The junkie economy will freak out when you take its methadone away, unsurprisingly:
“On Wednesday, the U.S. Federal Reserve hiked its benchmark interest rate by a quarter-percentage point to 2% – 2.25%, which is the highest level since April 2008. As rates continue to climb off their post-Great Recession record lows, market participants and commentators are showing almost no signs of fear as the stock market is hitting records again and complacency abounds.
“Unfortunately, “soft landings” after rate hike cycles are as rare as unicorns and virtually all modern rate hike cycles have resulted in a recession, financial, or banking crisis. There is no reason to believe that this time will be any different….
“When central banks set interest rates and hold them at low levels in order to create an economic boom after a recession (as our Federal Reserve does), they interfere with the organic functioning of the economy and financial markets, which has serious consequences including the creation of distortions and imbalances. By holding interest rates at artificially low levels, the Fed creates “false signals” that encourage the undertaking of businesses and other endeavors that would not be profitable or viable in a normal interest rate environment [in other words, malinvestments]….
“Though it can be difficult to tell precisely which investments or businesses are malinvestments in a central bank-distorted economy, a quote by Warren Buffett is extremely applicable: “only when the tide goes out do you learn who’s been swimming naked.” For the purpose of this discussion, “the tide going out” refers to rising interest rates. The mass failure of malinvestments in an economy as interest rates rise typically results in recessions or banking/financial crises.”
One such malinvestment is the fracking industry, which had in aggregate, from mid-2012 to mid-2017, negative free cash flow of $9 billion per quarter, and which has been propped up by over-ambitious equity issuance and artificially low interest rates.
Or it could be the various property bubbles that have been inflated around the world:
“Washington rewrote the rulebook for Wall Street after the 2008 financial crisis, but dangerous lending is still eluding regulators. Take Bomgar Corp., which just lined up $439 million in loans. The deal marked the software company’s third trip to the debt markets this year. By one estimate, Bomgar’s leverage could soon spike to 15 times its earnings, raising questions about whether the firm could ever pay it off.”
“Investor confidence is at its lowest level in more than five years, and is weakest in North America, according to a US bank. State Street’s Global Investor Confidence Index (ICI) gave a score of 88.3 for September, below the neutral score of 100. This is down 5.7 points from 94.0 in August and is the lowest measure since March 2013.”
“The odds of a recession in 2019 are large and growing, according to a pair of veteran market watchers quoted by Barron’s. They see interest rate hikes by the Federal Reserve and rising trade tensions as the main catalysts for a downturn.”
“Hyman Minsky, a much-neglected economist, warned about the psychology of the business cycle. His concerns focused on what happens next after a prolonged period of stability: people fall into the trap of believing that calm will persist indefinitely. In a sense, stability becomes a kind of bubble itself.”
“A measure of global trade weakened this month, dropping to the lowest since 2016 and indicating a slower pace of growth in the months ahead. DHL cited “rising political tensions” for the slump in its trade barometer, as the tariff battle between the U.S. and China escalated.”
“A widely watched private survey of China’s factory activity is expected to show further slowdown in the manufacturing sector’s growth in September, as the country’s trade dispute with the U.S. escalates.”
“Eurozone manufacturers grew less upbeat about their prospects in September, as French businesses saw a slowdown in new orders and pared back production expectations. Consumer confidence also weakened, largely as a result of a gloomier assessment of the economic outlook in France, where growth slowed sharply in the first six months of the year, and Spain.”
“Nearly two-thirds of businesses have yet to do any risk assessment of a no-deal outcome in the Brexit negotiations as “Brexit fatigue” sets in, the British Chambers of Commerce has found. Adam Marshall, the director general of the BCC, said: “Too many businesses across the UK are still not ready for Brexit. Many smaller firms don’t have the capacity to scenario plan, don’t think they’ll be affected or have simply switched off from the process altogether.”
From the cynical British standpoint, this is helpful because it removes focus from Brexit and onto the overall viability of the EU, and helps strengthen the struggling £ relative to the Euro.
“The Italian government agreed to a 2019 budget deficit target at 2.4% of GDP on Thursday night in a move that was celebrated by leaders but could bring the heavily indebted country into conflict with the European Union.”
“IL&FS’s defaults have highlighted the risk of a sharp growth slowdown in the world’s fastest growing major economy, as lenders pare their exposure to the shadow banking space, or what are called non-banking finance companies (NBFCs) in India.”
As per yesterday’s feed, India’s growth has been propped up on excessive and shaky debt and has not provided a commensurate increase in employment, so calling it robust is a stretch.
“Turkey’s economic confidence index has taken a nosedive to its lowest level in nearly 10 years, the Turkish Statistical Institute revealed on Thursday.
“Economic confidence index decreased by 15.4% compared to previous month decreasing from 83.9 to 71 in September.”
“Drug gangs and addicts are a common scourge in the Villa Zavaleta slum in Buenos Aires, where even before the recent economic crisis brought them to their knees, the 1,200 families faced a daily struggle just to eat.
“Rubbish and excrement fill the streets where a dog chews on a cow’s jaw bone and a drugged woman staggers about.”
“Thousands in the capital Harare have been infected by [cholera]… The rise in prices of basic goods, coupled with persistent fuel shortages, has revived fears of economic collapse from hyperinflation that occurred in 2008…
“Recently, [President] Mnangagwa acknowledged Harare’s water is contaminated with raw sewage.”