At the end of January, I flew to Jerusalem to attend a 2016 global investment summit. With so many challenges to the investment markets being global in nature, I felt an international perspective would lend a unique perspective. The event was well-attended, with over 3,000 participants. I must have picked the coldest week, because it snowed on Monday and Tuesday which made Jerusalem headlines.

The issues facing the capital markets for 2016 are: (1) Saudi Arabia is deliberately flooding the energy markets with an over-supply of crude oil, (2) China's national politboro has shifted priorities resulting in a slower national growth rate, and (3) the Fed has moved into interest rate tightening (versus an easing stance).

First, the event speakers were amazed at how one nation (Saudi Arabia) could have such a broad impact upon the energy markets. Under King Abdullah, Saudi Arabia was relatively quiet and the its foreign policy was ultimate indirectness. It often consulted with the U.S. before taking action, if any at all. After his death, the younger generation of rulers is very different. They want Saudi Arabia to exert influence and want the nation's foreign policy to have impact. Saudi Arabia no longer seeks permission from the U.S. before taking action. By over-supplying the energy market with crude oil and pushing down the price of crude oil, Saudi Arabia is deliberately striking at Syria, Iran, and Russia whom it considers enemies. Further, the fact that it can put out of business many U.S. shale producers/competitors, is a secondary collateral impact. There is no doubt that the low energy prices are being driven this way by Saudi Arabia. There is also the seed of good news in this: to the extent Saudi Arabia reverses course, crude oil can rebound fairly rapidly to profitable levels in short order. However, this may not occur soon. Saudi Arabia as a nation recently took out a multi-billion dollar loan to fund general government operations and administrative expenses, signaling that it is in this for the long-haul. This is causing an economic shock to the global economy.

Second, China. Historically, China national spending was focused on real estate and infrastructure build-out of the nation. At last year's politboro, there has occurred a shift in spending toward healthcare, education, and promotion of internal domestic consumption. The difference is significant: $1 spent on real estate and infrastructure translated into $1 of GDP. Now, however, it takes $5 of healthcare and education spending to achieve $1 of GDP. Hence, a much lower growth rate is coming out of China. This is reverberating globally. For example, in a new home there is about 600 pounds of copper -- pipes, electronics, appliances, and so forth. With much less spending on real estate, think of all the companies, producers, service companies that supplied China the commodity and related products for a house, which are now adversely affected by China's policy decisions. Also, China has introduced new taxes for a 2nd and 3rd house purchase, further discouraging real estate building. Third, the Fed has shifted from an easing stance to a tightening stance.

While the Federal Open Markets Committee has published slightly aggressive rate positioning (see graph below), it is unlikely the Fed will push through more rate hikes in the intermediate future due to market volatility and the two factors discussed above. Interestingly, Stanley Fischer of the Federal Reserve was recruited from the central bank of Israel. In Israel, Mr. Fischer engineered rate hikes and the Fed had brought him aboard last year as part of initial preparations. Current market conditions, though, will likely force the Fed to P pause. Further, the market implied rates (designated by the red line in the graph slower, longer, and shallower tightening trajectory than FOMC Economic Projections.