2015 – How is the World Doing?

It might be helpful to take a reading on various countries at the beginning of 2015 to help investors decide where to place their bets in the coming year. Some trends are affecting all major world economies while others are country specific.

Mega Trends

World economies are desperately trying to avoid deflation. Most governments have decided to print more money through various schemes. Most of them see a 2% inflation goal as the way to stimulate growth. The fundamental problem has been that governments saw only one piece of the equation. The underlying malaise is that prices have risen way more than wages. The world is wage poor. Consumers can only buy the basics. As a result growth is at a standstill or falling backward into recession.

During the hey days governments leveraged themselves beyond reason by issuing bonds that now they are not able to repay. Bankers have demanded FACE value for their investments forcing countries, especially in Europe to gut their workforces throwing millions out of work.

The two forces of low wages and high unemployment have brought the world to a standstill. Let’s look at individual countries to see how it affects them.

Europe

Greece. The IMF gave Greece loans to repay their debts with the condition that they balance their budgets. Greece was forced to gut their public employees, throwing millions out of work. Now Greece is saying enough is enough. The Prime Minister was unable to sponsor his candidate, forcing Greece to hold national elections. The outcome will determine if Greece ditches the Euro and goes back to their own currency. Greek bond rates have risen to 12.2%.

France is the second largest economy in Europe. Jobless claims set a record with 3.48 million unemployed.

Russia. Russia invaded the Crimea and is facing economic sanctions and falling oil prices. The sanctions have deterred foreign investment. This created a stampede for investors to pull their money out of Russia. This year $100 billion left Russia. Russians have been huge buyers of foreign currencies and selling rubles. There has been heavy withdrawals of bank deposits. The ruble that was 30-35 to the US dollar has risen at one point to 80 to the dollar. The Russian stock market has plunged 40%. Falling oil prices added more fuel. The combination of these factors is gutting the government’s reserves. International reserves have shrunk by 20% this year. At this rate Russia’s reserves can only last three years. The government was forced to bail out a large bank, Trust Bank, to the tune of $2.4 million in loans. Russia was forced to sell some of its gold. It’s gold reserves are down by 15.7 billion in 2014. Interest rates were raised to 17%. Mortgage rates have risen to 12%. Putin even placed a cap on the price of Vodka.

Japan

Prime Minister Shinzo Abe’s government raised the sales tax in April 2104. Since then consumer spending has fallen sharply during two consecutive quarters, throwing the country into recession. In November Abe introduced a new spending package of $29 billion to try a pump up the economy.

China

China is a mixed bag. Some commodity sectors have lost revenue, while technology and automobile manufacturing gained. Coal and oil an gas fell 44% and 13.2% respectively. Telecommunication rose 20%. Auto manufacturing was up 16.7%.
China is providing $800 billion for lenders to support growth.
One land mine to watch for is the $1 trillion in unhedged foreign debt. Speculators have bought cheap dollars then used them as collateral to get more credit. With the US dollar rising against major world currencies and interest rates scheduled to rise this year, this situation could prove to be disastrous when these debts need to be repaid.

United States

The US economy is sailing into 2015 with a 5% growth rate in Q3. The price of West Texas Intermediate crude oil has fallen to $54.73 per barrel, giving consumers $14 billion in extra spending dollars. Gas at the pump is averaging $2.25 per gallon. The US dollar is on a strong rally with it trading at 90.31 for the March futures contract. The US dollar is traded against a basket of currencies. Consumer confidence is up and consumer spending rose .6% in November.

The elephant on the table for 2015 is wage growth. For the world economy to expand, wages must rise. Otherwise 2015 will see continued pullback in spending. In the United States consumer spending accounts for 70% of our economy.

How Producers and Suppliers are Coping with the Oil Crash

We all knew that there was an oil glut several months ago. US oil production is the highest in three decades. US crude stockpiles climbed 7.27 million barrels in the week ending December 19. This brought the gain to 387.2 million barrels. But the wild card was Saudi Arabia and OPEC. In previous periods of oversupply, OPEC has cut production. This time they dropped a bombshell and said NO to cutting production, that they would pump 30 million barrels per day. OPEC supplies 40% of the world’s oil. This caught the energy market by surprise. Where Brent crude was trading at $111.05 per barrel in June, it plunged more than 50% to $59.45 per barrel in the February futures contract. WTI crude closed at $54.73. The impact on producers and suppliers is creating a crisis of monumental proportions. Producers, oil- rig operators and manufacturers, refineries, and natural gas producers are all getting hit. The US dollar has been trending higher with a close on Friday December 26, of 90.31 for the March futures contract. Commodities usually take a beating with a stronger dollar. Let’s examine the impact of the oil crash on key oil exporting and importing countries.Continue Reading

Get Ready for Toyota’s New Fuel Cell “Mirai.”

The auto industry is in the midst of a revolution not seen since the invention of the internal combustion engine. Toyota has been the undisputed leader in developing new automotive technologies. Fifteen years ago, Toyota introduced the Prius, the first of its hybrid gas-electric vehicles. Now, every manufacturer has multiple hybrids coming online.Continue Reading

Big Banks Win – Derivatives are Back

Once upon a time in the long ago we had banks that lent money to individuals and companies to expand and grow the economy. During the Great Depression lawmakers saw the need to rein in and regulate banks’ activities. The Glass Steagall Act of 1933 ruled that banks could not become involved in selling or trading securities. Separate Investment banks were organized that could underwrite and sell securities but they could not use depositor money.Continue Reading

Oil Price War – Saudis up Ante Cutting Prices Another $2.00 Per Gallon

The State owned company Saudi Aramco announced that it is cutting prices to a record low $2.00 per barrel discount to Asia, Europe and all grades of crude to US refineries. To reinforce Saudi Arabia’s vow to crush US oil shale producers, Saudi prince, Turki Al-Faisal said: “Saudi Arabia won’t give up oil market share at this time for anybody.”Continue Reading

URGENT-Check Your Energy Portfolio Now!

The OPEC decision not to cut oil production is a watershed event that will change the energy industry for years to come. OPEC Secretary General, Abdalla El Badri stated: “We will produce 30 million barrels a day for the next 6 months and we will watch to see how the market behaves.” Energy Minister, Suhail Al Mazrovei said: “Newcomers to the market who have the highest costs and created the glut should be the ones to determine prices.”Continue Reading

Is the Bond Market Ready to Crash?

The media hype is for a sharp sell off in the bond market. Some “gloom and doom” pundits are even predicting a crash that will plummet the world into a worldwide depression. The US Federal Reserve has ended its $4.5 trillion bond purchase program. Fed Chairperson, Janet Yellen, has maintained a “stead as she goes” policy without a definitive time frame for raising rates. This has left analysts in a state of suspended animation.Continue Reading

Gold – The Long and Short of it.

It’s an understatement to say that gold is a mysterious commodity. There are wars in the Mid East and we have Russia and the United States verbally battling each other over Russia’s invasion of the Ukraine. The natural resource boom of 2011-12 is taking a breather, affecting the economies of Australia, Canada, South America and Africa. International conflicts usually drive investors to seek haven in precious metals. This time, however, they are running away from them with gold making new lows in the month of November. It is extremely difficult to make sense of these cross currents and come up with a rational sense of where gold is headed. A look at the fundamental and technical factors affecting gold trading will give us some insight about the market.Continue Reading

The Detroit Bankruptcy Case – Municipal Bondholders Take Note

For the past 16 months the city of Detroit has gone through a gut-wrenching series of negotiations to settle the largest bankruptcy in US history. Detroit has a population of 680,000 and a land mass larger than Manhattan, Boston and San Francisco combined.Continue Reading

Debt Wipeout: The Great $4.45 Trillion Experiment

Imagine this scenario. Bankers and Mortgage Brokers have gone berserk writing mortgages for people who could not afford to pay them off. Some customers didn’t even make the first payment. Some signatures were forged to get approval. It was an era of pure “greed.” Now, imagine this fictitious conservation between two bankers: “Tom, you know we have a lot of junk here with some of these mortgages.” “Yes, says Bill. Why don’t we just package them together and resell them to hedge funds and pension funds? We’ll use a fancy name like Collateralized Debt Obligations. That way no one will know exactly what we are selling them.” This scheme goes along for a while until a few “sane” investors start thinking: “I don’t think we should buy this stuff.” There are no bids and the market freezes up. Panic sets in and the markets are in freefall. The bankers run to the politicians and beg, hat in hand, for a bailout from Congress. The politicians dream up a fancy name like TARP and give the bankers $787 billion of taxpayer money. However, this is just a drop in the bucket. A whopping $7 trillion of household debt has been wiped out.
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