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Risks to the Global Economy in 2019

January 12, 2019

Risks to the Global Economy in 2019

Over the course of this year and next, the biggest economic risks will emerge in those areas where investors think recent patterns are unlikely to change. They will include a growth recession in China, a rise in global long-term real interest rates, and a crescendo of populist economic policies.

CAMBRIDGE – As Mark Twain never said, “It ain’t what you don’t know that gets you into trouble. It’s what you think you know for sure that just ain’t so.” Over the course of this year and next, the biggest economic risks will emerge in those areas where investors think recent patterns are unlikely to change. They will include a growth recession in China, a rise in global long-term real interest rates, and a crescendo of populist economic policies that undermine the credibility of central bank independence, resulting in higher interest rates on “safe” advanced-country government bonds.1

A significant Chinese slowdown may already be unfolding. US President Donald Trump’s trade war has shaken confidence, but this is only a downward shove to an economy that was already slowing as it makes the transition from export- and investment-led growth to more sustainable domestic consumption-led growth. How much the Chinese economy will slow is an open question; but, given the inherent contradiction between an ever-more centralized Party-led political system and the need for a more decentralized consumer-led economic system, long-term growth could fall quite dramatically.1

Unfortunately, the option of avoiding the transition to consumer-led growth and continuing to promote exports and real-estate investment is not very attractive, either. China is already a dominant global exporter, and there is neither market space nor political tolerance to allow it to maintain its previous pace of export expansion. Bolstering growth through investment, particularly in residential real estate (which accounts for the lion’s share of Chinese construction output) – is also ever more challenging.1

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Darkening Outlook For Global Economy Threatens Crude

January 10, 2019

Darkening Outlook For Global Economy Threatens Crude

“The outlook for the global economy in 2019 has darkened.”

That conclusion came from a new report from the World Bank, citing a variety of data, including softening international trade and investment, ongoing trade tensions, and financial turmoil in emerging markets over the past year. “Storm clouds are brewing for the global economy,” the World Bank warned.

As a result, economic growth in emerging markets could “remain flat” this year, while overall growth could be “weaker than anticipated.”

One of the key backdrops to this assessment is the rate tightening from the U.S. Federal Reserve. “Advanced-economy central banks will continue to remove the accommodative policies that supported the protracted recovery from the global financial crisis ten years ago,” the World Bank report said. After several rate hikes in 2018, the Fed had suggested that two more were on the way in 2019, although the central bank’s chairman Jerome Powell recently softened that tone.

Higher interest rates and a corresponding strengthening of the dollar puts enormous pressure on indebted countries, companies and consumers in emerging markets. Such countries are vulnerable to sudden capital outflows, which could leave them crushed under the weight of dollar-denominated debt. Worse, government debt in low-income countries has surged over the last four years, from 30 percent of GDP to 50 percent of GDP, according to the World Bank. Related: Energy Experts Are Watching This Hotspot In 2019

Growth contracted in Japan, Italy and Germany in the third quarter of last year, and financial turmoil rocked global equities in the final few weeks of 2018.

“At the beginning of 2018 the global economy was firing on all cylinders, but it lost speed during the year and the ride could get even bumpier in the year ahead,” said World Bank Chief Executive Officer Kristalina Georgieva.

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Is This Downturn A Repeat of 2008?

January 6, 2019

Getty images

Is This Downturn A Repeat of 2008?

Crashes differ, so be cautious about your assumptions

Even people who don’t follow the stock market closely are aware that the global economy is weakening and appears to be heading into recession.

For those who track the stock market, the signs are ominous: the U.S. was the last major market to notch gains this year and in October the U.S. market followed the rest of the global markets into an extended slide which has yet to end.

Just as sobering, key sectors such as oil, banking and utilities have crashed with alarming ferocity, reaching oversold levels last seen in 2008 as the global financial system was melting down.

These sectors crashing sends an unmistakable signal: the global economy is heading into a potentially severe recession and assets will not be rising in value in a recessionary environment. So better to sell risk-assets like stocks now rather than later, and rotate the money into safe assets such as Treasury bonds.

And indeed, households now own more Treasuries than the Federal Reserve–a remarkable shift in risk appetite.

Many other indicators of recession are in the news: auto and home sales and global trade are all slumping.

Are we in a repeat of the global financial meltdown and recession of 2008-09? The sharp drop in equities is certainly reminiscent of 2008. Indeed, the December decline is the worst in a decade. Or are we entering a different kind of recession, the equivalent of uncharted waters?

And if we are entering a recession, what can central banks and governments do to ease the financial pain and damage? We can’t be sure of much, but we can be relatively confident central banks and states will respond to the cries to “do something.” This poses two questions: what actions can central banks/states take, and will those policies work or will they backfire and make the recession worse?

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“The Outlook For The Global Economy Has Deteriorated”: Oil, Copper And Lumber Are All Telling Us The Next Economic Downturn Is Here

November 19, 2018

“The Outlook For The Global Economy Has Deteriorated”: Oil, Copper And Lumber Are All Telling Us The Next Economic Downturn Is Here

Oil, copper and lumber are all telling us the exact same thing, and it isn’t good news for the global economy. When economic activity is booming, demand for commodities such as oil, copper and lumber goes up and that generally causes prices to rise. But when economic activity is slowing down, demand for such commodities falls and that generally causes prices to decline. In recent weeks, we have witnessed a decline in commodity prices unlike anything that we have witnessed in years, and many are concerned that this is a very clear indication that hard times are ahead for the global economy.

Let’s talk about oil first. The price of oil peaked in early October, but since that time it has fallen more than 25 percent, and the IEA is warning of “relatively weak” demand out of Asia and Europe…

The International Energy Agency said on Wednesday that while US demand for oil has been “very robust,” demand in Europe and developed Asian countries “continues to be relatively weak.” The IEA also warned of a “slowdown” in demand in developing nations such as India, Brazil and Argentina caused by high oil prices, weak currencies and deteriorating economic activity.

“The outlook for the global economy has deteriorated,” the IEA wrote.

Meanwhile, the price of copper has been declining for quite some time now. The price of copper also fell substantially just before the last recession, and many analysts are pointing out that “Dr. Copper” is now waving a red flag once again…

The message of weakening demand on the oil front was reinforced by the falling price of copper.

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

The Global Economy and Political Murder: Why Trudeau Won’t Stop Arms Sales to Saudis

November 6, 2018

The Global Economy and Political Murder: Why Trudeau Won’t Stop Arms Sales to Saudis

Photo Source 2017 Canada Summer Games | CC BY 2.0

Almost 5,000 miles from the city in which his corpse was secretly buried – in one piece or in bits – by his Saudi killers, Jamal Khashoggi’s murder now rattles the scruples and the purse-strings of yet another country. For Canada, land of the free and liberal conscience – especially under Justin Trudeau – is suddenly confronted by the fruits of the bright young prime minister’s Conservative predecessors and a simple question of conscience for cash: should Trudeau tear up a 2014 military deal with Saudi Arabia worth $12bn?

When Ottawa decided to sell its spanking new light armoured vehicles (LAVs) to the Saudi kingdom, the Saudis already had a well-earned reputation for chopping off heads and supporting raving and well-armed Islamists. But Mohammed bin Salman had not yet ascended the crown princedom of this pious state. The Saudis had not yet invaded Yemen, chopped off the heads of its Shia leaders, imprisoned its own princes, kidnapped the Lebanese prime minister and dismembered Khashoggi.

So the Conservative Canadian government of Stephen Harper had no scruples about flogging off its LAVs – as these little armoured monsters are called – to Riyadh, specifically for the “transport and protection” of government officials.

Now you can hardly accuse Trudeau of being a supporter of the Saudi regime. Back in August, Mohammed bin Salman’s lads ordered the expulsion of the Canadian ambassador to Riyadh and closed down trade agreements with Canada after Trudeau’s foreign minister had complained about the arrest of women’s rights campaigners in the kingdom. The Canadians had made “false statements”, claimed the Saudis – whose own reputation for false statements would soon achieve proportions worthy of a Hollywood horror epic. Trudeau was in the Saudi doghouse as well as Washington’s because, only two months earlier, Trump had called him “dishonest and weak”.

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

Nassim Taleb Explains How The Global Economy Is More Fragile Today Than In 2007

November 5, 2018

Nassim Taleb Explains How The Global Economy Is More Fragile Today Than In 2007

In what was incredibly appropriate timing given the ‘shocktober’ market blowup, Bloomberg News invited “Black Swan” author Nassim Taleb to its set on Halloween for a discussion about the increasingly fragile market ecosystem in which we all reside, and the mounting risks that, Taleb believes, could soon ignite another financial crisis that will be even more severe than what we saw in 2008.

Taleb, dressed up as “black swan man”, wasted little time in explaining how the global economy is becoming increasingly vulnerable to a global debt crisis, how the global quantitative easing did nothing to fix the underlying problem of too much debt – instead it exacerbated it – and how the inevitable reckoning might play out in markets once the long-dreaded “inflection point” finally arrives.

Taleb began the interview by describing how the global aggregate debt burden has only climbed since the crisis. And while this debt is no longer dangerously concentrated in a single sector, like, say, the housing market, it doesn’t change the fact that the overall credit risk in the system has been amplified. And while central banks have for years managed to impose metastability in global markets, as they transition from a period of low interest rates back to “neutral”, the destructive forces that they long suppressed will surge back to the surface.

Just like he did in the run-up to the 2008 crash, Taleb isn’t trying to forecast the next crash; he’s only trying to explain how the global economy has become “more fragile today” than it was in 2007.

“You put novocaine on cancer, and what happens? The patient is going to look better, he’s going to feel better, but at some point, you pay a higher price.”

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

Oil Prices Plunge As Storm Clouds Gather Over Global Economy

November 2, 2018

Oil Prices Plunge As Storm Clouds Gather Over Global Economy

Oil declined more than 3% on Thursday, and extended those losses Friday, with ICE West Texas Intermediate (WTI) Light Sweet Crude Oil Futures probing lows not seen since April, due to weakening global demand at a time when the output from the Organization of the Petroleum Exporting Countries (OPEC), Russia, and the U.S. is rising.

Record crude production from the U.S. and Russia, along with a surge from OPEC, has once more created oversupplied conditions.

Russian, U.S. & Saudi crude oil production (data via Reuters Eikon Graphics)

Oil prices started declining in early October on fears that global economic momentum was waning as the U.S-China trade war escalates, and a slowdown in emerging market economic data (primarily in Asia) was becoming more evident.

Global Crude Futures (data via Reuters Eikon)

WTI has plunged 17% since its 76-handle probe in early October. Analysts told Reuters they anticipate more selling in coming sessions, noting that oil did not bounce on Thursday on weakness in the dollar, nor did it positively correlate with the rebound in equity markets.

WTI monthly futures (data via Reuters Eikon)

Besides global growth momentum waning, another reason for downward pressure in oil could be that Washington just granted several waivers on sanctions on Tehran, allowing countries like South Korea, Japan, and India to continue to import Iranian crude (in other words, more supply).

John Kemp, Reuters Senior Market Analyst of Commodities and Energy, believes oil prices are falling as a broad range of financial and real-economy indicators show the global economy is slowing.

“The depth and duration of the slowdown is impossible to gauge at this point, whether it turns out to be simply a mild and short-lived “soft patch”, a longer but still positive “growth recession” with output falling relative to trend, or an “outright recession” with activity falling in absolute terms.

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The World’s Fragile Economic Condition – Part 1

September 24, 2018

The World’s Fragile Economic Condition – Part 1

Where is the world economy heading? In my opinion, a large portion of the story that we usually hear about how the world economy operates and the role energy plays is not really correct. In this post (to be continued in Part 2 in the near future), I explain how some of the major elements of the world economy seem to function. I also point out some relationships that tend to make the world’s economic condition more fragile.

Trying to explain the situation a bit further, the economy is a networked system. It doesn’t behave the way nearly everyone expects it to behave. Many people believe that any energy problem will be signaled by high prices. A look at history shows that this is not really the case: fighting and conflict are also likely outcomes. In fact, rising tariffs are a sign of energy problems.

The underlying energy problem represents a conflict between supply and demand, but not in the way most people expect. The world needs rising demand to support the rising cost of energy products, but this rising demand is, in fact, very difficult to produce. The way that this rising demand is normally produced is by adding increasing amounts of debt, at ever-lower interest rates. At some point, the debt bubble created to provide the necessary demand becomes overstretched. Now, we seem to be reaching a situation where the debt bubble may pop, at least in some parts of the world. This is a very concerning situation.

Context. The presentation discussed in this post was given to the Casualty Actuaries of the Southeast. (I am a casualty actuary myself, living in the Southeast.) The attendees tended to be quite young, and they tended not to be very aware of energy issues. I was trying to “bring them up to speed.” This is a link to the presentation: The World’s Fragile Economic Condition.

Slide 1

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Oil Prices Have Been Rising And $4 A Gallon Gasoline Would Put Enormous Stress On The U.S. Economy

September 4, 2018

Oil Prices Have Been Rising And $4 A Gallon Gasoline Would Put Enormous Stress On The U.S. Economy

Thanks to increasing demand and upcoming U.S. sanctions against Iran, oil prices have been rising and some analysts are forecasting that they will surge even higher in the months ahead. Unfortunately, that would be very bad news for the U.S. economy at a time when concerns about a major economic downturn have already been percolating. In recent years, extremely low gasoline prices have been one of the factors that have contributed to a period of relative economic stability in the United States. Because our country is so spread out, we import such a high percentage of our goods, and we are so dependent on foreign oil, our economy is particularly vulnerable to gasoline price shocks. Anyone that lived in the U.S. during the early 1970s can attest to that. If the average price of gasoline rises to $4 a gallon by the end of 2018 that will be really bad news, and if the average price of gasoline were to hit $5 a gallon that would be catastrophic for the economy.

Very early on Tuesday, the price of U.S. oil surged past $70 a barrel in anticipation of the approaching hurricane along the Gulf Coast. The following comes from Fox Business…

U.S. oil prices rose on Tuesday, breaking past $70 per barrel, after two Gulf of Mexico oil platforms were evacuated in preparation for a hurricane.

U.S. West Texas Intermediate (WTI) crude futures were at $70.05 per barrel at 0353 GMT, up 25 cents, or 0.4 percent from their last settlement.

If we stay at about $70 a gallon, that isn’t going to be much of a problem.

But some analysts are now speaking of “an impending supply crunch”, and that is a very troubling sign. For example, just check out what Stephen Brennock is saying…

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

Oil Prices At Risk Of Economic Downturn

July 19, 2018

Oil Prices At Risk Of Economic Downturn

Oil prices have retreated as disrupted supply from Libya has started to come back online, threatening the recent gains in oil prices. But a bigger threat to crude over the second half of 2018 and into 2019 is a slowdown in the global economy.

The International Monetary Fund warned in its latest World Economic Outlook that a series of threats to economic growth are brewing. The Fund maintained its projection for solid global GDP growth of 3.9 percent for both 2018 and 2019 – rather robust figures – but said that “the expansion is becoming less even, and risks to the outlook are mounting.”

“Growth generally remains strong in advanced economies, but it has slowed in many of them, including countries in the euro area, Japan, and the United Kingdom,” the IMF said.

As John Kemp of Reuters points out, these are signs that the U.S. economy is in a late stage of an economic growth cycle, with growth topping out, inflation picking up, rising interest rates and an inversion in the yield curve for U.S. treasuries, which tends to precede recessions.

As has happened in the past, the last phase of an economic expansion has often coincided with a surge in oil prices, which is then followed by both a dip in oil prices and an economic contraction. The recessions following the price spikes in 1973 and 2008 are the most obvious, but not the only examples.

Others take a different tack, arguing that rising oil prices need not be a drag on the economy. “[T]he rise in oil and commodity prices today is leading to a recovery in pricing power for commodity companies and an improvement in terms of trade for commodity-exporting nations, thus providing support to capex in these segments,” Morgan Stanley’s chief economist and global head of economics Chetan Ahya wrote in May.’

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“Will The Real Global Economy Please Stand Up”

June 11, 2018

“Will The Real Global Economy Please Stand Up”

To say I’ve become skeptical of “markets” and their movements is probably an understatement. However, rather than waste more time trying to make sense of these skewed markets, I believe real economic activity is more accurately represented by changing populations and their energy consumption. So today, we’ll play a little “To Tell The Truth”, an old television show where two imposters could lie but one contestant had to tell the truth. The celebs would ask questions and then attempt to pick which contestant was the real deal. I’ll lay out the data and let you determine how well this lines up with non-stop narrative of record market valuations and stories of strong economic activity.

I’ll start with Japan and work my up progressively larger. The population data is from the UN and I use the 15 to 60 year old population to avoid speculation about changing birth rates over the next fifteen years. Energy data is from the US Energy Information Administration (EIA) and their projections using their IEO’17 (International Energy Outlook, 2017) models.

Japan

Core population peaked 1993, declined 14% since (as of 2015), will decline 22% by 2030 and 33% by 2040.
Energy consumption peak 2006, declined 17% since
- My est. -25% by 2030, -30% by 2040
- IEO’17 est. +3% by 2030, unchanged by 2040.

Germany

Core population peaked 1995, declined 5% since, will decline 17% by 2030 and 19% by 2040.
Energy consumption peaked 2006, declined 14% since, will decline 22% by 2030 and 28% by 2040. IEO’17 data will be wrapped together for EU below.

Italy

Core population peaked 2005, declined 4% since. Will decline 17% by 2030 and 25% by 2040.
Energy consumption peaked 2005, declined 17% since. I estimate declines of 26% by 2030 and 32% by 2040.

Greece

Core population peaked 2006, declined 5% since. Will decline 15% by 2030, 29% by 2040.
Energy Consumption peaked 2007, declined 27% since. I estimate declines of 40% by 2030, 47% by 2040

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The Global Economy’s Wile E. Coyote Moment

March 11, 2018

The Global Economy’s Wile E. Coyote Moment

Economies and markets may already be plunging off a cliff.

Always behind.
Photographer: Justin Sullivan/Getty Images

Our prediction last year of a global growth downturn was based on our 20-Country Long Leading Index, which, in 2016, foresaw the synchronized global growth upturn that the consensus only started to recognize around the spring of 2017.

With the synchronized global growth upturn in the rearview mirror, the downturn is no longer a forecast, but is now a fact.

The chart below shows that quarter-over-quarter annualized gross domestic product growth rates in the three largest advanced economies — the U.S., the euro zone, and Japan — have turned down. In all three, GDP growth peaked in the second or third quarter of 2017, and fell in the fourth quarter. This is what the start of a synchronized global growth downswing looks like.

Still, the groupthink on the synchronized global growth upturn is so pervasive that nobody seemed to notice that South Korea’s GDP contracted in the fourth quarter of 2017, partly due to the biggest drop in its exports in 33 years. And that news came as the country was in the spotlight as host of the winter Olympics.

Because it’s so export-dependent, South Korea is often a canary in the coal mine of global growth. So, when the Asian nation experiences slower growth — let alone negative growth — it’s a yellow flag for the global economy.

The international slowdown is becoming increasingly obvious from the widely followed economic indicators. The most popular U.S. measures seem to present more of a mixed bag. Yet, as we pointed out late last year, the bond market, following the U.S. Short Leading Index, started sniffing out the U.S. slowdown months ago. Specifically, the quality spread — the difference between the yields on junk bonds and investment-grade corporate bonds — has been widening for several months.

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The Global Economy in 2018

December 22, 2017

The Global Economy in 2018

The global economy will confront serious challenges in the months and years ahead, and looming in the background is a mountain of debt that makes markets nervous – and that thus increases the system’s vulnerability to destabilizing shocks. Yet the baseline scenario seems to be one of continuity, with no obvious convulsions on the horizon.

HONG KONG – Economists like me are asked a set of recurring questions that might inform the choices of firms, individuals, and institutions in areas like investment, education, and jobs, as well as their policy expectations. In most cases, there is no definitive answer. But, with sufficient information, one can discern trends, in terms of economies, markets, and technology, and make reasonable guesses.

In the developed world, 2017 will likely be recalled as a period of stark contrast, with many economies experiencing growth acceleration, alongside political fragmentation, polarization, and tension, both domestically and internationally. In the long run, it is unlikely that economic performance will be immune to centrifugal political and social forces. Yet, so far, markets and economies have shrugged off political disorder, and the risk of a substantial short-term setback seems relatively small.1

The one exception is the United Kingdom, which now faces a messy and divisive Brexit process. Elsewhere in Europe, Germany’s severely weakened chancellor, Angela Merkel, is struggling to forge a coalition government. None of this is good for the UK or the rest of Europe, which desperately needs France and Germany to work together to reform the European Union.

One potential shock that has received much attention relates to monetary tightening. In view of improving economic performance in the developed world, a gradual reversal of aggressively accommodative monetary policy does not appear likely to be a major drag or shock to asset values. Perhaps the long-awaited upward convergence of economic fundamentals to validate market valuations is within reach.

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What Does It Mean to Live in the Age of the Anthropocene?

November 30, 2017

What Does It Mean to Live in the Age of the Anthropocene?

Photo by possan | CC BY 2.0

It’s another day in the age of the Anthropocene where a global game of musical chairs continues to play out.

As humans continue to plunder and pillage the earth in a global economy that thrives on converting the living to the dead, more chairs get removed from the game.

The game doesn’t care about your race, gender, or class it just needs your chair so those that think they are watching the game from afar can enrich themselves at the expense of the living. What these game managers do not know is they are part of the game as well.

The only living organism that gets to see the end of the game is Mother Earth, and it will squeeze humans and most other living beings on this planet out of existence. These psychopathic oligarchs are nothing more than a pimple on Mother Earth’s ass.

Many experts believe the age of the Anthropocene began in 1950shortly after the United States dropped nuclear bombs on Japan. The Anthropocene is the age in which humans are causing massive changes to the planet which can include mass extinctions of plant and animal species, polluted the oceans and altering the atmosphere.

The Anthropocene epoch will also be known as the time of the decline and fall of the United States as the world’s global superpower. It will be a time where the global superpower torch will be passed to China. Some critics of U.S. Imperialism will gush at this passing of this torch, and continue to compliment China’s “New Silk Road” ambitions and their investment over intervention strategy.

While I long and fight for an end to U.S. Imperialism, as well as, the U.S. ceasing to be the planet’s superpower, I will not celebrate the successes of China.

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

The Real Risk to the Global Economy

November 8, 2017

THE REAL RISK TO THE GLOBAL ECONOMY

WASHINGTON, DC – One of the great mysteries of today’s global markets is their irrepressible enthusiasm, even as the world around them appears on the verge of chaos or collapse. And yet, investors may be more rational than they appear when it comes to pricing in political risks. If investing is foremost about discounting future cash flows, it’s important to focus precisely on what will and will not affect those calculations. The potential crises that may be most dramatic or violent are, ironically, the ones that the market has the easiest time looking through.

Today’s market is easy to explain in terms of fundamental factors: earnings are growing, inflation has been kept at bay, and the global economy appears to be experiencing a broad, synchronized expansion. In October, the International Monetary Fund updated its global outlook to predict that only a handful of small countries will suffer a recession next year. And while the major central banks are planning, or have already begun, to tighten monetary policy, interest rates will remain low for now.

Political crises, however sensational they may be, are not likely to change investors’ economic calculus. Even after the greatest calamities of the twentieth century, markets bounced back fairly quickly. After Japan’s attack on Pearl Harbor, US stock markets fell by 10%, but recovered within six weeks. Similarly, after the terrorist attacks of September 11, 2001, US stocks dropped nearly 12%, but bounced back in a month. After the assassination of President John F. Kennedy, stock prices fell less than 3%, and recovered the next day.

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

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