“When China finally has its inevitable growth recession – which will almost surely be amplified by a financial crisis, given the economy’s massive leverage – how will the rest of world be affected? With US President Donald Trump’s trade war hitting China just as growth was already slowing, this is no idle question.
“Typical estimates, for example those embodied in the International Monetary Fund’s assessments of country risk, suggest an economic slowdown in China will hurt everyone. But the acute pain, according to the IMF, will be more regionally concentrated and confined than would be the case for a deep recession in the United States. Unfortunately, this might be wishful thinking.
“First, the effect on international capital markets could be vastly greater than Chinese capital market linkages would suggest. However jittery global investors may be about prospects for profit growth, a hit to Chinese growth would make things a lot worse…
“Investors today are also concerned about rising interest rates, which not only put a damper on consumption and investment, but also reduce the market value of companies (particularly tech firms) whose valuations depend heavily on profit growth far in the future. A Chinese recession could again make the situation worse…
“A recession in China, amplified by a financial crisis, would constitute the third leg of the debt super-cycle that began in the US in 2008 and moved to Europe in 2010. Up to this point, the Chinese authorities have done a remarkable job in postponing the inevitable slowdown. Unfortunately, when the downturn arrives, the world is likely to discover that China’s economy matters even more than most people thought.”
“Investors are bracing for more debt defaults among China’s cash-squeezed real estate developers as funding costs surge and refinancing pressure intensifies. Borrowing costs in dollars for China’s high-yield issuers, most of whom are property developers, almost doubled this year to 11.2pc, the highest in about four years, ICE BofAML indexes show. To make things worse, the sector faces a record $18bn bond maturities in both onshore and offshore markets in the first quarter of 2019.
“That number is expected to double if investors demand early repayment on some of these notes, according to Bloomberg-compiled data.”
“The worldwide tablet market declined 8.6% during the third quarter of 2018, as demand for slate and detachable devices slumped. According to preliminary data from IDC, global shipments fell to 36.4 million during the quarter, with slate tablets accounting for the majority of the market with 31.6 million units, down 7.9% from the previous year. Detachable tablets also declined, down 13.1% from the previous year…”
“Japan’s core machinery orders tumbled by the most on record in September after a severe earthquake and typhoons disrupted business activity, with economists now also worried about a fall in overseas orders. The 18.3 percent slump in machinery orders far outpaced the median market estimate for a 10.0 percent decline… Japan’s economy is forecast to contract in July-September, and the machinery orders slump suggests any rebound in the following quarters is likely to be weak.”
“Turkey and Argentina will undergo sharp contractions in the coming quarters as economic growth decelerates across advanced and emerging market economies, Moody’s Investors Service said in a report Thursday. As monetary tightening in major economies and geopolitical trade disputes continue to undermine investment globally, Moody’s is taking an increasingly dim view of the growth prospects of emerging markets…”
“Venezuela’s consumer prices rose 833,997 percent in the twelve months through October, according to a report by the opposition-controlled Congress published on Wednesday…
“…the latest sign that policy changes in August failed to halt rampant hyperinflation.”
“The annual guide reports that 117 independent restaurants closed in the capital over the past 12 months, the highest figure since the guide’s first publication in 1991.”
“The UK property market is at its weakest for six years, with prices flat or falling across half the country according to Britain’s official surveyors body, with reports that sales are “in limbo” until a Brexit deal emerges. The Royal Institution of Chartered Surveyors (Rics) said its monthly survey of members found “the weakest reading since September 2012” in October, with prices falling in London, the south-east, south-west and East Anglia.”
“The German auto sector’s problems are only the latest indicator of a broader slowdown in the eurozone.”
“Investors are starting to worry about the massive increase in debt issued by the U.S. Treasury Department. The latest being BlackRock CEO Larry Fink.
“Fink said the U.S. was heading towards a “supply problem” as the widening budget deficit, expected to top $1 trillion each year starting in 2019, requires more borrowing.”
“The president debased the US public accounts with a Peronist fiscal policy of staggering irresponsibility in order to keep control of Congress – or rather to buy Congress with $US1.5 trillion ($2.1 trillion) of future public debt, might be a better description… The sugar rush of stimulus so late in the economic cycle is already starting to fade. Over the course of 2019 the Faustian pact will progressively close in on Mr Trump, and on the credit-rating of the US Treasury. Morgan Stanley said it will turn ineluctably into “fiscal drag” as the months pass without more handouts to feed the monster.”
“The Federal Reserve opened its two-day policy meeting on Wednesday, with central bankers widely expected to hold their fire but likely to signal a December rate hike… a decade of job creation and falling unemployment are at last pushing up pay and raising the odds of faster inflation. That puts the Fed on pace to continue raising rates, with a fourth increase expected this year and three more in 2019.”
““One of our primary concerns is a sharper-than-expected growth slowdown in China. We believe this will result in a material slowdown to developing economies, which may also may weigh on global growth in 2019.
“We have also lowered our 2018, as well as 2019, growth forecasts for the Eurozone. GDP, sentiment and economic activity data have been softer than expected.”
“Central banks enable debt because they think it will generate economic growth. Sometimes it does. The problem is they create debt with little regard for how it will be used.
“That’s how we get artificial booms and subsequent busts. We are told not to worry about absolute debt levels so long as the economy is growing in line with them. That makes sense. A country with a larger GDP can carry more debt. But that is increasingly not what is happening…
“…centuries of history show that every prior debt run-up eventually took its toll on the economy. There is always a Day of Reckoning.
“In the last year, the world’s largest economies are generating debt 10X faster than economic growth.
“I am trying to imagine a scenario where this ends in something less than chaos and crisis. The best I can conceive is a decade-long (and possibly more) stagnation while the debt gets liquidated.
“But realistically, that won’t happen because debtors won’t let it. The rational course would be to delay the inevitable as long as possible. Yet in the U.S. we’re rushing it.”