The Global Economic Storm is Here, but There are Silver Linings for Some
A global economic storm has arrived. It’s not blowing full force, but here is what it looks like in a bullet list of recent economic changes:
- Japan’s economy is in rapid recession, dropping 7% with industrial production tumbling 3.3% year-on-year.
- U.K. inflation has plunged to its lowest in five years, edging up fears of a deflationary spiral, and it’s doubtful they can pour more stimulus to any effect into their economy. (Of course, I maintain prices need to drop, since wages have not risen to keep up with them if buying power is going to return to the people who move the economy.)
- The European Union is also about to enter deflation.
- U.S. retail sales dropped in September, and wholesale prices fell for the first time in a year. Consumer confidence, however, remains strong (but that was measured prior to this week’s bouncy ride, which could shake confidence).
- For a moment this week, all major indexes in the U.S. stock market erased all gains made in 2014.
- The U.S. stock market has failed at every rally for more than a week, which means to me that the bull run is clearly over.
- British and Canadian housing may be reaching the top of their own bubble, which could trigger banking problems like those that started the Great Recession.
- The U.S. economy contines under a perilous overhang of student-loan debt.
- China’s slowed economy is dragging instead of driving growth.
- Chinese factory prices dropped for a record-matching 31st month in a row.
- The sense of global tumult is being exacerbated by war in the Middle East, the standoff in Ukraine, the extended stand-off with Iran, and street protests in Hong Kong
- Ebola fear is clearly contagious between consumers and investors, resulting in a significant impact on stock markets over just three cases having entered the U.S.
- The Russian economy is being crushed under sanctions, which hurts European exports more than U.S. exports.
- It’s been five years since the U.S. government boldly proclaimed the recession was over (a moment reminiscent of George Bush proclaiming the war in Iraq was over after a hundred days), and the stimulus effects that central banks can give have entered the sharp downward slope of diminishing returns while central banks have surely about reached their capacity for such actions.
- European stocks fell for an eighth day in the longest rout since 2003.
- Oil fell toward $80 a barrel where the Bakken Boom may have to bust until prices go back up because fracking doesn’t pay when crude gets somewhere between $70 and $80 a barrel.
- Commodity prices have sunk to a five-year low.
- Gold and treasuries rose as safe-haven investments.
- So did stocks of Ebola equipment manufacturers (i.e., hazmat equipment).
- Bonds from Greece to Spain slid, and the Greek stock market collapsed (down a massive 9% in just one day), bringing the euro crisis back into the rearview mirror.
- A Bank of America survey of fund managers showed the lowest optimism for economic growth in two years.
- Emerging markets that had been doing well during the Great Recession have begun to deteriorate. West African economies have been ripped to shreds by Ebola, and South American economies are falling apart.
- The Federal Reserve is finally turning off the taps on its expansion of the money supply — once $80 billion a month and more recently $15 billion, which through our fractional reserve banking system gets leveraged up to much more money added to the economy than that.
- The market has returned to its dependency on the Fed, hanging on every word the Fed has to say. (That clearly indicates the market needs the Fed’s assistance to survive as its moves are driven by Fed actions.)
Isn’t that enough to say that economic volatility has hit full force in the fall and declare that I won my bet and don’t have to give up my blog? Still, I won’t claim victory just yet because maybe all of this will go away before year’s end. It’s not a hurricane, but it’s close to being that strong. It could easily grow to hurricane force with so many damaging currents coming together. The ride will be rough and its going to stay rough for some time, but should be less rough for the U.S. than for others. When the Great Recession started, it was the other way around.
A silver lining to the global economic storm
Here are some of the upsides that will uniquely help the U.S. avoid some of the discomfort from this re-emergence of the Great Recession:
Foremost, the U.S. is the one economy in the world that everyone can invest in with hope of lower losses (or even small gains, particularly in bonds but also in some stocks after the initial decline). Nearly everyone outside the U.S. would do better by investing here than in their own economy. So, as other economies go down, some of their losses will come from capital moving over to U.S. investment, which will be a counterforce to what is happening in our market now.
Second, profits of U.S. companies were expected to come out good in the third quarter (because the crash hadn’t started yet). However, expectations are being revised down some. Still, if they come out fairly good that would be enough fundamental good news to help stop the slide of the U.S. market from going much deeper. But that’s counting on a lot of traction against a steep slope and no great worsening of the Ebola epidemic.
Third, cheaper oil and lower consumer debt will also help the U.S. economy weather this storm … at least for awhile. In the end, however, an ebbing tide lowers all boats.
In my mind, there is no question that the economic rough ride I bet my blog on last spring is here, yet some voices remain optimistic:
Fed Chair Janet Yellen voiced confidence in the durability of the American expansion at a closed-door meeting in Washington last weekend….
Peter Hooper, chief U.S. economist at Deutsche Bank AG and a former Fed official, said, “Things aren’t looking bad enough in the rest of the world to drag the U.S. I wouldn’t say the world’s falling apart by any means.” (NewsMax)
I’d say the world is falling apart, and Yellen’s optimism about the durability of American expansion only indicates to me that the Federal Reserve will, as it has in the past, be late to the rescue as the U.S. economy declines. (Not that being slow to restart stimulus is ultimately a bad thing because stimulus has not caused recovery anyway. It has only lessened the fall by postponing the correction.)
“It’s hard to be positive given how negative the mood is in the markets,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London, “but I think sentiment is unnecessarily pessimistic.” (See: NewsMax)
The tumult in stock markets all over the world during the last two weeks says to me the markets were overly optimistic in the first the place. Too many people were ignoring the many impacts of all the economic realities I’ve listed above.
It’s a Halloween economy this October.
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