The Coming Economic Hurricane Will Be Worse Than 2008: Central Banks Are Now Fighting With Each Other, Europe Is Deeply Divided Politically, Chinese Economy Is Entering A Permanent Slowdown, And The Effect Of QE Is Diminishing!
I believe the global economy stands on the brink of meltdown. The immediate trigger of this collapse is the European Debt Crisis, but the build up to this catastrophe has been building for years and decades.
Three of the major drivers of Global economic growth: the US, Europe, and mainland China , are all on the verge of economic slowdown, if not outright collapse. Usually, if one region of the globe is contracting other regions are growing and able to take up the economic ‘slack’. For the first time in modern history, all regions are slowing at once. This is uncharted economic territory.
I will look individually at how each region got into the economic malaise it is in and what some consequences may be.
Greece is the poster child for Europe’s economic problems, but they are not alone. Europeans have lived beyond their financial means for decades and now the bill is coming due.
China sits on the edge of a housing bubble that will make the US housing bubble of a few years ago seem tiny.
China has grown into a global economic power by becoming a factory to the world. When the US went into recession in 2008, China kept their factories humming bylaunching a stimulus program costing trillions of Yuan.
The US economy still hasn’t fully recovered from the housing crisis that started in 2008. Like Europe, The US has lived beyond it’s financial means for decades. Government spending (at all levels) is out of control.
The Coming Economic Hurricane
Bernanke’s now obvious desire for a cheaper dollar is a dangerous escalation in what has become known as the global currency war. Other central banks are actively seeking to offset the effects of capital inflows and ensure their currencies remain competitive. The resulting currency instability further complicates the difficult task of investment for global companies. Faced with currency volatility, the fiscal cliff and the uncertain outcome of the election, companies are sitting on their hands with the US and global economy suffering the consequences. The GDP report and the durable goods report, along with various regional manufacturing surveys, show a reluctance to invest. Non residential fixed investment fell in the most recent quarter while shipments and new orders of capital goods (ex-aircraft) are down 2.1% and 10% respectively year over year.
The perfect storm of a failing monetary policy, flatlining corporate earnings growth, falling investment, the potential for a massive fiscal contraction and more political gridlock will not be easily weathered by the markets. Currency instability in particular is a whirlwind that could reap a nasty crop of protectionism and a further contraction of world trade. That won’t be in anyone’s best interests and the sooner the Fed is allowed to pursue more normal policies the better. Unfortunately, that can’t happen until we see better tax, spending and regulatory policies. No matter who wins the dubious prize of the Presidency I find it hard to be optimistic in the short term on that front. It may take another recession – but hopefully not a full blown crisis – before the politicians get the message. In the meantime, we continue to maintain a larger than normal cash reserve until the storm blows over.
Blair Warns Euro-Area Crisis Could Lead to Whole EU Breaking Up
“I would give a stark warning,” Blair said in the speech, which was released by his office. “If eurozone structures end up with a Europe that is fundamentally divided politically as well as economically, rather than a Europe with one political settlement that accommodates different levels of integration within it, the EU as we know it will be on a path to break up.”
Blair, the British prime minister from 1997 to 2007 who now serves as a Middle East envoy, made his intervention on the day his Labor Party tried to seize the initiative from Prime Minister David Cameron in the debate over the EU’s future budget by calling for a reduction of spending in real terms.
China bigger risk than Europe for Latin America
The magnitude of the shock will largely depend on the nature of the transition in China, whether it is cyclical or structural, the officials said. “There has been a change in the constellation of global risks that affect Latin America the most in the last eight months. China has now become a more important source of concern than Europe,” said Augusto de la Torre, Latin America chief economist at the World Bank, in an interview with Emerging Markets.
China’s growth slowdown is “not just a cyclical phenomenon,” said de la Torre, and it will lead to a more permanent slowdown. “China is undergoing the beginning of a more structural transformation where, slowly but surely, the sources of Chinese growth will rotate in favour of domestic sources, and will rely less on an export-led growth model. This transformation is not painless, and it will imply a more permanent slowdown,” he said.
S&P each Fed action: QE1 +50%, QE2 +30%, Twist +18%, QE3 & Twist +8%… so QE4 +4%, QE5 +2%, and QE6 +1%…
The Incredible Shrinking Half-Life Of Central Bank Action
It seems the market – or the collection of pre-programmed heuristic biases that make up the equity investing public (and machines) – is slowly but surely realizing the confidence trick that is the Fed’s Quantitative Easing programs. The following chart should clarify – to anyone placing their gambling chips on the hopes of another round of easing from the Fed – why the game is up. To wit, the reverse geometric progression of S&P 500 performance during each Fed action: QE1 +50%, QE2 +30%, Twist +18%, QE3 & Twist +8%… so QE4 +4%, QE5 +2%, and QE6 +1%…
Save this chart, so when all your pathetic Facebook “friends” ask why the stock market crashed 30%, you can post this chart and show them how the Fed created their latest bubble! So easy, even an Obama phone using, EBT card using, food stamp using, facebook junkie can get it!
Hedge Fund Consultant Michael Belkin spoke at The Big Picture conference, predicting a 40% stock market drop in the coming 12-15 months. Belkin joins Sam Mamudi to discuss his case for a market drop.
Please Listen Carefully: This Is An Economic “Perfect Storm.” All Of Our Nine Scenarios End In Bad News For All Markets, Spell Danger For Your Future Income, Your Family’s Security. START PLANNING NOW.
“Is the U.S. Condemned by History to Slow Growth?” asks Bloomberg BusinessWeek. Yes. But for traders and investors, it’s far worse than just bearish slow growth. Plan for no growth or zero growth.
Why? Wall Street, America and the world economy are in the early stages of a long era of “de-growth,” a reversal of economic growth and reduction in market growth as population growth adds new stresses on commodities resources, creates unrest, disasters and wars. Big problems ahead.
Please listen: Earnings growth is in a long slowdown in all of the following nine scenarios. Economy down. Earnings down. Stocks down. Trading down. Focus on the long term, on history, look past the noise about elections and fiscal cliffs.
Why? This is an economic “perfect storm.” All nine scenarios end in bad news for all markets, spell danger for your future income, your family’s security. Start planning now.
1. 800-year growth trend: Back to pre-Industrial Revolution levels
Yes, BusinessWeek says America is condemned by history to slow growth. They open with an “IMF warning that global growth would slip below 2% in 2013.” Then a review of Richard Gordon’s provocative National Bureau of Economic Research study: “Is U.S. Economic Growth Over?”
Yes. History tells us for five long centuries before the 18th century, a “capita rate of just 0.2 percent per year.” Then, the Industrial Revolution. A few centuries as U.S. “growth shot up” to 2.5% by 1930. Driven by endless innovations: Steam engine. Railroads. Electricity. More. But “it’s been downhill since 1950, with annual growth averaging just 2.1 percent per capita through 2007.”
NBER’s Gordon warns: “If the U.S. continues on its current trajectory, by 2100 the world’s biggest economy will wind up back where it started, at 0.2 percent growth per annum.”
2. ‘Less Than Zero Growth:’ Long decade of decline: 2013-2022
3. ‘Hyper-Growth’ traders: New bubble repeats 2008 meltdown