Best of 2015: Economics, Innovations, and Magic Leap
Every year at this time, we reflect back on the events of the last 12 months and take inventory.
Last year I remarked that the status quo is shifting, meaning the policy-driven, post-2008 crisis world had reached an important turning point and was in transition from one set of norms to another. Perhaps the most remarkable thing about this year’s retrospective is that it is awfully similar to last year’s. In other words, 2015 remained a period of transition
A year ago, the world was awaiting the US Federal Reserve’s much-publicized rate hike. However, the prospect was met with a sharp slowing of economies around the world, causing the Fed to delay. Now that rate hike has finally come to pass. Meanwhile, commodity prices continue to fall, the US dollar continues to strengthen, emerging markets continue to weaken, and the developed world is still struggling to rid its addiction to easy money. While the facade is not yet crumbling, fissures are certainly showing, suggesting that the financial pressure for a new era is building.
In what appears to be political jousting between Saudi Arabia and Iran, Saudi-led OPEC has maintained high output levels even as demand falls, causing oil prices to swoon. As recently as 4 December 2015, OPEC voted to maintain production levels — pushing oil prices below $40 per barrel for the first time since 2004. Of course, low prices are having a significant impact on US shale oil producers. As of December, the US Energy Information Administration (EIA) forecasts US shale oil output to fall for the eighth consecutive month. And now the United States has struck a deal with Iran that will enable Iran to re-enter the world oil market. So, it appears the bottom is falling out of the oil sector.
But falling oil prices also suggest future troubles elsewhere. Namely, among US shale producers. And in a roundabout way, London. And, of course, Russia. Russia collects about two thirds of government revenue from taxes on oil. As oil prices fall, Russia’s tax revenues do too. This phenomenon hasn’t escaped investors’ notice either. Now with oil prices taking another leg down, the currency market may very well take another run on the Russian ruble and test the Central Bank of Russia (CBR) once again.
A year ago, I wrote, “If oil prices continue to fall, pop goes the real estate bubble in London. Boom.” The piece, titled “Connecting the Dots: From US Shale Oil to London Real Estate,” outlines the connections among Chinese and Russian wealth, US shale oil production, oil prices, and London real estate. And now it looks like that basic thesis is proving correct. In London, high-end real estate prices have begun heading south, falling by 11% year over year as of November 2015 — causing some to speculate that the bubble may have already burst. And, according to local real estate brokers, ultra high-end real estate transactions are down 14% year over year in London.
In China, the government has worked hard to maintain the status quo, but the economy keeps slowing and slowing. The juggernaut that once was is now coming back down to earth. China’s demand for copper is falling. In this Financial Times piece, the author writes that Chinese housing is expected to “weigh more heavily on GDP growth” in 2016 vs. 2015. Now China appears to have an accelerating bad loan problem. The virtuous cycle has now turned into a vicious circle. As growth slows, bad loans increase, which hampers credit creation which in turn further slows growth, etc.
Turning to Japan, it seems when the country takes two steps forward, it then takes three steps back. Despite the implementation of all three arrows of Abenomics in 2013–2014, Japan remains in a struggle to spark inflation. Even Paul Krugman is worried about Japan’s debt profile, suggesting that the Japanese economy may need even more stimulus to get over the hump. Japan is once again in recession — for the fifth time in seven years. In this excellent video, the creators suggest that Japan’s financial situation blows up if and when interest rates reach 4%. The only place it appears that Abenomics has been successful is in the stock market, where the Nikkei Index has soared from roughly 10,000 when Abe took over in 2013 to around 19,000 today — leading some to suggest that Japan’s newest bubble is in poverty.
The situation in Europe is better than in Japan, but not by much. The economies there remain subdued. Terrorism and the Syrian refugee crisis are creating social discord, and the banking crisis has yet to be resolved. Now, thanks to European Central Bank (ECB) actions, banks in Europe are charging depositors negative interest rates — meaning you must pay to keep your deposits there. The world is truly upside down. A New York Times piece suggests that negative rates are “the new normal.”
With this dismal backdrop, the United States appears to be the cleanest dirty shirt in the laundry. Though growth is sluggish, it remains positive. The US dollar continues rising. And capital continues flowing into the United States. Indeed, the Fed believed the situation was stable enough to raise interest rates for the first time in seven years. But it may, in fact, be a case of too little too late. Corporate loan charge-offs and delinquencies are rising briskly, and with rates already so low (not to mention heading upward), it is very unlikely that the Fed can counteract a recession should one manifest here in the United States. Perhaps now the world will pay the cost of the recession earned in the crisis of 2008?
But all is not lost. I always reserve this section to highlight important innovations, inventions, and productivity trends. And this year did not disappoint. While I have written about the virtues of bitcoin in the past, this year I discussed something called the bitcoin proof, which essentially makes the case for bitcoin having intrinsic value — a claim that is rejected by many, including Warren Buffett. However, I took Mr. Buffett to task in my piece, titled “Warren Buffett Is Wrong: The Bitcoin Proof,” suggesting that bitcoin has serious staying power.
Another important innovation has been achieved by the Israeli company Israel Desalination Enterprises (IDE). This is the first company to achieve cost-effective desalination on a large scale — and may perhaps offer a potential solution to the growing number of freshwater shortages around the world. And late last year, Florida-based start-up Magic Leap made a splash by receiving an investment of over $500 million from Google. Magic Leap promises to take virtual and augmented reality into the mainstream with their new glasses. Whereas the uptake of virtual reality has failed to cross the mainstream threshold, Magic Leap may have just the invention that satisfies both form and function. Check them out. You won’t be disappointed.
Lastly, discussion of cold fusion as a serious technology often elicits scoffs and ridicule. Nevertheless, it is something I check in on from time to time. I recently learned of a company called Brillouin Energy that claims to have perfected the technology. To be sure, many others have made similar claims before. This time, however, validation tests of the energy output were performed by scientists at Stanford Research International and appear to confirm a fourfold gain in power as well as control of the fusion trigger. If true, and this is a big if, this technology could not only transform the energy industry, but also geopolitics as we know it. It will be fascinating if this thing succeeds.
In total, 2015 was a transition year during which those in power seemed to be resisting the transition. They are fighting to maintain the status quo, but the market pressure for change is building. It’s not clear how long this game can last, but the longer it takes, the greater the impact the change will have when markets demonstrate their power. Please have a safe and prosperous New Year!
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.