Interpreting Middle East Economic News and Analyzing Market Trends

Deflation, defaults, social unrest and other ‘surprises’ waiting for us in 2015

Financial Crisis - Slideshare

Photo: Slideshare.net

    

As 2014 comes to an end, we wanted to take a look back at events and trends over the past few years and give you some of our thoughts on what we expect to see in 2015.  We decided to make a list… a top 10 list of ‘surprises’ we expect to see in the coming year.  Here they are… enjoy…  

     

1. Deflation

We’ve heard of low inflation and no inflation.  We’ve even heard of negative inflation and disinflation in the news lately.  However, the D-word is creeping back up on us and we expect the developed world to slide into deflation in 2015, which will eventually take the rest of the world down in to deflation with it.  Most mainstream economists do not expect to see deflation any time soon, but we disagree.

Eurozone CPI

Source: The Wall Street Journal

The slide in the price of oil is not the only reason we expect to see deflation.  A slowdown in the global economy, debt defaults and Basel III are all to blame as we shall see in some of the other surprises below.  Some countries in the Eurozone are already in deflation, such as Spain, with Germany and France trending towards deflation.

2. Shale hits a brick wall

We have covered this story a lot this year and feel the same as we did the first time we posted an article on shale.  There is no shale revolution.  Yes, US oil production has risen dramatically since 2005, but this was no due to new technology or new oil findings. The simple reason for the rise in US production was due to the rise in the price of oil and cheap money thanks to the Fed.

Oil Price - Defendyourwealth

Source: Defend Your Wealth

Now that the slide in oil has caught everyone off guard, it’s only a matter of time before the trillions of dollars in cheap bonds and loans made to shale producers begin to default.  If enough of these defaults occur as we expect, watch how easily it will spread to other markets.

3. Recession takes hold as fake recovery fizzles

Brazil, Italy and Japan are already in recessions.  Russia and Turkey are expected to be in recessions as early as next quarter.  The global recovery that never was is starting to fade as the entire global economy slows down.

Global GDP

Source: Bloomberg. Click on chart to enlarge.

4. Stock market crash, emerging market crisis, junk bond crisis

As a result of the simmering crisis in oil and the bond market, volatility has increase across financial markets.  Nervous investors have already begun pulling their money out of high-risk debt and emerging markets.  Stock markets in the Middle East have already crashed.  Lofty stock prices in the US and UK will be hit in 2015 as investors flee for safety in US Treasuries, German bunds and other perceived save-havens.

GCC Stock Market Dec 2014

Source: Zerohedge. Click on chart to enlarge.

5. Basel III disaster

The Basel Accords are an excellent concept, but in practice they have been a disaster, namely for their bad timing.  The first Basel Accord came into effect in 1988 when Japan was the largest creditor in the world. Japanese banks lent billions around the world.  Then the Basel Committee put the brakes on Japanese banks’ ability to lend.  The slowdown in lending helped make Japan the economic mess it is today.

In 2007 Basel II came along just in time to put the brakes on real estate lending and enacted the ‘mark to market’ rule that exposed all sorts of problems and holes in corporate and bank balance sheets.  This helped spark the Global Financial Crisis and increased the severity of its effects on the global economy as the Basel Committee later admitted.

As a solution to the problems and deficiencies in Basel I and II, the committee came up with Basel III to fixed these problems and will require banks to hold more capital on their books.  This is already a disaster as the largest global banks will have two options to meet these new requirements, which take effect on 1/1/2015; slow lending or raise billions in fresh capital.  Either way, this is going to spell disaster to the banking system.  Thanks Basel!

6. Faith in central banks fades

In 2015 we expect to see the following:

– ECB will add more words but no action;

– Fed decides not to hike rates in 2015;

– Abenomics fails.

The failure of central bank policies will slowly make its way into mainstream thought. Right now, the media and leading economists are all strong believers in central banks’ ability to save the day without much thought into how successful (or lack of success) their policies have been.  In 2015, we will see this faith fade.

7. Cyprus-style bail-ins coming to a country near you

The Cyprus-style bail-ins (a.k.a. depositor theft) was not a one-time deal.  It was a roadmap for the future.  The graph below highlights the countries most at risk of Cyprus-style bail-ins.  We would also like to add the Dubai to the list because we see Cyprus and Dubai sharing similar offshore banking characteristics, which we will be writing about in 2015.  Needless to say, expect to see a bank bail-in in Dubai as a real option when there is another crisis.

Global Bail-in Monitor

Source: The Market Oracle. Click on image to enlarge.

8. Rise in social unrest and political instability

This is not a new trend as we have seen across the Eurozone over the past few years and more recently in Turkey and Hong Kong.  We see this trend continuing if not increasing in 2015.

9. Russia and China push more OPEC members away from the petrodollar

It’s no secret that Russia and China, and the rest of the BRICS for that matter, want to see an end of the US dollar as the world’s reserve currency (read about the BRICS Bank).  In 2014 Russia and China signed a $400 billion oil and gas deal, which will not be in US dollars.  The two countries have recently been courting GCC oil producers to get them to transact in currency swaps cutting out the dollar in the process.  Qatar (and Canada) has already signed on with China and Saudi Arabia should be next.  Let’s not forget that the petrodollar was a deal concocted by the US in 1971 as Nixon closed the gold window.  To ensure the survival of the US dollar as the world’s reserve currency, Henry Kissinger brokered a deal with the Saudis to only price oil in dollars in return for US protection.  Today, this deal is cracking and looks like it could end at any time.  This is not good news for the dollar and do not expect the US to stand by and watch this happen.

10. Central banks discover that their gold held at the NY Fed is gone

This year we saw Germany try to get some of its gold held at the New York Fed shipped back to Germany with little success.  Of the 37 tons expected to be delivered only 5 tons were delivered and they were not the gold bars Germany had deposited there (I guess they checked the bar serial numbers).  Next, the Netherlands quietly shipped some of its gold back from the NY Fed.  Today, three other countries, Austria, Belgium and France, are looking into whether or not they should bring some of their gold back… and a couple of months ago we learned that the Ukraine shipped its gold to the NY Fed without the knowledge of the Ukrainian people.  This incident is being dubbed as the theft of Ukraine’s gold.

It’s not difficult to see what is going on here.  The NY Fed does not have the gold entrusted to it.  It has either been sold or lent out over the years and now central banks have no luck it getting it back.  Instead, the NY Fed will offer to send back paper dollars instead.  This scam will be exposed in 2015 leading to the collapse of central bank trust.

These are merely a summary of the surprises we see coming in 2015.  We will post more details on each one as the year unfolds and provide updates throughout the year.