I have been keeping tabs pretty much daily on the global economy’s health since oil prices crashed in 2014 and I have to say there has never been as much cause for alarm as there is right now.
I am seeing burgeoning risk and a growing multitude of vulnerabilities.
We have to hope that the trade war is swiftly resolved and the Fed cuts aggressively this autumn or we are in trouble. We may be in trouble regardless:
“Another day, another round of bad news highlighting the risk that the global economy is headed for a serious downturn.
“China reported the weakest growth in industrial output since 2002. Germany’s economy shrank as exports slumped, and euro-area production plunged the most in more than three years as the overall expansion cooled. US and UK bond markets sent their biggest recession warnings since the global financial crisis.”
“Stocks plunged on Wednesday after the bond market threw up one of its last remaining warning flags on the economy…
“The Dow Jones Industrial Average closed down 801 points at 25,479, a loss of 3%, in the largest one-day point drop since October 2018…”
“London house prices have been on the slide longer than during the slump that followed the financial crisis, after a 16th consecutive month of falls was revealed today.
“The latest 2.7 per cent drop in the year to June also means that average prices in the capital are now below where they stood on the day of the Brexit referendum.”
“According to a new report commissioned by the supporters of second [Brexit] poll, more than half of UK farms could go out of business if Britain crashes out of the EU on 31 October…
“To coincide with the report and launch of the Farmers for a People’s Vote group, campaigners are taking a small flock of sheep past the Cabinet Office where no-deal planning is taking place.”
“Deutsche Bank’s recently announced restructuring meant to correct its decadelong financial woes could ultimately make matters worse. Indeed, it could become even more of a threat to taxpayers, the financial system and the global economy…
“Reducing capital to increase short-term returns for shareholders is grossly irresponsible. Deutsche Bank is essentially diverting its critical loss-absorbing capital buffer — that would otherwise be available as a source of strength to weather an economic downturn — to placate its angry shareholders.”
“Most governments around the world owe a fortune. But the Italian debt pile would make most others blush. Italy owes $2.3 trillion (€2.06 trillion) in public debt. That’s around 133% of its GDP — a massive ratio that puts it in the top five in the world.
“While the majority of that stock of borrowing is weighing down banks in Rome and Milan, European banks are severely exposed in the event of anything going wrong.”
“Argentina’s main problem is that it’s a stick in a doom loop. The central bank ought to print money in order to maintain a reasonable deficit. However, due to the very bad economic situation in the country, the deficit keeps growing…
“This means that you need to print more and more money to maintain “stability.” Of course, that’s only possible up to a certain point when investors lose faith, trust, and patience.”
“Though only a small city-state, events in Hong Kong should rouse Americans because of the threat to democracy there, and also the considerable risk of international financial and economic contagion.
“American investors should pay greater attention to the implications of what is happening halfway around the world.”
“The jobless rate in Chinese cities returned in July to its highest level since regular reporting on the data began, as employers turned cautious.
“Other key economic readings for the month, including factory production, consumption and property investment, came in much lower than expected.”
“As China moves toward a more market-based approach to determining the cost of money in its economy, one metric suggests corporate debt is going in the opposite direction.
“Some 17% of company bonds in the first half were sold at yields at least 50 basis points below rates in the secondary market, according to data from China Chengxin International Credit Rating Co. That’s a jump from 9.9% in the second half of 2018.”
“President Donald Trump defended his trade wars and attacked the Federal Reserve on Wednesday: “We are winning, big time, against China. Companies & jobs are fleeing.
“Prices to us have not gone up, and in some cases, have come down,” the president wrote on Twitter. “China is not our problem, though Hong Kong is not helping. Our problem is with the Fed. Raised too much & too fast. Now too slow to cut….”
“For Americans accustomed to paying 4 or 5 percent mortgage rates, let alone the double-digit figures consumers endured in the early 1980s, the new loan from Denmark’s Jyske Bank might seem inconceivable.
“The Danish lender last week started offering home buyers 10-year mortgages at an interest rate of -0.5 percent. That means borrowers over a decade will pay back a little less than the amount borrowed, not including one-time fees.”
“The recession alarm bell ringing in U.S. government bond markets sent investors rushing once more to haven assets, pushing the world’s stockpile of negative-yielding bonds to another record.
“The market value of the Bloomberg Barclays Global Negative Yielding Debt Index closed at $16 trillion Wednesday after the key U.S. 2-year and 10-year yield curve inverted for the first time 2007 — a move often considered a harbinger of an economic downturn.”
“The combination of a slew of data suggesting a slowdown in global growth amid the U.S.-China trade war and persistently high levels of oil in U.S. storage has punctured recent optimism in crude markets, stoking expectations leading oil producers may take further steps to support prices.”
“Five big economies are at risk of recession. It won’t take much to push them over the edge… Germany, Britain, Italy, Brazil and Mexico each rank among the world’s largest 20 economies.
“Singapore and Hong Kong, which are smaller but still serve as vital hubs for finance and trade, are also suffering.”
“During the global financial crisis, I regularly called a close friend in NYC to comment on then-daily economic events that were shocking. Bear Stearns went bankrupt; Lehman went bankrupt; the economy shed 600,000 jobs per month. While the build-up to the crisis was amazingly slow, once the bottom dropped, it dropped hard.
“That event stands in stark contrast to the last 12 to 18 months when there’s been a continual grinding lower in the global economic data, primarily centered in the manufacturing sector.”
“…events this month signal that the problems facing the world economy are more complex and intractable than the immediate reaction to President Trump’s trade war de-escalation might suggest. A tactical retreat here and there won’t solve the deeper problems hanging over the world economy.
“Once chaos has been unleashed into the global economic system, it can be hard to reel back in.”
“When assumptions about how the world works are shattered, a global downturn is often the result. The world learned in the early 1970s that the era of cheap oil was over, in the early 1980s that countries could default, and a decade ago that American mortgages and global banks aren’t safe.
“Today, a similar rethink of globalization is under way. From Washington to Buenos Aires, nations’ mutually reinforcing commitment to open markets is disintegrating.”
“What should worry risk managers is that we are in unchartered territory. According to Sven Henrich, founder and lead market strategist for NorthmanTrader…
““We’ve never faced a recession with so much debt and so little Fed ammunition available.” I agree with him that “With negative rates still in effect in many places, there’s no playbook for this. Historical data will be of little use.””
Read the previous ‘Economic’ thread here and visit my Patreon page here.
A ‘monetarist’ disagrees?
“Given that the Fed and the ECB have shown a welcome pragmatism in responding to the current global slowdown, and given also that – despite our concerns – money growth trends remain more or less satisfactory, a central forecast for 2020 can sensibly be for roughly trend growth of the world economy accompanied by low inflation. As ever, many worries surround a benign view of this sort, but recent financial events in China and India – like those in the developed world – also support it. “
Many thanks for this, James. I shall read it over the weekend… Best wishes, Justin