During the days leading up to Christmas we observed “Best Of” Week at Wall Street Daily.
In these, the final days of 2015, our analysts are taking a look at the year ahead.
Today’s Weekend Edition is actually a hybrid, a “Best Of” Saturday Spotlight that also highlights a potentially highly problematic development in a key segment of the biggest part of the global financial system.
It was the No. 1 most engaging Saturday Spotlight presentation among the 13 we’ve produced since we started the weekly series on September 26, 2015.
Alan’s introductory discussion of the “the plumbing of debt markets” will help you understand financial crises – and even, perhaps, see them developing before they crush your portfolio.
The U.S. equities market – made up of publicly traded stock issued by big companies such as Apple Inc. (AAPL) and Amazon.com Inc. (AMZN), as well as small ones like Zagg Inc. (ZAGG) and Zogenix Inc. (ZGNX) – is valued at approximately $26 trillion.
The total value of the U.S. bond market – comprising publicly traded debt securities issued by the federal government, mortgage-backed securities (MBS), corporate debt, municipal bonds as well as money market instruments such as Treasury bills and commercial paper – is approaching $40 trillion.
The bond market is more than one and a half times bigger than the stock market.
Some things that happen there simply can’t stay there. The ripple effect, for example, of a rising trailing 12-month high-yield corporate bond default rate, can be earthquake-like.
You Better Watch Your Speed
As Alan notes in his Wall Street Daily piece looking forward to 2016 and the major issues that will impact financial markets, the “trailing 12-month high-yield corporate bond default rate was 2.8% in November.”
That key indicator peaked above 10% in 1991, 2001, and 2009. So we’re far from crisis territory.
But a credit “crunch” – “somewhere between a pinch and a crisis” – is inevitable.
That’s the result of “trouble behind” – a “feedback loop” within which easy credit is necessary for an economy already maxed out on debt to grow.
The not-so-bad news is that the impending economic downturn we’re going to endure will be far less damaging than the Great Recession.
The most important mitigating factor, as Alan notes, is the fact that the U.S. banking system is much healthier than it was in 2008.
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But consumers won’t be able to spend as much amid tighter credit conditions. And consumer spending – which peaked in January 2015 – is by far the biggest driver of the U.S. economy.
A slowdown here will impact production, which will impact employment… which will impact consumer spending.
This “vicious cycle” is playing out in the U.S. “against the backdrop of a weak global economy.”
There’s logic here that’s inescapable. And Alan’s applying it consistently and with positive effect in The Shockproof Investor.
If you’re not reading The Shockproof Investor, you’re missing out on Alan’s ability to turn insightful analysis into practical advice that will insulate your portfolio against major market tremors.
As I note above, this has been another special holiday week at Wall Street Daily.
In addition to Alan’s forebodings about the year ahead, Global Markets Analyst Martin Hutchinson weighed in with his own apprehensions for 2016, which “is shaping up to be fraught with political risk.”
“For one thing,” writes Martin, “there’s a U.S. presidential election. Meanwhile, the Middle East has descended into an even bigger mess than usual, and nobody has any expectation that it’ll improve soon.
“Vladimir Putin is likely to take chances, seeing a weak U.S. administration in its last year.
“Japanese debt is increasingly a worry, and could go critical in 2016.”
Like Alan, Martin sees “a distinct possibility of a credit crisis, probably in the fall before the U.S. election, the traditional season for them.”
Martin followed up on Thursday with another rather grim forecast, this one for income-focused investors.
“Unless we get a major crash,” he posits, “2016 will be a year of rising dollar interest rates. And that means it will be a tough year for income investors.”
Senior Correspondent Shelley Goldberg takes a solutions-oriented look at the next 12 months.
“Whether you call it a power house or smart home, residences are quickly growing more sophisticated,” writes Shelley. “And as investors, we should ask ourselves: Why just purchase these apps and devices when you can also profit by investing in the companies making it all possible?”
Shelley ticks off several ideas that will help you “make a bit of profit” and to “make your life better and easier” and “reduce your global footprint.”
Finally, Senior Analyst Jonathan Rodriguez’s wraps up our outlook series on an unabashedly positive note. He’s a trader, of course, and for traders “volatility” is the sexiest word.
And Jonathan says “we’re in for some of the best and most profitable volatility since the financial crisis of 2008.”
One analyst’s crisis is indeed another’s opportunity.
You’ll have the opportunity to read Jonathan’s thoughts on 2016 when he wraps up our special preview series on Monday, January 4, 2016.