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Britain’s constitutional crisis has hit before the next great spasm of Europe’s intractable monetary crisis. But they are in close competition.

The eurozone faces a category five economic storm. It is structurally defenceless as the world slides into recession. This will not be an ordinary downturn because central banks no longer have the instruments to fight it.

If there is an October election in the UK – and if it delivers a bigger Tory majority as polls suggest – EU leaders will have to decide whether to risk adding the shock of a no-deal Brexit to all the other shocks hitting their industries.

The US economy has been the last pillar holding up the global edifice. It is now crumbling too. The yield curve is deeply inverted. Consumer sentiment has dropped to a seven-year low. The ISM manufacturing index has tipped into contraction. Export orders are the lowest since April 2009.

In my view, the recessionary door has already closed. Even if the Federal Reserve were to slash rates by 50 basis points this month, it would be too late.

Donald Trump’s fiscal cliff has arrived and the Democrats in Congress are in no mood to offer the White House a lifeline. Net stimulus from state and federal governments will swing from plus 0.75pc of GDP last quarter to negative levels by early next year, according to the fiscal gauge of the Hutchins Centre.

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World trade is contracting. The eurozone has in turned stalled. It is paying the price for its chronic reliance on global demand to keep afloat.

It is also the chief casualty of Donald Trump’s trade wars. Chinese goods that are shut out of the US market are being diverted into Europe. The more that Beijing devalues the yuan, the worse it gets.

The European Central Bank cannot do much to counter the Chinese deflationary wave. The policy rate is still stuck at minus 0.4pc after decade of global expansion.

There is much talk of an imminent ECB rescue package. But Frankfurt has already reached the ‘reversal’ threshold where further rate cuts turn contractionary. They hurt banks. They lead to a rise in ‘precautionary’ savings as household puts aside more money…

“…we may all go over the cliff together, Europe and Britain lashed together in mutual destruction into the storm waters of global recession… The currency bloc would disintegrate.

We might then be having a very different political discussion in the early 2020s.”

https://www.telegraph.co.uk/business/2019/09/04/double-shock-global-recession-no-deal-brexit-may-europe-can/


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“Britain’s economy looks to be heading for its first recession since the financial crisis, as growth in the important services sector slows. The closely watched IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI) fell to 50.6 in August…

“…a drop from July’s 51.4. The survey also revealed that business optimism is at its lowest level for more than three years. The services sector is the largest part of the UK economy, forming about 80% of GDP.”

https://news.sky.com/story/closely-watched-survey-indicates-uk-on-track-for-recession-within-months-11801902


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“German industrial orders fell more than expected in July on weak demand from abroad, data showed on Thursday, suggesting that struggling manufacturers could tip Europe’s biggest economy into a recession in the third quarter…

“Germany’s gross domestic product contracted by 0.1% quarter-on-quarter in the second quarter on weaker exports…”

https://uk.reuters.com/article/us-germany-economy-industrial-orders/recession-risks-rise-for-germany-as-industrial-orders-plunge-idUKKCN1VQ0M1


“The US economy is contracting. I am glad my indicators have done a good job predicting a slowing growth trend back in 2018.

“Unfortunately, it means that the economy is suffering. I expect hard economic data to come in very weak in the months ahead. I also expect the pressure on the stock market to rise as I discussed in a previous article.”

https://seekingalpha.com/article/4289600-u-s-economy-contraction


“Conditions are favorable for another steep fall in the U.S. Treasury bond yield curve, says UBS, Switzerland’s largest financial institution. In revised projections published Wednesday, the bank identified U.S.-China trade tensions and their impact on economic growth as the chief catalyst for the continued drop off in yields.”

https://www.ccn.com/10-year-treasury-bond-yield-will-crash-to-1-ubs-warns/


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“Jay Powell, the Fed chief, hasn’t had much chance to take a vacation this summer.  

“Amid headlines that point to a global slowdown, he is under pressure to cut rates – the market is currently pricing 100 basis points of cuts within a year. Unfortunately, Powell has few levers to pull when it comes to staving off the next recession.”

https://www.forbes.com/sites/randybrown/2019/09/04/the-fed-rethinks-its-role-in-a-recession/#3c0ba2ba45e7


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“Passive investments such as index funds and exchange-traded funds are inflating stock and bond prices in a similar way that collateralized debt obligations did for subprime mortgages more than 10 years ago, Burry told Bloomberg News in an email. When the massive inflows into passive vehicles reverse, “it will be ugly,” he said.

““Like most bubbles, the longer it goes on, the worse the crash will be,” Burry said.”

https://www.cnbc.com/2019/09/04/the-big-shorts-michael-burry-says-he-has-found-the-next-market-bubble.html


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“Argentina’s main stock index Merval fell on Tuesday over 14 percent amid a continuing economic crisis in the country, Trend reports citing Sputnik.

“As of 17.48 GMT, Merval was down 14.07 percent to 22,510 after rising 6.45 percent to 26,195.41 on Monday.”

https://www.azernews.az/region/155505.html


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“Inflation in Argentina this calendar year will soar to 55 percent, while the troubled nation’s gross domestic product (GDP) will contract by 2.5 percent, according to new survey from the Central Bank.

“Those are significant rises. Prices were originally expected to rise by 40 percent this year…”

https://www.batimes.com.ar/news/economy/new-central-bank-survey-predicts-55-inflation-in-2019.phtml


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“South Africa’s cash-strapped power utility Eskom could be forced to shut some plants if it fails to reduce emissions, its chief operating officer warned on Wednesday, raising the specter of further blackouts.

“The potential closures, which Jan Oberholzer said could cut a tenth of the state firm’s 45,000 MW production capacity, piles pressure on the government which has had to bail out the debt-ridden company to keep it afloat.”

https://www.cnbc.com/2019/09/04/reuters-america-update-2-s-africas-ailing-eskom-faces-emissions-violations-could-shut-plants.html


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“More Chinese companies are defaulting on private bonds this year as the slowing economy weighs on weaker companies and firms seek to repay publicly traded debt first.

“The nation’s issuers have missed repayments on a record 31.8 billion yuan ($4.4 billion) of private bonds this year through August, compared with 26.7 billion yuan for all of 2017 and 2018 combined…”

https://www.caixinglobal.com/2019-09-05/private-bond-defaults-hit-record-44-billion-as-economic-slowdown-bites-101459113.html


“Provincial auditors across China are sounding the alarm on a wave of fast-approaching local government debt maturities that analysts think could amount to at least Rmb3.8tn ($560bn) within the next two and half years, presenting a risk to China’s financial system.”

https://www.ft.com/content/5093658a-ced1-11e9-b018-ca4456540ea6


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“What it means is that an investor is paying £159 today to receive £150 in future cash flows – a £9 loss. The price of £159 for the bond is effectively saying that the £5 of future cash flow is effectively worth more than £5 today.

“This can only happen if the buying power of £5 will increase because the prices of goods and services fall – deflation in other words.”

https://www.investorschronicle.co.uk/comment/2019/09/04/investing-in-a-world-of-negative-interest-rates/


“Falling expectations for consumer-price growth, plunging bond rates and flatter yield curves all point to mounting doubts in financial markets over whether monetary policy makers have what it takes to reflate their economies and avert a global recession…

““What markets are telling us is that they don’t expect central banks to be able to raise inflation now,” said Naoya Oshikubo, senior economist at Tokyo-based Sumitomo Mitsui Trust Asset Management Co., Asia’s largest asset manager. “Central banks need to regain credibility.””

https://finance-commerce.com/2019/09/the-worlds-central-banks-have-lost-credibility-with-markets/


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“Economists doubt there’s much that can be done in terms of monetary policy to stave off a downturn. With short-term interest rates so low already, central banks don’t have the firepower they once possessed to get economies back on track.

“As the economic challenges pile up — from the U.S.-China trade war to the seemingly never-ending Brexit saga — business confidence and investment is falling off.”

https://www.voanews.com/economy-business/economists-fear-central-banks-have-no-firepower-deter-slowdown


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“Monetary policy – both conventional and unconventional – works through lower interest rates. Lowering rates across the yield curve helps stimulate demand by lowering the cost of financing consumption or investment.

“It also gives investors incentives to re-balance into riskier assets, in principle reducing the cost of capital for companies.

“If policy rates are near their effective lower bound and the scope for longer-term rates to fall is limited, monetary policy cannot provide much more stimulus through this channel – a liquidity trap situation.”

https://seekingalpha.com/article/4289756-central-banks-running-ammo


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““A few people became rich beyond the wildest dreams of Croesus,” Appelbaum observes, “but the middle class now has reason to expect that their children will lead less prosperous lives.”

“The financial crisis and the Great Recession bared and exacerbated those consequences in ways that 10 years of recovery have not erased. The rise of angry populism suggests “the economists’ hour” has passed.”

https://www.cnbc.com/2019/09/04/capitalism-is-in-a-moment-of-crisis-and-business-leaders-know-it.html


“Revenues at the world’s top investment banks plunged to a 13-year low in the first half of 2019 as geopolitical tensions, slowing growth and low interest rates compounded a structural decline that set in after the financial crisis.”

https://www.ft.com/content/3074d05c-cf28-11e9-99a4-b5ded7a7fe3f


Read the previous ‘Economic’ thread here and visit my Patreon page here.