Global Economic Headwinds Continue to Build
The economic turmoil I predicted last spring and summer arrived onshore right on schedule, but the arrival was not quite the storm I said it would be when I later added that the U.S. stock market would likely crash. While the stock market did take a serious plunge a few days after I said its crash was likely imminent, it now rises above it’s pre-dive peak.
I won’t go as far in affirming my predictions as to call a five-day drop a “crash” since the market recovered to new highs in just as many days. When something truly crashes, it sits on the ground awhile. If it bounces back into the air to fly again, that’s a touch-and-go landing — perhaps a bone-jarring one, but it’s not a crash.
Still, there is more of the fall quarter to come, and the economic storm is only growing everywhere … other than in the U.S. stock market. So, it’s too early to call my bet as to whether the volatility of fall is proving there has been no real economic recovery. Volatility arrived and panic with it, but because things have turned back upward (at least for the stock market) this week, I’m going to hold of on the claim that my prediction was right.
In my last article, I explained why I think the stock market so quickly bounced back and avoided sinking into the void of the Great Recession. It certainly looks like it’s climb to new heights was rigged, as a few analysts have said. There is certainly no arguing that the plunge was significant enough to rattle investors and advisors everywhere (more so than any drop in the past couple of years). Even Larry Kudlow affirmed that many analysts were panicking as a result of this fall’s turmoil. I think that speaks volumes about underlying fear about the headwinds I’ve been talking about. So, perhaps I’m being too conservative in not calling victory on my bet just yet.
Perception of the event was far more radical than economists and market bulls usually give way to, even though the drop was no deeper than normal market corrections. I think that, at some subconscious level, people know the economy really is a rickety skeleton. They know that the end of quantitative easing might be the end of “recovery,” and they fear that a storm building up all around us now. The market’s volatility index soared. I think it’s the fact that the plunge happened during the time of these headwinds I’ve been talking about, that shook people.
So, in all those respects my prediction was right on; but what I want to see is whether this latest rise just an attempt (a last hurrah) at the old bull market again or if the bull market (and all of its false sense of economic recovery) continue on. What I said was that the volatility that would develop this fall would make it clear that the “recovery” was a sham. For a fleeting glimpse many saw the deep belly of recession opening back up and panicked, but now they’re all happy again and believe the recovery is right back on track.
Almost as many people as were surprised by how shaky this fall became seemed surprised at how quickly the U.S. stock market recovered. That rebound has caused some noteworthy voices (i.e. those who are not a part of the usual conspiracy nut cluster) to suggest the market’s recovery was rigged by the government, but I cannot prove the market’s recovery was rigged in order to save my blog from my bet. I was very specific in stating which events of the spring and summer would grow worse into the fall, and they have; but is that fleeting, or is this rebound fleeting. That’s what remains to be seen.
One of the global economic headwinds that make up the perfect storm is Japan
Yesterday’s news stated that Japan officially entered recession … again. I said in my spring predictions that “Abenomics,” intended to save Japan’s economy would fail, so check that off as an accurate prediction:
On the other side of the storm brewing in the China Sea stands Japan, whose economy is faltering again. Abenomics (the ultimate in quantitative easing) has reached the reality of diminishing returns that was practically predictable. Abe’s wild stimulus money is stimulating no more. The shine has worn off the coin, and Japan has nowhere left to go. Abe has pushed economic stimulus as hard as he could — probably harder than the world has ever seen — yet Japan’s economy remains still sunk in the mud. Now on the horizon, taxes are set to rise. Japan’s economy has not looked this dire since the 2011 tsunami.
That particular global economic headwind, which I said would become worse by fall, is important for a reason beyond the impact Japan’s economy has on the global economy. Abenomics amounted to the Federal Reserve’s quantitative easing on steroids. It has now clearly and utterly failed. If Q.E on steroids failed, will the U.S. do any better now that its Q.E. has just ended? It’s a different situation to be sure, since Japan had a tsunami and nuclear meltdown to contend with on top of its prior economic troubles, but that’s why it was Q.E. on steroids. It should, at least, lift an eyebrow about the ability of Q.E. to create a sustained recovery.
Prime Minister Shinzo Abe had pledged to end two decades of stagnation, and he spent hundreds of billions in economic stimulus, announcing another two billion yesterday. Hours later the news become public that Japan’s economy shrunk 1.6% in the third quarter. The previous three months also saw a drop, so that means Japan is officially in recession.
All of Abe’s economic stimulus gave no positive lift. Now he promises even more. Like the U.S., he really has no plan for fundamental economic changes. I see no reason to believe the outcome will be any different for the U.S. For those who do believe it will work or has worked, there is no evidence to support such blind hope. Japan now provides one case of evidence where it clearly failed.
For both Japan and the U.S., each new round of money printing yielded paler results than the round before. That the pattern of diminishing returns holds for both countries doesn’t bode well for the U.S. If the U.S. does try another round of Q.E., I would expect it to end like Abenomics with a decline, rather than a boost.
The sleeping Chinese giant
I continue to be baffled by those who are alarmed by China’s decline. More than two years ago, China announced its intention to let some of the steam out of its bloated economy. Growth was too fast, leading to creation of ghost towns. China’s economy has declined by exactly as much as China’s leaders said they wanted China’s economy to decline.
On the China syndrome, which manifests itself in endless hand wringing, I’ve kept a firm steady position. No great collapse has come from China, as some Doom and Gloomers said it would. While I see bad portents where others do not, I also often do not see bad where many do. I’m not a conspiracy theorist or someone who sees doom and gloom wherever they can find it. In this case, even the optimists sounded gloomy about China, while I said China would not crash.
Decline in China’s case only means slower growth. That’s not true decline. China is far from recession. It means they took their foot of the accelerator. Even so, they are still growing at more than double the rate of growth in the U.S. China has reached the point where it said two years ago it would like to settle, so now we see them adding some more fuel to stop the deceleration. All perfectly normal and according to plan.
It amazes me how people talk about this as if it means China is in trouble. I predicted the big bird would come in for an easy landing as planned. Anything unpredictable can arise and go wrong with anything, but so far the giant Chinese albatross is gliding in right on schedule. So, check off that prediction for where things would stand this fall as being right, too.
My words last spring were:
China is trying to bring its C130-size economy in for a soft landing…. [China’s economy] is going to land because China wants its economic growth to settle down, and that will be a dead weight on the world economy.
While China’s landing is not the dire situation some said it would be, China was an engine that helped propel the global economy against its headwinds. So, it’s slower pace is still a headwind against the global economy because it’s rapid pace was helping sustain the flagging economy. A planned decent means China will be buying somewhat less of everything. It will not be the savior to the rest of the world’s economies that it has been. In the very least, that gives the global economy less power to buck the headwinds.
China and Russia have also continued to divest from U.S. dollars and to buy gold, and that means significant longterm trouble for the U.S. in financing its debt. For now, however, the rest of the world is worse off than the U.S., so the U.S. buys some time as a safe haven. The Federal Reserve doesn’t have to buy all U.S. debt because there are others who see that debt, bad as it is, as safer than the alternatives. Long range, however, China and Russia have no intention of returning to U.S. dollars for storing their sovereign funds any more than they have to. Their move is political as it is intended to end U.S. hegemony in global affairs.
The U.S. has lost for good its two largest financiers … unless those financiers for some reason find themselves with no other good alternatives. Ultimately, that should mean the U.S. will have to pay more to finance its enormous debt.
One of the global economic headwinds that I said could cause trouble appears to have settled down. China and Japan have found a way to live a more at ease with each other in the South China Sea. How that will work out remains to be seen, but it looks like that force, which portended economic trouble if it got worse, has, in fact, backed off. I did not, however, state that was a force that would get worse by fall … just that, if it did, it would be a serious headwind.
The Russian Rampage
On the other hand, the reduction of trouble from the Sino-Japanese side of Asia is more than offset by a growling bear on the other side of Asia that I said would surely get worse. Russia’s conflict with Ukraine has continually intensified as I said it would. I promised Russia would not yield to sanctions, sanctions would become worse than they were back in March, and Russia would find ways to retaliate, and the Russian people would endure.
Here are the latest bullet points on what might also be called the Ukrainian Cranium Cracker:
- Nato, yesterday, warned of a serious Russian buildup of armaments and troops along the Russia-Ukraine border inside of Ukraine.
- Moscow is refusing to dialogue with Ukraine on the matter and denies that it is doing anything to help the Russian-speaking rebels in Ukraine. An article by the L’Agence France-Presse asks if relations have reached “the point of no return.”
- Vladimir Putin made a hasty departure from the G20 summit last weekend as he was regaled by Western leaders for his aggressive behavior toward Ukraine.
- 4100 people have died since I first said the conflict would intensify and create economic troubles.
As I said last spring,
The situation in Crimea is a growing headwind to the global economy that isn’t fading away anytime soon. It raises fears throughout Eastern Europe that a new Soviet Union is rising from the ashes of the old. If we want to go down the path of creating economic crisis in Russia, Putin will do his best to make sure we all go there with him. The trade war has begun, and sanctions against Russia will be almost as damaging to Europe’s economy and even the U.S. economy as they are to Russia’s economy.
So, you can check that prediction off as accurate, too.
Just yesterday, German Chancellor, Angella Merkel, said, “Who would have thought that, 25 years after the fall of the Berlin Wall, after the end of the Cold War and the end of the world’s separation into two blocks, something like this could have happened in the middle of Europe? Old ways of thinking in spheres of influence, which spurn international law, must not become accepted.”
Merkel warned that such conflicts can very quickly broaden to regional fires. “It’s not only about Ukraine. It’s about Moldova, it’s about Georgia, if it continues like this … one has to wonder about Serbia, one has to wonder about the countries in the western Balkans.”
As I said months ago, sanctions have had no effect on what Russia does. In support of that statement, I pointed out that the Russian people are used to braving far more austere times for decades. It should be no surprise, then, that the Russian people continue to stand behind their man. He has raised national pride in Russia’s strength and heritage, and they appreciate him for it. Russian media now repeatedly refers to parts of Ukraine as “New Russia.”
At the same time, the European Union has just declined on the U.S. idea of strengthening sanctions against Russia, even though it is Europe that is most directly threatened by Russia’s aggression. Sanctions will only work if they break Russia’s economy completely. They could do that with the decline in oil prices also hurting Russia’s revenue, but clearly one more seriously broken economy is not good news for the failing global economy economy either. So, there is another global economic headwind that is going to keep causing trouble, no matter what is done.
Europe feeling deflated
It is Europe that cannot afford the Russian sanctions. Its economy is sinking almost as fast as Japan’s. It can ill afford to lose trading partners or to pay higher gas prices to Gazprom. And that, I’m sure, is why Europe refused to increase sanctions against Russia this week. The Russian government still owns controlling interest in the world’s largest gas company. Sanctions have the likelihood of hurting a faltering Europe more than they hurt Russia.
Europe is now worried all over again about the possibility of a deflationary spiral settling in, in which the prices of goods drop uncontrollably, causing unprofitable companies to drop wages and lay off people, resulting in fewer people who can buy things and, thus, additional price drops. That’s the vortex of corrections.
What can Europe do this time as it slides back into serous decline? Like Abe in Japan, they’re pouring on more Q.E., even though they are going back into recession after the past rounds of Q.E. For some European countries, this is their third recession since the Great Recession began. Do you really have any hope that the next Q.E. is going to accomplish any more than the last?
Here’s what I said about Europe being another global economic headwind:
What I am certain of and willing to bet this blog on is that the [global] economy will not do better this year — so certain, that I will quit writing this blog if I’m wrong on that prediction…. Nothing Europe does will supplant the problems that are brewing in Europe in large part because of Russia but also because Europe has not fixed its banking problems that came out the Great Recession. I have read many pundits who are saying the economy will improve in 2014, but there is absolutely nothing going to lift this economy up any longer. It’s moribund.
Check that spring prediction about Europe’s contribution off as correct, too.
Wars and rumors of war
There is civil war in Syria against Basshar Assad. There is war in Syria from the U.S. and other nations, including Iran, against ISIS, which is fighting Assad. There is war in Iraq where ISSIS and Al Qaeda have joined ranks. There is war in the Ukraine, which is intensifying. And now it is looking increasingly everyday like a third Palestinian intifada against Israel is developing. (More on that in my next article.)
With all of that, we are coming to a critical point for the Iranium Reaction. Talks over Iran’s nuclear program are scheduled to end this fall. Europe does not want another war. Russian does not want another war. The U.S. does not want another war. All are already involved in small wars and have too many troubles to want more. Even Israel is looking like it could become involved in a war with Palestinians. All the major players arguing against Iranian enrichment don’t want another war.
I think that makes it unlikely that Iran will capitulate to Western demands. (If it does, I fully don’t believe it will honor its agreements, but will only use them to buy time.) So, here’s a new prediction: I think the most likely outcome of the current round of talks under the Obama administration will be another round of talks.
While the press absently mentions that the present talks were an extension from July, they routinely fail to mention that July was an extension from February, and February was an extension from the previous November. With Russia and China as parties to the talks and Britain offering the hope of extensions in the past long before deadlines loomed, I think everyone will agree to kick the Iranian can further down the road.
Still, no one knows how it will settle out, even those involved in negotiation, but it is certainly coming to a head at a time of great global turmoil; and no one is going to want U.S. military action against Iran in the midst of all this.
A report by a committee of several members of the European Parliament was released this week that concluded,
All the available information points to the conclusion that [Iran] has resorted to further secrecy and concealment to keep its program intact and unhindered. Further revelations and information all point to the fact that a military program and military-related activities are at the heart of the Iranian nuclear program.
According to this report, talk has done nothing but buy Iran time for more nuclear development. That is what I’ve said would be the outcome all along. Iran had not even complied with those requirements that were conditions for the previous extensions. If negotiators cannot even assure that Iran is complying with conditions for their past extensions, how can any group be trusted with ensuring Iran complies with any agreement finalized out these discussions? So, a deal coming out of the present talks may be worse than the talks, themselves, have been. The West is being duped because it wants a deal badly enough to see only hope for that deal and to deny evidence to the contrary.
I suspect we will only know with certainty how successful Iran has been in manipulating these extensions to continue nuclear development behind everyone’s back after Iran has developed a nuclear weapon. Maybe even after they have used it. Then everyone involved in negotiations will stand and wring their hands and wonder at how such calamity happened as they watch the smoke clear over Tel Aviv or Rome.
It would surprise me greatly to see the West have the pluck to say this fall, “This was our fourth deadline, so the talks are off because the deadline has passed again.”
The global economy, its sails already in tatters from years of the Great Recession, is being battered on all sides. For right now, the only good news seems to be in the U.S. where it all started. When the Great Recession began, I wrote that the great tsunami that started from a banking and housing landslide in the U.S.. would cross the Atlantic and wash over Europe’s shores. Then it would bounce back on the U.S. All the troubles above in economies that have not been able to right themselves since the U.S. tsunami swamped them portend trouble ahead for the U.S., too. That will be the tsunami bouncing back.
The monstrous Great Recession keeps unfolding before us, and we have done nothing in all this time to create a better economic foundation, such as learning not to build via expansion of debt but via accumulation of wealth. National debt levels in much of the world have doubled since the Great Recession began, so how much more stimulus can any country afford?
My conclusion now is the same as it was last spring when I talked about what would be happening now:
There is one caveat when I say I am not predicting calamity in 2014. My predictions are based on the global trends that are currently in play, against which minutia like job statistics and corporate profits will have little sway. Those mega forces by themselves will put the global economy under great stress. My only caveat is that every year brings unexpected disasters and difficulties. If only the forces that can now be seen and felt are the ones at work, then the economy will grow worse but not crash. If something unexpectedly bad — such as war with Iran — bursts into the picture, then the economy could easily crash.
…While one can never know what unexpected force might hit and make things worse, I am certain that there is no force positive enough to have the capacity to lift this dinosaur economy back to its feet.
Whether the recent stock market turmoil which seemed to be amplified because of the unexpected ebola outbreak will turn out to be a crash remains to be seen; but I did not bet there would be a crash. I bet on economic turmoil growing greater and proving recovery to be a false hope and said there would “likely” be a stock market crash in such an environment if some unexpected danger hit at the same time as all this uncertainty.
The market’s recovery may have been rigged, but I can’t prove that. Everything else is going exactly as I said it would, and even the stock market took a dizzying plunge, so I think I won my bet, but before declaring victory, let’s see where things go through the end of this final quarter of the year.
What went wrong and what could we be doing about it:
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