“Business leaders in Davos aren’t thrilled about the global economic slowdown. But they’re even more worried about how central banks will respond.
“”What scares me the most longer term is that we have limitations to monetary policy, which is our most valuable tool,” Ray Dalio, the billionaire founder of hedge fund Bridgewater Associates, said Tuesday at the World Economic Forum.
“Central banks took dramatic and unusual steps to prevent economic collapse during the 2008 financial crisis. One decade later, most of the world’s big central banks are only just starting to reverse those moves, limiting their ability to respond to a new downturn.
“Interest rates remain at historically low levels, giving central banks little room to make new cuts. Now that the economy is softening, it’s probably too late to get rates much higher.
“The only bank that has any room to maneuver is actually the Federal Reserve,” said Axel Weber, chairman of Swiss bank UBS (UBS).”
“Behind these asset price declines, higher interest rates and recent reductions in the size of the Federal Reserve’s balance sheet are reducing liquidity and increasing a flight to cash.
“Given the high level of leverage of consumers, corporations, and governments, the financial system has become addicted to the Federal Reserve providing excessive liquidity; with the reverse now occurring, bad things are starting to happen in the financial markets.”
“Seth Klarman, a hedge fund billionaire some call the next Warren Buffett, wrote a sobering letter warning his investors of the economic impact of global tension, rising debt and the pervasive political divide. “It can’t be business as usual amid constant protests, riots, shutdowns and escalating social tensions,” Klarman wrote in the annual letter to investors…”
“Structural issues like U.S.-China trade tensions and climate change could trigger a catastrophe which could in turn affect growth of emerging countries like India and China, according to Adam Tooze.
““There is reason for profound pessimism which we have to adjust to a distinct possibility of a catastrophic outcome due to these structural issues,” Tooze, Professor of History at Columbia University…”
“The government shutdown, the longest in history, comes with a hidden revelation: Millions of Americans are financially unprepared for the next economic downturn. Worse, they are highly vulnerable, with few protections available to them.
“Ten years after the financial crisis, the economic recovery has left millions behind with little to no savings, and the government shutdown serves as a preview for what will happen once unemployment rises from 50-year lows.”
“U.S. home sales tumbled to their lowest level in three years in December and house price increases slowed sharply, suggesting a further loss of momentum in the housing market.
“The National Association of Realtors said on Tuesday existing home sales declined 6.4 percent to a seasonally adjusted annual rate of 4.99 million units last month.”
“The answer hinges on how long we have until the credit cycle turns, how long we have until interest rates have gotten to the point where they start to snuff out economic activity.
“If we were of the opinion that interest rates are already too high for the economy to stand and the recession was going to happen sometime next year, then I would say we’ve got a real big problem here.”
“Canadian manufacturers and wholesalers recorded sharply lower sales in November, adding to evidence the nation’s economy entered a soft patch at the end of last year.
“Wholesale sales dropped 1 per cent in November, the biggest one month decline for the sector since March 2016, Statistics Canada reported in Ottawa on Tuesday. Factory sales were down 1.4 per cent, the largest drop since January. Both sectors also recorded declines in volumes.”
“The end of quantitative easing will increase the risk of countries defaulting on their debt and may start a “game of political chicken” in the eurozone if Italy needs a Greek-style bailout, Credit Suisse has warned.
“Government debt levels have climbed since the financial crisis on the back of an unprecedented period of low interest rates.”
“A debate over whether China’s central bank should directly bankroll state spending is flaring up among bureaucrats and economists in Beijing as the Chinese government is under growing pressure to find new ways to arrest a deepening economic slowdown…
“Beijing’s traditional way of pumping liquidity into the banking system is not working as effectively as expected to bolster economic activity.”
“Japan’s exports fell 3.8 percent in December from a year earlier, hit by slowing demand in China, as the trade balance shifted back into deficit for the year, the government reported Wednesday. China’s economy has slowed most quickly than anticipated recently…
“Vibrant growth in the U.S. and China, among other regions, is vital for Japan’s export-oriented economy.”
“Investors are becoming increasingly nervous that Australia’s 27 years without a recession is being tested by global economic tremors.
“The risk of a sharp slowdown in China and simmering trade tensions between the US and China leave Australia exposed – on top of a potentially damaging correction in real estate prices.”
“As Argentina’s President Mauricio Macri tries to steer the national conversation away from economic gloom ahead of the October elections, one cabinet member is constantly by his side.
“Security Minister Patricia Bullrich stood prominently next to Macri at the presidential palace on Monday as he announced a decree strengthening the government’s powers to recoup goods obtained via bribery, drug-trafficking or other criminal activities.”
“Governments in developed countries like the U.S., Japan and Europe… have done very little to bring down debt in recent years despite low borrowing costs and the recent pickup in growth… The world is now “pushing at the boundaries of comfortably sustainable debt,” IIF’s Managing Director of Policy Initiatives Sonja Gibbs said…
“Emerging economies also have borrowed at an unprecedented rate and at a time when global interest rates are rising and the dollar has strengthened, meaning the loans will cost more to pay back…
“In 2019 the global economy will face stresses it hasn’t seen in at least a decade and central bankers and governments globally will be armed with fewer tools to fight them.”