“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” the Royal Bank of Scotland (RBS) wrote in a note to clients.
RBS has warned investors to get ready for a “cataclysmic year” amid an international deflationary crisis. What’s going to happen? The global bank’s credit team says stock markets could collapse by one-fifth and oil could reach $16 per barrel.
In addition to a drop in stock market averages worldwide, the analysts say markets are showing the same stress alerts as they did just before 2008’s Lehman crisis.
A couple of the signs showing just how bad things can get: global trade and loans are contracting, which could hurt corporate balance sheets and equity earnings. Moreover, debt ratios, whether at the government level or at a personal level, have reached record highs.
“China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, and we have hardly even begun to retrace the ‘Goldilocks’ love-in of the last two years,” said Andrew Roberts, the bank’s credit chief.
Throughout 2016, Roberts thinks Wall Street and European Stocks will tumble between 10 and 20 percent, while the FTSE-100 can plummet even further because of its dependence on energy and commodities.
“London is vulnerable to a negative shock. All these people who are ‘long’ oil and mining companies thinking the dividends are safe are going to discover that they’re not at all safe,” he added.
What about oil? It could hit $16 a barrel, which will have such an immense effect on countries like Canada, Saudi Arabia and Russia.
But the financial institution’s biggest criticism comes at the hands of the Federal Reserve. Roberts thinks the United States central bank is “playing with fire” by hiking interest rates.
“We are deeply sceptical of the consensus that the authorities can ‘buy time’ by their heavy intervention in cutting reserve ratio requirements (RRR), rate cuts, and easing in fiscal policy,” the global bank said.
In the end, if China doesn’t produce any good date within the next two to three months then there could be a massive sell off that could metastasize into a global financial crisis.
Will 2016 be such a devastating year? Well, everyone is talking about it, even Peter Schiff, CEO of Euro Pacific Capital (SEE: Peter Schiff: Gold is still reaching $5,000, U.S. heading into a recession), who thinks a recession is already beginning. This could prompt the Fed to introduce another round of quantitative easing.
“They’re going quickly have to reverse course next year,” averred Schiff. “They are going to bring rates into negative territory … and they’re going to do QE4 and it’s going to be bigger than ever.”
At the time of this writing, the Dow Jones is up half a percent, while the NASDAQ and the S&P500 are in the green by about one percent. European markets are also up. It’s the Asian markets that are tumbling yet again. The Nikkei shed another 500 points.
–AM
It’s that Mayan end of tenably marketable time thing only now becoming sufficiently evident in hindsight. Just in time for 2020, another election year.
Real time crowd sourced, volume based profits against debts/costs is increasingly no longer possible.
But go in and think I’m crazy and wishful-thinking lazy.