Dangerous imbalance now in the global economy between the US economy and the rest of the world:
“Mounting concern about the inflationary impact of falling US unemployment has sent tremors through global financial markets amid fears that the long post-financial crisis rally in asset prices is nearing its end.
“The effective interest rate on 10-year benchmark US bonds reached their highest level for seven years after the latest snapshot of the American labour market showed fewer workers claiming jobless benefits.
“Shares on Wall Street fell sharply as investors predicted that the monthly official payroll report out on Friday would show that the drop in unemployment was leading to pressure for higher wages…
“Asian markets followed suit on Friday with Tokyo, Hong Kong and Seoul all in the red. Although the US dollar took a pause ahead of the payroll numbers, currencies in Asia Pacific were under pressure again against the greenback. The Australian dollar hit a 32-month low of US70.59c… The Indian rupee fell to an all-time low against the dollar on Thursday morning of 73.77, while in Indonesia – host for next week’s annual meeting of the International Monetary Fund – the rupiah plunged to a 20-year low.
“The Federal Reserve has already raised interest rates eight times in the past three years in order to head off the threat of higher inflation, but its chairman, Jerome Powell, said on Thursday the economy could expand for “quite some time”.
“Markets saw Powell’s remark as a strong hint that further policy tightening was in prospect, with the threat of tougher action from the Fed having a marked impact on emerging markets, which borrowed heavily in dollars when interest rates were at rock-bottom levels in the years after the crisis.
““A simple dynamic is playing out in the global economy right now – the US is booming, while most of the rest of the world slows or even stagnates,” said HSBC economist Kevin Logan.
““A Federal Reserve that is raising rates to prevent the US economy from overheating is constraining the policy options of countries where financial conditions are tightening and trade tensions intensifying.”
“Investors now see an 80% chance of a Fed hike in December and have revised upwards their expectations for how high rates may eventually go.
“Yields on 10-year Treasury debt were at 3.232% on Thursday, a fresh increase after Wednesday saw the steepest daily increase since the US presidential election in November 2016.”
“Across the U.S., companies are hitting the panic button. The Trump administration has levied 10 percent tariffs on $200 billion of Chinese goods, a charge that is expected to rise to 25 percent by 2019… Against that backdrop, it’s becoming clear that many companies are rushing to secure products and materials before prices rise regardless of current demand. You could say they are in panic-buying mode. The upside is that this behavior bolsters economic growth in the short term. The downside is that there is likely to be a nasty hangover.”
“With a staggering $1.5tn in outstanding student loans, the United States faces a crisis that has rippled throughout the economy – and is getting worse.
“Nearly two-thirds of 2017 college graduates need to pay back student loans, according to the California-based Institute for College Access and Success, and about 9 million have defaulted .”
“Alaska’s economy has been in recession for three years now… The state has lost so much ground — between 12,000 and 13,000 jobs — that it’s going to take a while to get back to where Alaska was in 2015. And even though job losses are letting up, they’re still happening. Parts of the economy, like the retail sector, are struggling.”
“The tough economic work may only just be starting for Justin Trudeau after Canada struck a last-minute deal to be included in the new NAFTA. Wages are barely keeping up with the cost of living, business executives complain they can’t compete and households are carrying record levels of debt that will weigh down the expansion.”
“Experts use the word “recession” for “a state of decrease in economic activity over a period of time,” but for the Nicaraguans that suffer its effects, it’s nothing less than a disaster that depresses their businesses, cuts their income and puts the welfare of their families at risk.”
“When Danielis Diaz stopped receiving HIV/AIDS drugs four months ago, she had a life or death choice – stay home and become another lifeless casualty of Venezuela’s crumbling health system, or flee to Colombia. Today, the 32-year-old transgender woman is about to restart her free antiretroviral medication at the Censurados Foundation, a non-profit HIV/AIDS rights group that runs a clinic out of a garage in Colombia’s border city of Cucuta.”
“To call him Latin America’s Donald Trump, as some have, is much too kind. Mr Bolsonaro is a misogynist and homophobe whose views on indigenous communities and the environment are every bit as grim. He praises torturers and the military dictatorship that ran Brazil from 1964 to 1985. He recently called for political opponents to be shot. His bigotry is portrayed as “honesty”…Brazil is struggling to recover from its worst ever recession.”
“Brazilian automakers are facing the prospect of a sharp drop in exports this year as a crisis in neighboring Argentina hampers the prospects of car sales abroad, the national automakers’ association said on Thursday… Anfavea, as the association is known, said auto exports will now drop 8.6 percent this year to a total of 700,000 units. The estimate represented a significant revision…”
“Uganda became the first major sub-Saharan African economy to increase interest rates this year to counter inflation pressures caused by weakening currency and rising oil prices. The Monetary Policy Committee in the east African nation increased the benchmark rate to 10 percent from 9 percent… The U.S. Federal Reserve has raised rates three times this year. That added to pressure on emerging-market assets and currencies that’s already taken a knock from the trade war between the U.S. and China and the recent turmoil in Turkey.”
“Turkey’s lira weakened more than one percent on Thursday, a day after data showed that annual inflation had hit nearly 25 percent in September, vastly exceeding expectations, and as the dollar held at a six-week high…
“Turkey’s lira has lost around 40 percent of its value this year on concerns about the central bank’s ability to rein in double-digit inflation.”
“Thousands of demonstrators chanted slogans condemning the ousted president Mansour Hadi and the Saudi-backed aggressors, and blamed them for worsening economic conditions in the country…
“The economic and living conditions are deteriorating sharply, as prices continue to rise, following the rapid collapse of the national currency because of an ongoing blockade against the country.”
“Consumer prices in the Philippines rose at the fastest pace in more than nine years in September, with central bank Deputy Governor Diwa Guinigundo pledging a “strong tightening bias.” Inflation accelerated to 6.7 percent from 6.4 percent in August, the Philippine Statistics Authority said in Manila on Friday… On top of that, a more than 8 percent slump in the currency this year is adding to the inflationary pressure.”
“J.P. Morgan is getting less optimistic about the trade conflict between the U.S. and China. The firm lowered its rating for Chinese equities to neutral from overweight, predicting the escalating trade war between the countries will affect China’s economy next year. “A full-blown trade war becomes our new base case scenario for 2019,” emerging market strategist Pedro Martins Junior said in a note to clients Wednesday. “There is no clear sign of mitigating confrontation between China and the US in the near term.””
“A reliable leading indicator for the world’s least affordable housing market is sending a sell signal for the first time in three years. Losses in the Hang Seng Properties Index on Thursday left the gauge of Hong Kong real estate stocks trading as much as 20 percent below its peak in January. Declines of that magnitude from major highs have preceded the last four downturns in Hong Kong home prices, data compiled by Bloomberg show.”
“Four out of five of the UK’s leading retail chairman have stated that they aren’t ready for Brexit as pessimism in the sector skyrockets.
“According to Korn Ferry’s 2018 Retail Chairmen Survey, which quantifies the views of 34 leading retail chairman employing more than 1.45 million people, pessimism about the future of retail has hit its highest level since 2012 at the peak of the recession.”
“The controversial budget plans of Italy’s populist government are hanging on an economic premise that looks too optimistic. A week after releasing an initial deficit target, the coalition finally unveiled the figures underpinning that aim. It sees growth of 1.5 percent in 2019, followed by 1.6 percent and 1.4 percent in subsequent years. By comparison, the median in Bloomberg’s latest survey is for expansion of no more 1.2 percent.”
“Italian banks have been restructuring in recent years, raising capital to fund disposals of bad debt and cutting costs. But loan losses and negative interest rates hurt earnings and mean returns do not cover their cost of equity. Market stress is meanwhile driving up the cost of funding.”
“Crude oil prices continue to climb.. Recent price moves bear a strong resemblance to previous price spikes in 2007-2008 and 2010-2012… Prices in Indian rupees are already at the same level that they peaked in 2008 and on the way to the record set in 2013… Only the strength of the dollar against other currencies is masking how high prices have become in oil-consuming countries outside the US…
“The oil market has become locked in an upward price trend… Hedge funds and other money managers have accumulated bullish long positions betting on a further rise in prices amounting to almost 1.2 billion barrels of oil.”
“The jump in interest rates on Thursday may be just the beginning, Jim Grant, editor of a closely followed market newsletter, told CNBC… Grant, a frequent critic of the Federal Reserve, blamed central banks for a “huge distortion” of interest rates because they pushed them down for the better part of 10 years. He thinks that will have consequences for the economy because people have borrowed at false prices.”
So, to recap, we have:
*Rising interest rates in the US causing other currencies to weaken relative to the $ and forcing other nations to raise their rates
*Demand-destroyingly high oil prices
*Unprecedented levels of global debt
*Stocks and property priced hopelessly unrealistically on the back of ten years’ artificial central bank stimulus
*Ever-worsening energy and resource constraints; climate change; loss of biodiversity; destruction of the environment etc. all acting as ‘axial stressors’ on the financial system
*The rise of protectionist trade policies and a world of increasingly fractious and polarised politics.
Literally all the ingredients are in place for GFC 2.0. We’re just waiting for the proximate catalyst to make itself known now…