The Bear is Coming

This post The Bear is Coming appeared first on Daily Reckoning.

Look out below. We’re about to take a long walk off a short pier.

I’m not in the business of prognosticating (much). As a student of economics, I’m well aware that no one really knows what’s coming.

Some of us can get it right some of the time. But there are simply too many tea leaves to read to get a full picture. Predicting the weather is an easier business.

That said, every tea leaf I’m paying attention to says that we’re in for a very rocky start to 2016.

Let me tell you what’s got me worried — and what it should mean for you and your portfolio.

Commodities Are Falling Through the Floor

Demand just isn’t there.

Sure, there’s oil hitting recent lows nearly every trading session. That gets the headlines — with good reason. Demand growth looks sets to fall by 33% next year.

But just about every other commodity is falling apart as well.

Demand for steel shrank this year. The price went from nearly $500 to $170 per tonne today.

Iron has been in decline since 2014. It was around $140 back then — it’s under $40 per tonne now.

Lead, zinc, tin — every single industrial metal has been in the crapper, with most falling 50% or more in the past year. And with most of that fall happening in the last six months.

You can claim that oil has fallen hard because supply has gone up so fast. You can’t say the same for everything else. The reason everything is falling off a cliff is because demand has shriveled up.

Manufacturing Is Contracting

The two biggest manufacturers in the world are China and the U.S.

Chinese manufacturing has been shrinking since February — it hit a record low in September. And U.S. manufacturing started shrinking last month.

The factory floor of the world is starting to gather dust. That ain’t good.

Shipping Is Slipping

The Baltic Dry Shipping Index hit an all-time low in November. We’d expect the Baltic — a bellwether index for commodities — to get hit by falling commodity demand. But an all-time low? To say the least, that’s worrying.

The Emerging Market Is Collapsing

We all know about Russia. Between economic sanctions and oil’s plummet, a tanking Russian economy can be excused.

But there’s no such excuse for Brazil, which is seeing both inflation and unemployment rise. The Brazilian markets have dropped almost 20% in the last year, while the real is teetering on the brink of a crisis. It doesn’t help that the speaker of Brazil’s congress is under investigation for bribery and is now trying to impeach the president. They almost make our politics look functional.

And then there’s China. For all the Chicken Littles who thought that China had proven a state-directed economic model would win out over democratic capitalism, get ready to see the ugly side.

China is in serious trouble. The official story is that GDP growth is slowing to 6.2% next year — which would be disastrous, since China needs about 7% growth just to avoid a de facto recession (thanks to the number of new workers coming in from the agrarian countryside).

But the actual GDP is almost certainly lower than China’s easily manipulated official stats.

The Chinese housing market is in a state of collapse.

And — going back to the state-run thing — China has too much employment.

What? It’s simple — Chinese factories are running at much less than capacity. Some should be shuttering, and the workers should be shifting to other industries. (That’s the whole point of China becoming a service economy after all, right?)

But Chinese factories can’t do that. They are mostly state run or state controlled. Already, it’s estimated that China has around 500 protests a day — many of them from factory workers. Imagine what would happen if all those people were suddenly out a job?

The Communist Party doesn’t want to imagine it. The party will do everything it can to avoid such a scenario.

China is stuck. It needs to keep the machine humming — as it is, the economy is in bad shape. Even if factories are making things that no one will ever buy (a lot like China’s famous ghost towns that will never be used), the show must go on.

That is helping to artificially goose GDP — while ballooning debt.

But the country can’t keep doing that forever. The state-run economy has a reckoning coming down the road.

And China’s looming population crisis isn’t going to make things easier. If you ask me, we’re witnessing the end of the China menace right now — just as we did with Japan 25 years ago.

Don’t Look for Help From the Developed World

Europe is a mess. As it locks down borders, it will get messier.

Canada is suffering from lower commodity prices.

The U.S. is the best off — but we’re in no position to put the world on our back. Indeed, our relative strength is more likely to be brought low by a rippling worldwide recession.

The Fed Wild Card

Tomorrow, the Fed will tell us whether it will raise rates or not.

Either answer may be bad news.

If the Fed does nothing, traders might see that as confirmation that we’re heading into a possible recession and panic. If the Fed raises rates, our economy may prove too fragile to handle the stress — and we’ll get a different later panic.

I don’t envy Yellen. Whatever she says tomorrow, people will be mad. And the markets — now or later — will react badly.

The Other Wild Cards

We’re in the midst of a currency war, with nearly every major country (save the U.S.) participating.

ISIS could spread enough terror to affect trade.

Russia and Turkey are this close to a fight with serious repercussions.

China, facing the reality of economic hardship over the coming years, might decide now’s the time to make a stand in the South China Sea, while it is strongest.

The various brush fires throughout the Middle East could easily come together into one huge conflagration that can’t be contained.

Sure — there’s risk like this all the time. There’s just a bit more than usual right now, and no one is in position to take the helm.

Add it all up and the first half of 2016 is looking pretty dreary.

I could be wrong. Perhaps looking for the least-bad option, investors will pour into U.S. markets and we’ll see a bull run.

But overall, there’s a lot more risk to the downside right now.

Next week, I’ll go over our portfolio and tell you how things are likely to play out for our holdings. We’ll likely trim a few that are in precarious sectors. And I’ll give you some guidance for how to weather the coming storm.

Unconventionally yours,

Ryan Cole
for The Daily Reckoning

The post The Bear is Coming appeared first on Daily Reckoning.