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MAULDIN: One Of These 3 Black Swans Will Likely Trigger A Global Recession By End Of 2018

MAULDIN: One Of These 3 Black Swans Will Likely Trigger A Global Recession By End Of 2018

Exactly 10 years ago, we were months way from a world-shaking financial crisis.

By late 2006, we had an inverted yield curve steep to be a high-probability indicator of recession. I estimated at that time that the losses would be $400 billion at a minimum. Yet, most of my readers and fellow analysts told me I was way too bearish.

Turned out the losses topped well over $2 trillion and triggered the financial crisis and Great Recession.

Conditions in the financial markets needed only a spark from the subprime crisis to start a firestorm all over the world. Plenty of things were waiting to go wrong, and it seemed like they all did at the same time.

We don’t have an inverted yield curve now. But when the central bank artificially holds down short-term rates, it is difficult if not almost impossible for the yield curve to invert.

We have effectively suppressed the biggest warning signal.

But there is another recession in our future (there is always another recession), which I think will ensue by the end of 2018. And it’s going to be at least as bad as the last one was in terms of the global pain it causes.

Below are three scenarios that may turn out be fateful black swans. But remember this: A harmless white swan can look black in the right lighting conditions. Sometimes, that’s all it takes to start a panic.

Black Swan #1: Yellen Overshoots

It is clear that the US economy is not taking off like the rocket some predicted after the election:

  • President Trump and the Republicans haven’t been able to pass any of the fiscal stimulus measures we hoped to see.
  • Banks and energy companies are getting some regulatory relief, and that helps; but it’s a far cry from the sweeping healthcare reform, tax cuts, and infrastructure spending we were promised.

…click on the above link to read the rest of the article…

The Coming Of Depression Economics

The Coming Of Depression Economics

Like it or not, this is where we have been all along and a great many people are just now catching up. No matter what Janet Yellen says about the economy, she is talking out the side of her mouth. Internally, the recovery is gone, and it is never coming back. Externally, we have sub-5% unemployment so we all should be so happy, especially with, in her view, stable prices.

To their credit, many prominent economists aren’t so enthusiastic about those prospects. Among them are Larry Summers, Paul Krugman, and Brad DeLong, all who recognize that “something” just isn’t right and therefore “something” else should be done about it. Thus, the real economic debate over the coming years (unfortunately) will take shape around those two facets. Having wasted nearly a decade on purely central bank solutions that were never going to work, the real discoveries can now possibly take place.

The problem is as I wrote yesterday, where in a rush to do anything and everything “different” the Trump administration might actually spoil the process. De-regulation and income tax cuts, as well as the repeal of Obamacare, are all very good things that sorely need to be addressed; but they didn’t cause this depression and thus won’t get us out of it. And you can bet that none of Summers, Krugman, or DeLong will be in favor of those options, so if they all fail to restore economic growth, as I believe they will if left in isolation, then that will severely diminish those ideas for perhaps a generation or more. That would be a fatal mistake, especially since for the first time in many generations people outside of Economics are receptive to “new” ideas (that are only new because they have been out of practice and actively discouraged for so long).

…click on the above link to read the rest of the article…

Global Recession? The Canadian Economy Shrinks At The Fastest Pace Since The Last Financial Crisis

Global Recession? The Canadian Economy Shrinks At The Fastest Pace Since The Last Financial Crisis

Canada - Public DomainThings have not been this bad for the Canadian economy since the last global recession.  During the second quarter of 2016, Canada’s GDP contracted at a 1.6 percent annualized rate.  That was the worst number in seven years, and it was even worse than most analysts were projecting.  This comes at a time when bad news is pouring in from all corners of the global economy.  While things in the United States are still relatively stable for the moment, the same cannot be said for much of the rest of the planet.  Canada in particular has been hit very hard by the collapse in oil prices, and the massive wildfire in northern Alberta back in May certainly did not help things.  The following comes from the BBC

The recent drop in GDP was larger than analysts had projected, but not far off the predicted 1.5% loss.

“[The figure] could have been worse, given the hit from the wildfire, and clearly confirms the disappointing downward trend in exports over the last few months,” said Sal Guatieri, senior economist at BMO Capital Markets.

In May, wildfires devastated the parts of northern Alberta where much of Canada’s oil and natural gas is produced.

For many years, high oil prices and booming exports enabled the Canadian economy to significantly outperform the U.S. economy.  But now conditions have changed dramatically, and all of the economic bubbles up in Canada are starting to burst.  This includes the housing bubble, as we have seen home sales in the hottest markets such as Vancouver drop through the floor late in the summer.  In fact, it is being reported that home sales during the first two weeks of August in British Columbia were down a whopping 51 percent on a year over year basis.

…click on the above link to read the rest of the article…

The Death Throes of Oil

The Death Throes of Oil

PRINCETON – The price of oil is often regarded as a sort of thermometer to measure the health of the world economy. What is less often noted is that it can also serve as a barometer – warning of approaching geopolitical storms. Indeed, the dramatic plunge in the price of a barrel of crude – from nearly $150 in June 2008 to around $30 today – is likely to fuel continued upheaval far beyond the world’s energy and commodity markets, with particularly worrying implications for the European Union.

Sinking oil prices are clearly correlated with financial instability, but the lines of causation do not point in the direction most pundits seem to believe. On the contrary, when the price of oil rises, so do costs in most rich, industrialized economies; thus, a rising oil price acts as a brake on growth. Surges in the price of oil led to global recessions in 1973, 1979, 2000, and 2008.

The reverse is also true. An economic slowdown will likely produce a price drop, which can be a financial boon for governments and consumers alike. After the collapse of Lehman Brothers in 2008, oil prices plummeted in anticipation of economic stagnation, only to recover substantially as vigorous growth continued in emerging markets. Viewed in this light, the recent drop in oil prices is unsurprising, as it follows signs of weakness in every major emerging market (with the possible exception of India).

Furthermore, oil prices today are subject to a powerful source of downward pressure: the expectation that the world economy will be restructured in response to worries about climate change. Current efforts to curb global warming may not have much bite, but in the long term, the fact that fossil fuels are major contributors to the rise in atmospheric carbon dioxide and thus climate change is likely to prompt policymakers – and investors – to take serious action.

…click on the above link to read the rest of the article…

We Know How This Ends, Part 2

We Know How This Ends, Part 2

In March 1969, while Buba was busy in the quicksand of its swaps and forward dollar interventions, Netherlands Bank (the Dutch central bank) had instructed commercial banks in Holland to pull back funds from the eurodollar market in order to bring up their liquidity positions which had dwindled dangerously during this increasing currency chaos.  At the start of April that year, the Swiss National Bank (Swiss central bank) was suddenly refusing its own banks dollar swaps in order that they would have to unwind foreign funds positions in the eurodollar market.  The Bank of Italy (the Italian central bank) had ordered some Italian banks to repatriate $800 million by the end of the second quarter of 1969.  It also raised the premium on forward lire at which it offered dollar swaps to 4% from 2%, discouraging Italian banks from engaging in covered eurodollar placements.

The “rising dollar” of 1969 had somehow become anathema to global banking liquidity even in local terms.

The FOMC, which had perhaps the best vantage point with which to view the unfolding events, documented the whole affair though stubbornly and maddeningly refusing to understand it all in greater context of radical paradigm banking and money alterations.  In other words, the FOMC meeting MOD’s for 1968 and 1969 give you an almost exact window into what was occurring as it occurred, but then, during the discussions that followed, degenerating into confusion and mystification as these economists struggled to only frame everything in their own traditional monetary understanding – a religious-like tendency that we can also appreciate very well at this moment.

At the April 1969 FOMC meeting, Charles A. Coombs, Special Manager of the System Open Market Account, reported that the bank liquidity issue then seemingly focused on Germany was indeed replicated in far more countries.

…click on the above link to read the rest of the article…

We Know How This Ends, Part 1

We Know How This Ends, Part 1

The finance ministers and representatives of central banks from the world’s ten largest “capitalist” economies gathered in Bonn, West Germany on November 20, 1968. The global financial system was then enthralled by a third major currency crisis of the past year or so and there was great angst and disagreement as to what to do about it. While sterling had become something of a recurring devaluation tendency and francs perpetually, it seemed, in disarray, this time it was the Deutsche mark that was the great object of conjecture and anger. What happened at that meeting, a discussion that lasted thirty-two hours, depends upon which source material you choose to dissect it. From the point of view of the Germans, it was a convivial exchange of ideas from among partners; the Americans and British, a sometimes testy and perhaps heated debate about clearly divergent merits; the French were just outraged.

The communique issued at the end of the “conference” only said, “The ministers and governors had a comprehensive and thorough exchange of views on the basic problems of balance-of-payments disequilibria and on the recent speculative capital movements.” In reality, none of them truly cared about the former except as may be controlled by the latter. These “speculative capital movements” became the target of focused energy which would not restore balance and stability but ultimately see the end of the global monetary system.

Some background is needed before jumping into West Germany’s financial energy. The gold exchange standard under the Bretton Woods framework had appeared to have lasted as far as this monetary conference, but it had ended in practicality long before. In the late 1950’s, central banks, the Federal Reserve primary among them, had rendered gold especially and increasingly irrelevant in settling the world’s trade finance.

…click on the above link to read the rest of the article…

The U.S. Dollar Has Already Caused A Global Recession And Now The Fed Is Going To Make It Worse

The U.S. Dollar Has Already Caused A Global Recession And Now The Fed Is Going To Make It Worse

Dollar Hands - Public DomainThe 7th largest economy on the entire planet, Brazil, has been gripped by a horrifying recession, as has much of the rest of South America.  But it isn’t just South America that is experiencing a very serious economic downturn.  We have just learned that Japan (the third largest economy in the world) has lapsed into recession.  So has Canada.  So has Russia.  The dominoes are starting to fall, and it looks like the global economic crisis that has already started is going to accelerate as we head into the end of the year.  At this point, global trade is already down about 8.4 percent for the year, and last week the Baltic Dry Shipping Index plummeted to a brand new all-time record low.  Unfortunately for all of us, the Federal Reserve is about to do something that will make this global economic slowdown even worse.

Throughout 2015, the U.S. dollar has been getting stronger.  That sounds like good news, but the truth is that it is not.  When the last financial crisis ended, emerging markets went on a debt binge unlike anything we have ever seen before.  But much of that debt was denominated in U.S. dollars, and now this is creating a massive problem.  As the U.S. dollar has risen, the prices that many of these emerging markets are getting for the commodities that they export have been declining.  Meanwhile, it is taking much more of their own local currencies to pay back and service all of the debts that they have accumulated.  Similar conditions contributed to the Latin American debt crisis of the 1980s, the Asian currency crisis of the 1990s and the global financial crisis of 2008 and 2009.

…click on the above link to read the rest of the article…

18 Numbers That Scream That A Crippling Global Recession Has Arrived

18 Numbers That Scream That A Crippling Global Recession Has Arrived

Scream - Public DomainThe stock market has been soaring, but all of the hard economic numbers are telling us that a major global recession is here.  This is so reminiscent of what happened back in 2008.  Back then, all of the fundamentals were screaming “recession” by the middle of that year, but the equity markets didn’t respond until later.  It appears that a similar pattern is playing out right now.  The trade numbers, the manufacturing numbers, the inventory numbers and even the GDP numbers are all saying that a very significant economic slowdown is happening, but stock traders haven’t gotten the memo yet.  In fact, stocks had an absolutely great month in October.  Of course just like in 2008, stocks will eventually catch up with reality.  It is just a matter of time.  The following are 18 numbers that scream that a crippling global recession has arrived…

#1 According to the biggest bank in the western world, British banking giant HSBC, the world is already in a “dollar recession“.  Global GDP expressed in U.S. dollars is down 3.4 percent so far in 2015, and total global trade has fallen 8.4 percent.

#2 In September, Chinese exports were down 3.7 percent compared to one year ago, and Chinese imports were down a whopping 20.4 percent compared to a year ago.

#3 Demand for Chinese steel is down 8.9 percent compared to a year ago.

#4 China’s rail freight volume is down 10.1 percent compared to last year.

#5 In October, South Korean exports were down 15.8 percent from a year ago.

#6 According to the Dutch government index, a year ago global trade in primary commodities was sitting at a reading of 150 but now it has fallen all the way down to 114.  What this means is that less commodities are being traded around the world, and that is a very clear sign that global economic activity is really slowing down.

…click on the above link to read the rest of the article…

The Calm Before The Storm

The Calm Before The Storm

Storm - Public DomainHave you noticed that things have gotten eerily quiet in the month of October?  After the chaos of late August and early September, many had anticipated that we would be dealing with a full-blown financial collapse by now, but instead we have entered a period of “dead calm” in which things have become exceedingly quiet in almost every way that you can possibly imagine.  Other “watchmen” that I highly respect have made the exact same observation.  Even though the economic numbers are screaming that we have entered a global recession, they aren’t really make any headline news.  A whole host of major financial institutions around the planet are currently in danger of collapsing and creating the next “Lehman Brothers moment”, but none of them has imploded just yet.  And of course Barack Obama seems bound and determined to start World War III.  On Monday, it was announced that he is sending a guided missile destroyer into Chinese waters in the South China Sea.  The Chinese have already stated that they might just start shooting if this happens, but Barack Obama doesn’t seem to care.  But until the shooting actually begins, that is not likely to upset the current tranquility that we are enjoying either.

To me, what we are experiencing at the moment would best be described as “the calm before the storm”.  If you are not familiar with this concept, this is how it is defined by How Stuff Works

Have you ever spent an afternoon in the backyard, maybe grilling or enjoying a game of croquet, when suddenly you notice that everything goes quiet? The air seems still and calm — even the birds stop singing and quickly return to their nests.

…click on the above link to read the rest of the article…

Confirmation: China As Brazil

Confirmation: China As Brazil

There is always some chicken and egg to any financial irregularity; as in does a crisis cause a panic or is it the panic that causes the crisis? Though the evidence of the past eight years is decidedly on the side of the irregularity, central banks continue to press as if that were not so. In no uncertain terms, central bankers persist in expressing their own confidence and, if you read or listen closely enough, great disdain for free markets they deem unworthy as if nothing more than unchained emotion. In the context of 2008, as the current FOMC tells it, the markets got all worked up over nothing much and should have instead simply enjoyed the blind faith in the Fed to have fixed it all without the fuss and bother.

As offensive as that sounds, that is exactly what is being preached. Janet Yellen in April 2014:

Fundamental to modern thinking on central banking is the idea that monetary policy is more effective when the public better understands and anticipates how the central bank will respond to evolving economic conditions. Specifically, it is important for the central bank to make clear how it will adjust its policy stance in response to unforeseen economic developments in a manner that reduces or blunts potentially harmful consequences. If the public understands and expects policymakers to behave in this systematically stabilizing manner, it will tend to respond less to such developments.

There is a fatal fallacy at the heart of this philosophy, one in which has blinded these economists as they marvel at their own assumed powers. Yellen suggests that markets should stop worrying so much about liquidity and other perhaps tangential, but no less meaningful, factors and instead only ignore them in the comfort that Yellen has those all under control. It is no less destructive conceit, one which was revealed to all amply this past decade – starting with the housing bubble itself.

…click on the above link to read the rest of the article…

Here Comes the Next Global Recession

Here Comes the Next Global Recession

shutterstock_243271804

It might seem peculiar to some people to talk about the ‘next’ global recession, given that it doesn’t feel like we ever really got out of the last one. Eight years on from the global financial crash we find that the global economy is still drowning in debt, and this new era of low economic growth, high unemployment and squeezed wages/conditions has somehow become normalised.

‘Secular stagnation’ is the description de jure of the global capitalist system’s inability to return to another bout of prosperity. But while our old friend Boom departed the stage some time ago, his unruly brother Bust is waiting in the wings, preparing to make an unwelcome return.

Well that’s according to some of the world’s major financial institutions which have been forecasting that 2016 will be the year of the next big global downturn. In the last fortnight the IMF reduced its global growth forecast to 3.1%, that’s a mere 0.1% over the threshold of what constitutes recession. While last month Daiwa – Japan’s second largest brokerage house – and Citibank both released reports in which they made a global financial meltdown in 2016 their baselinescenarios! Let that sink in for a minute; they’re not saying a meltdown next year is their worst case scenario, they’re saying it’s their assumed one!

So what could trigger this predicted crash? Well to echo the words of Yogi Bear, ‘It’s tough to make predictions, especially about the future’. Nevertheless there is general agreement that debt was the trigger for the crash of 2008. Considering that today the global economy is even deeper in the debt mire, it requires no great leap of faith to believe that debt will be central to the coming crisis.

…click on the above link to read the rest of the article…

Wal-Mart’s Worst Stock Crash In 27 Years Is Another Sign That The Economy Is Rapidly Falling Apart

Wal-Mart’s Worst Stock Crash In 27 Years Is Another Sign That The Economy Is Rapidly Falling Apart

Wal-Mart - Photo by MikeMozartJeepersMediaNow that a major global recession has begun, you would expect major retailers like Wal-Mart to run into trouble as consumer spending dries up, and that is precisely what is happening.  On Wednesday, shares of Wal-Mart experienced their largest single day decline in 27 years after an extremely disappointing earnings projection was released.  The stock was down about 10 percent, which represented the biggest plunge since January 1988.  Over 21 billion dollars in shareholder wealth was wiped out on Wednesday, and this was just the continuation of a very bad year for Wal-Mart stockholders.  Overall, shares had already declined by 22 percent so far in 2015 before we even got to Wednesday.  Here is more on this stunning turn of events from Bloomberg

Wal-Mart Stores Inc. suffered its worst stock decline in more than 27 years after predicting a drop in annual profit, underscoring the giant retailer’s struggles to reignite growth.

Earnings will decrease 6 percent to 12 percent in fiscal 2017, which ends in January of that year, the Bentonville, Arkansas-based company said at its investor day on Wednesday. Analysts had estimated a gain of 4 percent on average, according to data compiled by Bloomberg.

If it was just Wal-Mart that was having trouble, that would be bad enough.  But the truth is that signs that the U.S. economy has entered another major downturn are popping up all around us.  Just consider the following list of economic indicators that Graham Summers recently put out

The Fed has now kept interest rates at zero for 81 months.

This is the longest period in the history of the Fed’s existence, lasting longer than even the 1938-1942 period of ZIRP.

And the US economy is moving back into recession. Consider that…

1)   Industrial production fell five months straight in the first half of 2015. This has never happened outside of a recession.

2)   Merchant Wholesalers’ Sales are in recession territory.

…click on the above link to read the rest of the article…

 

The Numbers Say That A Major Global Recession Has Already Begun

The Numbers Say That A Major Global Recession Has Already Begun

Global - Public DomainThe biggest bank in the western world has just come out and declared that the global economy is “already in a recession”.  According to British banking giant HSBC, global trade is down 8.4 percent so far this year, and global GDP expressed in U.S. dollars is down 3.4 percent.  So those that are waiting for the next worldwide economic recession to begin can stop waiting.  It is officially here.  As you will see below, money is fleeing emerging markets at a blistering pace, major global banks are stuck with huge loans that will never be repaid, and it looks like a very significant worldwide credit crunch has begun.  Just a few days ago, I explained that the IMF, the UN, the BIS And Citibank were all warning that a major economic crisis could be imminent.  They aren’t just making this stuff up out of thin air, but most Americans still seem to believe that everything is going to be just fine.  The level of blind faith in the system that most people are demonstrating right now is absolutely astounding.

The numbers say that the global economy has not been in this bad shape since the devastating recession that shook the world in 2008 and 2009.  According to HSBC, “we are already in a dollar recession”…

Global trade is also declining at an alarming pace. According to the latest data available in June the year on year change is -8.4%. To find periods of equivalent declines we only really find recessionary periods. This is an interesting point. On one metric we are already in a recession. As can be seen in Chart 3 on the following page, global GDP expressed in US dollars is already negative to the tune of USD 1,37trn or -3.4%. That is, we are already in a dollar recession. 

…click on the above link to read the rest of the article…

A Global Recession Is Inevitable

A Global Recession Is Inevitable

In every market supply and demand are determining the price. Charles Biderman uses this simple logic as the foundation for his investment philosophy. The outspoken founder of the research firm TrimTabs is convinced that stock prices are a function of liquidity—the amount of shares available to buy and the amount of money available to buy them—rather than fundamental value. Therefore, he carefully tracks the announced actions of companies. In his view they are among the biggest players in the stock market and the driving force behind today’s bull market. For now, Biderman thinks that this trend will push stock prices even higher. For the medium term though, he cautions that the financial markets are poised for a severe crash. He spots the first signs of a global recession in the drop of the commodity prices and warns of the moment when people don’t trust the paper money of the central banks anymore.

Mr. Biderman, once again the economy is not doing well. Nevertheless, the stock market in the United States seems to be in record setting mood. What’s behind the rally?
What’s present in the stock market in the moment are companies, their transactions, buyers and sellers of stock. That’s all what happens in the market. So if you count the number of shares available and how much money is available you might get a sense of what’s going to happen. Since 2011, the amount of shares in the market has been declining every year. Even though individuals are taking money out of the market, companies have spent around $1.6 Trillion in cash on takeovers and stock buybacks.

…click on the above link to read the rest of the article…

 

What Happens to the Stock Market if the U.S. Follows the World into Recession?

What Happens to the Stock Market if the U.S. Follows the World into Recession?

History is rather unkind to blind faith in central banks, just as the rising U.S. dollar and stagnant sales are being very unkind to corporate profits.

The quasi-religious faith that central banks can push stock markets ever higher regardless of real-world realities may well be tested in 2015-2016. The global economy spiraling into recession (a.k.a. a period of slow growth–heh) raises two questions:

 

1. Can the U.S. economy decouple from the global economy, i.e. keep expanding production, sales, income and payrolls while the rest of the global economy falters?

2. What happens to the U.S. stock market if/when the U.S. follows the rest of the world into recession?

My colleague Dave P. at Market Daily Briefinghas posted information on a recession detector based on the work of economists Chauvet and Piger.

In essence, the model considers four data series: real personal income, nonfarm payrolls, industrial production and real final sales (as a percentage of change). If all four are rising, the probability of recession is low.

If all four roll over and decline, the probability of recession (generally defined as a decline in gross domestic product for two consecutive quarters) approaches 100%.

This makes intuitive sense: if personal income, industrial production, real final sales and payrolls are all declining, how can GDP continue expanding?

For context, let’s start with a chart I published earlier this week of new manufacturing orders–which look unambiguously recessionary:

 

 

…click on the above link to read the rest of the article…

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