppo was also a great channel for weapons from Turkey…so that is even more crippling for the rebels.

The Syrian war will end in 2017, unless Turkey gets fully involved.

Mosul, center of IS in Iraq, the battle is still raging as the strategy to take Mosul was a bit botched (instead of encircling and leave an escape door open they decided to sent in the special forces in first from only one direction).

By the way you always here by the civilian deaths in Aleppo.

in Mosul there is no word of civilian deaths…but UN sources says that already 2,000 Iraqi soldiers have died in November and IS launched at least 600 suicide attacks (15 a day!!).

Mosul battle will rage for months probably

But the civilians deaths are only in Aleppo…or is it the Western media?

Guess!