U.S. and Global Growth Disappoints Yet Again; Negative Interest Rates?

by the Curmudgeon with Victor Sperandeo



Introduction (Curmudgeon):

U.S. economic growth decelerated sharply in the second half of 2015, with GDP up only 0.7% at an annual rate in the fourth quarter.  That's down from gains of 2% in Q3 and 3.9% in Q2, according to the BEA report released on Friday.  

“The deceleration in real GDP in the fourth quarter primarily reflected a deceleration in PCE (Personal Consumption Expenditures price index) and downturns in nonresidential fixed investment, in exports, and in state and local government spending that were partly offset by a smaller decrease in private inventory investment, a deceleration in imports, and an acceleration in federal government spending.”

Real GDP increased 2.4% in 2015 (from the 2014 annual level to the 2015 annual level), which was the same annual rate as in 2014.  In Q4-2015, non-residential fixed investment fell 1.8%, its first decline since Q3 2012. The energy sector continued to slash capital spending due to falling oil prices while other businesses haven’t increased CAPEX to make up the difference.  Please see charts below.


Inventories subtracted 0.45 % from GDP growth in the 4th Quarter, after reducing growth by 0.71% in Q3-2015. Inventory levels remain high, suggesting they’ll remain a drag on growth in early 2016. 

Exports slumped, as a strong dollar and weaker overseas economies sap demand for U.S. made goods. Indeed, it's a global economic slowdown with no country growing strongly.  

Consumer spending, which accounts for ~ 70% of GDP, rose at a 2.2% rate in Q4, though that was less than in the prior two quarters.   Economists are perplexed as to why consumer spending growth hasn’t been much stronger, given the collapse in crude oil prices since June 2014.   [The NY Times tried to address that issue in a January 21st front page article titled: “This Time, Cheaper Oil Does Little for the U.S. Economy.”]

Separately, several U.S. regional manufacturing reports have signaled economic contraction, including those from the New York, Dallas, Kansas City and Philadelphia Federal Reserve districts.  Please see John Williams, ShadowStats remarks below, which imply a national contraction.

Overseas, there were disappointing economic reports last week from Japan (which now has negative interest rates), Taiwan (adversely effected by China's slowdown), Russia (oil price collapse), and several other countries.  When Apple announced lower iPhone sales last week, it blamed weakness in oil-dependent economies like Russia, Brazil, and Canada.

It's not a pretty picture for those who believed in robust global growth almost seven years after the last recession ended.  The economic stagnation since then has been unprecedented.

ShadowStats Commentary on Fourth-Quarter GDP, Consumer and Monetary Conditions: 

Annualized Real GDP Growth Slowed to 0.69% in Headline Reporting,

In Commentary No. 783 to subscribers, John Williams wrote (bold font emphasis added):  

“The 'advance' estimate of 0.69% annualized growth in real fourth-quarter 2015 Gross Domestic Product (GDP) was no more than statistical noise.  Simply put, there was no statistically-significant difference between the “advance” headline quarterly gain and an outright quarterly contraction.  An outright contraction likely looms in the first (GDP) revision.

Given the accelerating downside trend in most near-term, headline economic reporting, including the durable goods orders detailed in yesterday’s Commentary No. 782, the consensus outlook for broad economic activity should be shifting rapidly to the downside.  Negative expectations for the first revision to fourth-quarter GDP on February 26th, and the actual reporting of same should follow.”

Discussion (Victor):

The economies of countries in the world that are not already in recession are heading lower.  The monetary policy tactic most used to combat economic weakness is best exemplified by a Saturday WSJ article titled: “Bank of Japan (BOJ) Launches Negative-Rate Policy

“The Bank of Japan will adopt a negative interest-rate policy for the first time as a sputtering economy, stubbornly low inflation and turbulent financial markets world-wide threaten to undermine Prime Minister Shinzo Abe's revival plan. The central bank said it cut the deposit rate paid on cash parked at the BOJ by commercial banks in excess of legally required reserves to minus 0.1% from the previous plus 0.1%."

The BOJ policy board voted 5-4 to cut rates.  This looks like the U.S. Supreme Court decisions of late, or the reality of the "fifth fool." 

Selected excerpts from a similar article in the Saturday NY Times are worth noting:


“With the global economy looking increasingly fragile, Japan is now taking a more aggressive step by cutting interest rates below zero on Friday…Moving to negative rates reflects a measure of desperation on the part of central banks. Their traditional tools have been largely exhausted, as most countries’ interest rates have been pushed to almost nothing.


With weak prospects for economic growth in many countries, businesses are reluctant to borrow for practically any new projects…In a global marketplace, Japan’s decision could have ripple effects, further clouding the outlook for the world economy.  The move to negative rates, for example, weakens the yen. That, in turn, creates a potential problem for China as Beijing struggles to contain outflows of money and prop up its own currency.


The People’s Bank of China, the country’s central bank, said last month that it was shifting away from pegging the value of its currency, the Renminbi, closely to the dollar. Instead, it preferred to link the renminbi to a basket of currencies, with the yen playing one of the largest roles after the dollar. If it ends up doing so, it could result in a weaker renminbi, as the yen falls.”

Let's examine what this BoJ negative interest rate action means to a typical Japanese saver.  We'll use U.S. dollars (rather than Japanese Yen) for simplicity. Assume you have $100,000.00 ($100K) in Japanese "Bank Sake." After Friday's BoJ announcement on negative interest rates, your account would be debited 10 bps over one year. So to hold cash at a bank would now cost the Japanese saver $100 per year in this example. The BOJ is doing this to stimulate savers to "spend your money" and for businesses to increase capital spending. 

But will a charge of $8.33 (=$100/12) per month do that?  If not, the BOJ will accomplish nothing. It is intended to be psychological. The implication is that if you don't spend your money we will charge you more of a penalty until you do so. Do you think that will work?

It's astonishing that "negative interest rates” are being used by many central banks to counter the economic declines all over the world (instead of tax cuts which would be a refreshing change from austerity based fiscal policies, especially in European countries with high debt/budget deficits).

The European Central Bank (ECB) became the first to cut deposit rates below zero in June 2014 and now charges banks 0.3% to hold their cash overnight. The ECB was followed by Denmark, Switzerland and Sweden.  Government bond yields in Europe and Japan fell further below zero on Friday. Negative yields now account for a quarter of JPMorgan’s index for government bonds.


Sidebar:  Cashless Society

Of course, you can take your money out of the bank, as this central bank's absurd method of thinking believes it can create greater penalties until you spend. The government's answer to you taking your money out of the bank is to create a "Cashless Society."  That was first promoted by Andrew G Haldane who is the Chief Economist at the Bank of England and Executive Director, Monetary Analysis and Statistics.  He is a member of the Bank’s Monetary Policy Committee. He also has responsibility for research and statistics across the Bank.   

A Cashless Society would prohibit you from countering the government from charging greater fees and thus force you to spend at some point. If you wanted your cash, you could only get a check to deposit in another bank. This is being talked about in several countries, especially Socialist dominated countries. 

Note:  David Haggath, A Curmudgeon reader, has written a blog post on this topic which you can read here. 

Only a politician would think of this form of controlling the masses. It would never work, and would rather lead to the purchase of gold, silver, real estate, precious stones etc.


As the Curmudgeon reports above, U.S. 4th quarter GDP ('advance' estimate) was only 0.7% at an annual rate. The price index for gross domestic purchases increased 0.3% in 2015, compared to 1.5% in 2014. Note that the CPI Core rate was + 2.13% for 2015.

The U.S. economy is weakening in almost all areas and forecasters have taken notice.

"The chance of the U.S. sinking into a full-blown recession now stands at 18%,” according to a CNN Money survey of economists released this week.  That's nearly double what the nation's top economic policymaker predicted only a month ago. Federal Reserve chair Janet Yellen put the probability of a recession in 2016 at about 10% during her December 2015 press conference after the Fed raised interest rates for the first time in years.  The above referenced CNN article states: “Yellen has said repeatedly that she thinks a recession is not on the horizon.  The U.S. has enjoyed two years of incredibly strong job growth -- the best since 1999 -- and the economy is expanding at a healthy pace of around 2% a year."

In addition, negative nominal rates have not worked for the EU and won't work for Japan.  However, it does drive currencies down and stocks up (temporarily).  For example, the S&P 500 rallied from an oversold condition on Friday to be up 46.88 points or 2.48%. The yen was down 1.91% vs the dollar.            

This mentality of trading reminds me of the late 1970's when we all watched Money Supply, which the Federal Reserve was trying to control.  Increases meant “buy stocks” while decreases said “sell.” This led to "higher interest rates," which was OK as long as money supply expanded.  It eventually ended in a painful death as higher rates helped bring on the double dip recession in 1980 and 1981-82.

Today, "lower rates" means “buy,” the Fed/ECB/BoJ doing nothing means “sell.” This is all ridiculous because after 6+ years of lower/negative rates global economic growth is extremely slow (or negative in some countries).

Slow growth leads to economic declines, until a central bank lowers rates. Then markets rally, while the economy yawns.  Yet nothing changes economically. It should be stressed that the U.S. 30 year- long term government bond yields are 2.75%, which reflects a recession.

The fact that the equity markets are disconnected from the economy has been pointed out by us many times. Several years ago, the Curmudgeon called it “the great disconnect.” Eventually, both the economy and stock market will be back in sync (on the downside).

Are there any countries whose economies are doing well? China, the EU, Japan, the U.K., the U.S., Brazil, Canada, Russia, emerging Asia nation's, most of South America and Australia are all struggling or already in recession.  A great deal of the cause is declining commodity prices especially oil and gas. This is scaring many creditors to believe that defaults are on the way. The high yield and corporate bond markets also reflect this.  It is a risk the Fed will have a tough time fixing.

The earnings picture for the S&P 500 is not bright, according to David Stockman's January 28, 2016 blog post titled “Death Throes of the Bull."  Here's an excerpt:

Reported GAAP earnings peaked at $106 per share on the S&P 500 more than a year ago for the LTM period ending in September 2014.

By the most recent reporting period they were down by 14.4% to $90.66 per share, and there is no reason to believe that this slide will rebound when the Q4 numbers are actually tallied.

Here’s the thing. This exact pattern occurred during the 2007-2009 collapse. While the Wall Street hockey sticks were projecting earnings of $120 per share or more for 2008, actual GAAP earnings starting falling in the June 2007 LTM period, and kept plunging until they hit bottom at $7 per share in June 2009.

Victor's Conclusions:

I've been a bear on the U.S. economy to the point I believe it cannot be fixed. The equity markets in the U.S. have a rally left in them, which will end when the Fed sings "it will not be raising rates," which everyone should know by now, despite Yellen's rhetoric.  That day will be fully discounted and will cause an intermediate high. The market will top that day and fall 10-20% before the Fed has to come up with another scheme to cause a rally.  After all, it's an election year.

To best describing the current economic situation everywhere you look here's a quote from a well-known book titled "The Law," which was written by Frederic Bastiat, in 1850:  

"...when plunder is abetted by the law, it does not fear the courts, your police, and your prisons. Rather, it may call upon them for help." – Bastiat

Good luck and till next time...

The Curmudgeon


Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

Copyright © 2015 by the Curmudgeon and Marc Sexton. All rights reserved.

Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the URL of the original posted article(s).