I have written a post on my expectations for Nigeria in 2016, outlook not good. It’s time for me to look at the world in general. I expect 2016 to be the beginning of the end for the global economy. I predict a series of events, starting in 2016, which will lead to a global depression, a global depression that would make the great depression look mild. The good news is: 2016 will actually be a good year for some. The bad news is, it will be year the first domino will fall that will lead to the eventual depression. Let me start by making a statement on the current position of the various economic Powerhouses.
The Federal Reserve (FED) took the unusual but seemingly intelligent decision to drastically increase liquidity in order to escape the financial crisis. This worked because it dropped interest rates, meaning businesses had more money to produce, and simultaneously devalued the currency making exports cheaper. Plus they did it in a time when no one else was doing it. In December 2015 the FED raised rates for the first time. They needed to do this because interest rates is the tool used by central banks to regulate the economy, raise rates to cool things down and drop them to spur growth (obviously Godwin is the exception here). If the FED didn’t raise rates they would have no tools to stimulate the economy in the event of a slowdown.
The European Union is quite possibly the most exciting and ambitious political experiment to have ever taken place on this planet. The idea that countries that have been at war with itself for over a millennium can now come together under one roof is simply amazing. This has absolutely nothing to do with their current economic state but I just thought their politicians needed a shout out. Now, the EU is witnessing an economic decline. As a result the European Central Bank, ECB, has started quantitative easing or QE and is set to increase QE in 2016. This means that not only are interest rates at record lows but the currency has fallen dramatically. These are only set to get even lower.
Asia or Basically China, the Chinese Economy has been growing at breakneck speeds as far back as anyone can remember. Economists use growth rates when judging the success of any economy. This means when economic growth drops from say 10% to 6% it is viewed as a disaster. In real life that’s not necessarily accurate. Lets say I double $10 to $20; I would have made $10 while growing at 100%. Now if I turn my $20 to $35 I would have made $15 while only growing at 75%. To an economist my growth rate would have slowed down and it will be a warning sign, to me I would have made more money because I would now have $15 extra. Basically, China’s economic woes are being grossly over exaggerated. Yes the economy’s growth rate is slowing down but in reality the country is still growing at a very impressive rate, albeit from a much lower base. What everyone seems to be forgetting is that the country is transitioning from an export oriented society to a consumer led society. Chinese politicians don’t really know to handle this transition. They meddle in markets when they need to let markets correct themselves. They believe that depreciating the currency is the best way to spur exports, failing to realize that they shouldn’t be trying to spur export but rather concentrate on strengthening the Chinese consumer. And while they are not quite as foolish as Godwin they do make some silly moves.
Now lets tie all this together and see what 2016 holds. The USA is raising rates while the EU is increasing QE. US Businesses and consumers will find it credit more expensive while EU businesses and consumers will have money thrown at them. US exports will get more expensive while EU exports get cheaper. This will lead to a gradual decline in competitiveness of US businesses. This decline will lead to a slowdown in the US economy. Conversely, EU businesses will witness a boom. Businesses will borrow cheaply, sell more overseas and have a richer local market. Earnings are going to rise leading to record high equity prices. As for China, well they meddled with markets so they must pay. China will witness economic turmoil brought on by the silliness of Chinese politicians. Compared to Emefiele the Chinese are geniuses so you can imagine what I see happening to Nigeria.
Basically the place to be in 2016 is Europe, Germany to be specific. However like I said, 2016 will be the year to signal the beginning of the mother of all economic depressions. The USA will witness a slowdown; the FED will be forced to take rates back to zero, this it would lead to a loss of confidence in markets. This loss of confidence will ultimately lead to a bust like no other. But hey, lets enjoy the European party while it lasts. See you all in the DAX.