Economic Weakness is Getting Worse
by Victor Sperandeo with the Curmudgeon
We briefly summarize the economies of the major countries in the world, which include the U.S., UK, EU, Japan, and the BRICs (Brazil, Russia, India and China). We follow with a largely unknown fact that 2015 was the worst year for world trade since 2008. Then we provide an assessment of global economic growth from several authorities. Our punchline is Victor's analysis of income inequality and the counterproductive effects of "central planning" on various economies.
Quick-take on Global Economies:
On Friday, the BEA revised 4th quarter 2015 real GDP to an increase of 1% (at an annual rate) from the prior quarter.
The BEA said the deceleration in real 4th quarter GDP primarily reflected a deceleration in PCE (personal consumption index) and downturns in nonresidential fixed investment, in state and local government spending, and in exports that were partly offset by a smaller decrease in private inventory investment, a downturn in imports, and an acceleration in federal government spending. Real gross domestic purchases (i.e. purchases by U.S. residents of goods and services wherever produced) increased 1.2% in the 4th quarter of 2015, compared with an increase of 2.2% in the 3rd quarter.
Even though the 4th quarter 2015 GDP report was a slight uptick from first “advance” estimate of 0.7%, it's a deceleration from the 3rd quarter and all of 2015. Real GDP increased 2.4% in 2015, which is the same rate as in 2014.
Indeed, US real economic growth and productivity are slowing down. Yet the beginning of each year always brings forecasts of the usual 2.5%-3% (trend) annual GDP growth, which seems to be predicted every year by the "Blue Chip Economists" and the Fed.
Somehow U.S. economic growth is always overestimated and doesn't seem to ever get to 3%? Did you ever wonder why?
The UK Office for National Statistics' (ONS) second estimate of GDP growth for the 4th quarter 2015 was unrevised at 0.5%. The UK economic growth estimate for 2015 was also unchanged at 2.2%, which was the slowest annual pace since 2012.
The UK will have a referendum1 vote on leaving the EU on June 23rd. Victor believes that will cause Brits to be cautious which will result in slowing UK economy.
Note 1. A referendum is basically a vote in which everyone (or nearly everyone) of voting age can take part, normally giving a "Yes" or "No" answer to a question. Whichever side gets more than half of all votes cast is considered to have won.
The G20 Finance Ministers are very concerned about “BREXIT.” Finance ministers from the world's leading economies have warned of a "shock" to the global economy if the UK leaves the EU. The ministers voiced their opinion in a statement released at the end of a two-day meeting of G20 nations in China.
Economies of the EU block of 28 member countries and Japan continue to stagnate such that there's little or no growth. The Economist reports that Euro-zone2 GDP in the final quarter of 2015 was still below its pre-crisis peak of early 2008.
Note 2. The Euro-zone consists of 19 European countries that use the Euro as their single currency. Short term interest rates for the Euro-zone are set by the European Central Bank (ECB) headed by Mario Draghi. The ECB currently has negative interest rates. Draghi has hinted that negative interest rates are going to go even more negative later this year (perhaps starting in March).
Japan is on the iron lung of life support. They are in the worst shape of any major country (and most minor ones too). Japan's Debt to GDP ratio is 245% (as of 7/23/15) which is the highest in the world. For comparison, Greece (often viewed as a “basket case” country) had a 179% ratio as of 12/31/15). Abenomics can be now classified as a complete failure--even as a Frankenstein.
The NIKKEI is down -22.4% from its June 2015 high as of this past Friday. The Yen has rallied from the 6/5/15 low to the Friday's close +10.3% (using the current month futures contract).
Indeed, the yen's surge to 15-month highs against the dollar recently reveals deep problems in global markets, according to Steven Englander, global head of currency and G-10 strategy at Citigroup. "It's rallying because it's a safe haven currency and the world's falling apart," Englander told CNBC's "Worldwide Exchange." "It's not rallying because there are negative interest rates."
The “nail in the coffin” and “stake through the heart” for Japan is that it not only has the oldest population of the major nations, but there's been a decline in its current population. The Guardian reports:
Japan's population declines for first time since 1920s – official census fall of nearly one million in official figures shows that demographic problems will be a reality for the country in the future...The country lost 947,345 people – more than the population of San Francisco – between 2010 and 2015.
It is an indication that as the nation gets older, and people have fewer babies at a later age, a demographic crisis is looming. According to the United Nations, Japan’s population is likely to shrink to 83 million by 2100, with 35% of them older than 65. Economists fear that the decline in population spells trouble for the world’s most indebted economy.
Negative interest rates were intended to force the public into riskier assets and to spend more. Clearly, that hasn't happened. Instead, it's caused the Japanese to take money out of banks and put it into safes they are frantically buying. From Zero Hedge: "Safes Sell Out in Japan, 1,000 Franc Note Demand Soars as NIRP Triggers Cash Hoarding."
“Look no further than Japan’s hardware stores for a worrying new sign that consumers are hoarding cash – the opposite of what the Bank of Japan had hoped when it recently introduced negative interest rates,” wrote the WSJ. “Signs are emerging of higher demand for safes—a place where the interest rate on cash is always zero, no matter what the central bank does.”
“In response to negative interest rates, there are elderly people who’re thinking of keeping their money under a mattress,” one saleswoman at a Shimachu store in eastern Tokyo told The Journal. Safes are much in demand. WSJ wrote that at least one model costing $700 is sold out and won’t be available again for a month.
“According to the BOJ theory, they should have moved their funds into riskier but higher-earning assets. Instead, they moved into pure cash that earned nothing,” Richard Katz, author of The Oriental Economist newsletter wrote this month.
Brazil and Russia are in recessions. China is in heading into recession, but will not say that. (Victor) Like all governments they lie about reality and thereby totally fudge their numbers to look better. As the Chinese saying goes: “When numbers produce officials and officials produce numbers, outright fraud will be an issue as well.”
Source: Animal Spirits with Chinese Characteristics: Investment Booms and Busts in the World's Emerging Economic Giant, by Mark A. DeWeaver
India is growing on target of 7.3% to 7.5% and performing the best of all nations. The Prime Minister Narendra Modi is a tax cuter and a believer in free enterprise! At a jam packed event in Delhi, Modi said:
"If the government doesn't do anything, so much will happen. We have done a lot for 70 years. Where have we reached? Please tell us what- not- to do. If we decide not do anything, they (entrepreneurs) will take us places."
Modi is the only leader of all the nations mentioned above that has a philosophy of markets and economics. It's no wonder India's economy is doing better than other countries.
World Trade - Double Digit Decline in 2015:
The February 27th Financial Times reports that 2015 was the worst year for world trade since the aftermath of the global financial crisis.
The value of goods that crossed international borders last year fell 13.8% in dollar terms — the first contraction since 2009 — according to the Netherlands Bureau of Economic Policy Analysis’s World Trade Monitor. Much of the slump was due to a slowdown in China and other emerging economies which resulted in much weaker demand for imported goods and services worldwide.
The new data released on Thursday represent the first snapshot of global trade for 2015. But the figures also come amid growing concerns that 2016 is already shaping up to be more fraught with dangers for the global economy than previously expected.
The Baltic Dry index, a measure of global trade in bulk commodities, has been touching historic lows. China, which in 2014 overtook the US as the world’s biggest trading nation, this month reported double-digit falls in both exports and imports in January. In Brazil, which is now experiencing its worst recession in more than a century, imports from China have collapsed.
Exports from China to Brazil of everything from cars to textiles shipped in containers fell 60 per cent in January from a year earlier while the total volume of imports via containers into Latin America’s biggest economy halved, according to Maersk Line, the world’s largest shipping company.
“What we are seeing right now from China is not only a phenomenon for Brazil; we are seeing the same all over Latin America, declining [Chinese export] volumes into all the markets,” said Antonio Dominguez, managing director for Maersk Line in Brazil, Paraguay, Uruguay and Argentina. “It has been going on for several quarters but is getting more evident as we move into the year .”
Three Views of the Global Economic Outlook:
1. Annual Report by Catherine L. Mann, OECD Chief Economist:
The world economy is likely to expand no faster in 2016 than in 2015, its slowest pace in five years. Trade and investment are weak. Sluggish demand is leading to low inflation and inadequate wage and employment growth.
The downgrade in the global outlook since the previous OECD Economic Outlook in November 2015 is broadly based, spread across both advanced and major emerging economies, with the largest impacts expected in the United States, the euro area and economies reliant on commodity exports, like Brazil and Canada.
Financial instability risks are substantial, as demonstrated by recent falls in equity and bond prices worldwide, and increasing vulnerability of some emerging economies to volatile capital flows and the effects of high domestic debt.
“Global growth prospects have practically flat-lined, recent data have disappointed and indicators point to slower growth in major economies, despite the boost from low oil prices and low interest rates,” said OECD Chief Economist Catherine L. Mann. “Given the significant downside risks posed by financial sector volatility and emerging market debt, a stronger collective policy approach is urgently needed, focusing on a greater use of fiscal and pro-growth structural policies, to strengthen growth and reduce financial risks.”
The OECD projects that global economic growth for 2016 and 2017 will be well below long-run averages of around 3.75%. Forecasted global growth will be lower than would be expected during a recovery phase for advanced economies, and given the pace of growth that could be achieved by emerging economies in convergence mode.
2. Citi Group’s Global Economic Outlook and Strategy Highlights:
· Global growth prospects are worsening further, with deterioration across advanced economies alongside previous weakness in emerging markets.
· We are cutting our 2016 global growth forecast to 2.5% from 2.7%. Allowing for probable mismeasurement in China’s GDP data, “genuine” global growth in 2016 probably will be barely above 2% YoY. Our growth forecasts are generally below consensus and risks probably still lie to the downside – especially for emerging markets. There are rising risks that “genuine” 2016 global growth will be sub-2% YoY.
· We expect the ECB and BoJ to ease further, but suspect this will provide only limited stimulus. Fiscal easing or helicopter money could be more effective reflation tools, but remain unlikely unless global growth prospects worsen much further.
· The UK’s EU referendum (June 23) is a key extra near-term global risk. Brexit, if it happens, would probably have large and adverse effects for the UK and the overall EU.
3. Stark Warning on Global Growth by Mark Carney, Governor of Bank of England (BoE):
Mark Carney, head of the BoE, has warned that Britain and other countries risk becoming trapped in a world of low growth unless governments implement vital reforms. The Governor of the Bank of England warned that “sizable downside risks” were currently “plaguing” the global outlook.
Speaking at the G20 meeting in Shanghai, China, he said the current “low growth, low inflation and low interest rate” environment could become permanent unless governments stop relying solely on central banks to boost demand.
While Mr. Carney stressed that central banks had not run out of ammunition and could still "buy time" for economies to reform and find new channels of growth, he said monetary firepower was not a panacea for the problems currently facing the global economy.
Victor's Comment: For this “global trade recession,” we can greatly thank Janet Yellen for her stellar acumen as Fed Chairperson. She talked up the dollar (from July 2015), warning of raising rates, and then raised the Fed Funds rate in December 2015, while the dollar was rising, U.S. and global economic growth was slowing. The currencies of dozens of emerging market countries that had borrowed in U.S. dollars and invested in their own country's projects via their own currencies now had to repay in rising US dollars (with respect to their own currencies) and higher interest rates.
-->Kindly note that GOLD, in almost all emerging market currencies, is making new major highs.
Helicopter Drops to the Rescue:
On February 24th, the Financial Time's Chief Economics commentator Martin Wolf wrote a stunning editorial titled: The helicopter drops might not be far away.
Curmudgeon Note: In November 2002, Ben Bernanke, then a member of the Board of Governors of the US Federal Reserve, made a speech before the National Economists Club in Washington, D.C. that referred to economist Milton Friedman’s famous “helicopter drop” of money as a solution for deflation. In essence, the suggestion was that, if there is deflation, it may be cured simply by dumping new currency from helicopters. Those who picked up the bills would then, theoretically, go out and spend them, and the deflation would end. Bernanke was became known as “Helicopter Ben” ever since and justified that moniker by his QE policies.
Curmudgeon Note: Image courtesy of the Financial Times
(Victor) This Keynesian Progressive/New World Order backer wrote:
No simple solutions for the global economic imbalances of today exist, only palliatives. The current favorite flavor in monetary policy is negative interest rates. (Hedge fund king) Ray Dalio argues that: “While negative interest rates will make cash a bit less attractive (but not much), it won’t drive…savers to buy the sort of assets that will finance spending.” I agree. I cannot imagine that businesses will rush to invest as a result. The same is true of conventional quantitative easing. The biggest effect of these policies is likely to be via exchange rates. In effect, other countries will be seeking export-led growth vis-à-vis over-borrowed US consumers. That is bound to blow up.
One alternative then is fiscal policy. The OECD argues, persuasively, that coordinated expansion of public investment, combined with appropriate structural reforms, could expand output and even lower the ratio of public debt to gross domestic product. This is particularly plausible nowadays, because the major governments are able to borrow at zero or even negative real interest rates, long term. The austerity obsession, even when borrowing costs are so low, is lunatic (see chart).
If the fiscal authorities are unwilling to behave so sensibly — and the signs, alas, are that they are not — central banks are the only players. They could be given the power to send money, ideally in electronic form, to every adult citizen. Would this add to demand? Absolutely. Under existing monetary arrangements, it would also generate a permanent rise in the reserves of commercial banks at the central bank. The easy way to contain any long-term monetary effects would be to raise reserve requirements. These could then become a desirable feature of our unstable banking systems.
The main point is this. The economic forces that have brought the world economy to zero real interest rates and, increasingly, negative central bank rates are, if anything, now strengthening. This is what the world economy is showing. This is what monetary policy is indicating. Increasingly, this is what asset prices are demonstrating.
Victor's Comment: To this I say: Mr. Keynes/Mr. Wolf — the long run is here, and we are the walking dead (aka Zombies) that are just not buried yet!
STOP PRESS: G20 Says Economic Risks Have Risen Globally:
Really? What else is new? From the Feb 27th on line WSJ (subscription required):
Citing mounting threats to the global economy, world financial chiefs vowed to accelerate long-promised economic overhauls to ease the burden on the easy-money stimulus policies that are fast running out of steam.
Finance ministers and central bankers from the Group of 20 largest economies meeting in Shanghai during the weekend sought to allay growing concerns that fissures in the global economy—including the potential for a sharp deceleration in the Chinese economy—could pitch the world back into recession.
“We will use all policy tools—monetary, fiscal and structural” to strengthen growth, boost investment and ensure stability in financial markets, the G-20 said in its official communiqué issued Saturday after two days of intense talks.
Global markets have shuddered in recent months amid a souring growth outlook, overall weak demand and anxieties that China’s economy may be falling faster than Beijing acknowledges and might potentially undermine an increasingly fragile global economy. The International Monetary Fund earlier this week said it likely would downgrade its forecast in coming months, calling for a coordinated program to boost demand.
“There’s clearly a sense of renewed urgency” among the G-20 countries, IMF Managing Director Christine Laggard said after the meeting. “They don’t have much time left.”
Victor's Comments: So doing more of what does not work to cure a problem the governments created?
It should be highlighted that when Japan cut rates to -10 bps on January 28th, Gold rallied 11.8% on 2/11/16 in a straight line. This should be noted, as any discussion of negative rates, and talk of a cashless society will drive gold up, as even fiat currency gets booted out of existence, which is beyond socialism. Government control jumps to virtual tyranny as all money is controlled by the “Statists.” This is the reason the Euro talks of stopping the manufacture of 500 euro notes, and the U.S. is talking of stopping the printing of the $100 note.
Income Inequality vs. Freedom:
In the 435 page "US Economic Report of the President," economist Brian Riley counted the use of the term "INCOME INEQUALITY," which is mentioned 235 times versus the concept "FREEDOM," which is mentioned only once.
Of course, the term “income inequality” is synonymous with Marxism. In a free society-by definition-income inequality is guaranteed, whereas in a Marxist /Communist country income is virtually perfectly the same, except for the leaders. Cuba and North Korea supposedly have no income inequality — is that good?
Curmudgeon Note: Isn't communism defined as a dictatorship of the proletariat (the common people)? If so, how can one justify Fidel Castro's estimated net worth of $900 Million? The UK Daily Mail stated that Fidel had his own private island called Cayo Piedra which featured a floating restaurant, helipad and even a pen containing two pet dolphins.
Victor: What is the pinnacle of insult, to anyone's intelligence is that Central Planning, or the “statist” controlled Federal Reserve is by far, virtually the total cause of income inequality.
The Wilshire Total Market Index was $6,858.4 trillion on March 9th 2009. On Friday, February 26, 2016 it was $19,969.7 Trillion. That's a 16.5% compounded annual rate of return, which was primarily due to ZIRP, rounds of QE, etc. Yet the overall U.S. economy has only grown at a 2.03% annual rate!
Naturally, about 90% of U.S. stock market equity is held by 10% of the shareholder population. Thereby, those that have the most wealth have gotten richer through their holdings of financial assets, stock options, trading bonuses, etc.
The irony is that the very income distortion the government is railing against to change has been greatly increased by Fed monetary policy since 2009. No politician points this out -not even the GOP contenders for President!
This problem of not allowing the public, especially the dwindling middle class, to retain more of their earnings after tax (e.g. Obamacare, aka ACA, is a grand tax increase on the middle class) and the value of their savings (with zero or negative interest rates on short term deposits) is causing a monetary death spiral. Governments all over the world (e.g. U.S., ECB, Japan, etc.) are attempting to keep their economies growing on borrowed and printed fiat money.
In this respect it should be obvious that "defense" for the average investor is the tactic to use to win the current game of life. This is as clear as world markets can be. Seeing things as they are is not easy...
A great observer of the world put it this way:
"All human unhappiness comes from not facing reality squarely, exactly as it is." - Buddha3
Note 3. Siddhartha Gautama (563-483 B.C.) was a Hindu prince who rejected his wealth and searched for years until he found enlightenment through meditation. The holy man came to be known as Buddha, "one who is awake."
Good luck and till next
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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.
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