In Thursday's podcast interview we spoke with the savvy head of Moneyball Economics, Andrew Zatlin, where he outlined three cycles converging in 2016 that he believes will be bearish for the market.
Given his outlook, he felt investors should be raising cash and selling into any future rallies.
The three cycles he outlined all combining this year are the following:
- The end of the Chinese supercycle, which began to impact global markets starting around 2014 and which is now coming to a head
- A peak of the US business cycle and possible mild recession
- No more easing by the Fed (a tightening of the liquidity cycle) and its related influence on corporate buybacks, which have largely held up the market
On the first cycle, Zatlin told listeners that the slowdown in China started to exert greater pressure on global markets starting around 2014 as the slide in oil and commodity prices picked up speed. It was around this time that the massive public spending for infrastructure by the Chinese government started to flatline, causing a ripple effect across the globe, particularly in commodity-exporting countries. This, he said, was one of the main stories of 2015 and is now coming to a head this year.
(See our related May 2014 interview with China expert Michael Pettis: Hard Commodity Prices Will Continue to Fall with Decade-Long Slowdown in China.)
On the second bearish cycle coming to a head in 2016, Zatlin believes we've passed the peak in US economic growth and is forecasting a possible recession later this year. Zatlin bases his forecast on retail numbers, payrolls, and jobless claims as well as his proprietary "vice index," which tracks cash-based discretionary spending by US consumers on items and services that are highly sensitive to changes in the economy.
On the third bearish cycle—the end of easy money supplied by the Fed—the head of Moneyball Economics says this will be most acutely felt by a reduction in stock buybacks, which was also a large focus of our interview with Charles Biderman late 2015 (see We're Heading Into a Volatile World for the Markets and Economy).
"So, to net it all down," Zatlin said, "you're going to have a lot of misses as we go into 2016. A lot of companies simply aren't going to be able to come out with a growth story. They're going to come out and have to guide down. The market is not going to like that...not going to like that whatsoever."
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