Two weeks ago, Janet Yellen and her cohorts at the Fed, in an 8-1 vote, elected to leave interest rates at record low levels for the 55th straight Fed meeting, a whopping 81 months since the last hike. Citing “global growth concerns” as well as still-tame inflation, the Fed chose to first do no harm, lest they be blamed for the slowdown that is clearly taking place around the world.
In August, Reuters published a much-overlooked report stating that the cost of shipping a container of freight from Asia to Europe had suddenly, inexplicably dropped a stunning 60 percent in only three weeks. If we think of Asia (China) as the factory and Europe as the distributorship, the warehouse has notified the factory that inventories are piled to the ceiling and no further supply is necessary. Those who ship between them (Maersk, et. al) have dropped their freight rates in a desperate attempt to attract new business, as the alternative is laying off crews and dry dockingexpensive vessels yet unpaid for. Clearly, say economists in the region, global trade is crashing.
Two years ago, faced with the least enthusiastic equity markets of the last ten years, Chinese policy makers announced that they would soon begin stimulating their markets by buying stock on the Shanghai Composite index. Fourteen months later, sitting on a predictable gain of over 140 percent, hedge fund managers around the world began to take profits. In less than three weeks, the Shanghai had lost 36 percent of its value and the blood-letting showed no sign of slowing.
In a desperate attempt to maintain their markets, their economy, and credibility, the Chinese government instituted the ineffective controls typical of a Communist government: They de-listed over half the companies on the Composite, forbade officers and directors of its companies from selling their own stock for six months, halted all IPO’s, and even threatened short sellers with arrest.
While these actions had a chilling effect within China, there was nothing the government could do to prevent asset managers in Dubai, London and New York from getting out of anything Chinese. Naturally, all of this is scaring away foreign capital since no investor wants to be allowed to buy, only to be prevented from selling once profits are realized. In addition, there is enormous suspicion that the Chinese government has manipulated and exaggerated their growth statistics, and few still believe that their official pace of seven percent GDP (Gross Domestic Product) is real. In actuality, the second largest economy in the world could be in contraction.
While Spain and Italy (where markets are down 15 percent) continue unemployment rates just shy of 25 percent and Greece has just re-elected their defiant “Extend and Pretend” team (known as Syriza), France’s total debt has just soared to 280 percent of GDP. The entire French economy is dead in the water, currently at zero growth and in danger of becoming the permanent “sick man” in the Eurozone. In Germany, where a banking crisis at its largest bank could become the “Lehman moment” for all of Europe, markets are down 25 percent. The “Economic Engine of Europe”, German factory orders unexpectedly fell in August (-1.8 percent when +.5 percent was expected) after decreasing 2.2 percent in July. Economists were stunned.
As if that weren’t enough, voters are aghast at Angela Merkel’s stated intention to absorb 800,000 “Syrian refugees,” a human wave of economic migrants, 80 percent of whom are young Muslim males potentially representing a modern day Trojan horse invasion that will surely sink the German economy next year.
As Dr. Martin Weiss recently reported, “Quietly and without much fanfare, Canada has just slipped into an undeniable, clearly-defined recession,” a nine year decline during which the nation has seen increased unemployment and household debt. With oil prices still slumping, don’t hold your breath for a recovery anytime soon.
Faced with widespread corruption, sweeping Federal investigations, and the arrests of prominent CEO’s, Brazil’s economy has gone the way of its currency (i.e. dropping like a stone) down by over one third this year alone. Two weeks ago, Brazil’s credit rating was downgraded to junk status, sending the Real down further and deepening its worst recession in 25 years. Many of America’s largest banks and companies have huge stakes in Brazil, interests that could soon be threatened by this economic collapse.
An economy deeply impacted by the glut in oil prices, has slowed dramatically, even as the Mexican peso has dropped to its lowest level against the dollar. Nearly 60 percent of the population lives in poverty, corruption is widespread, and drug cartels rule entire provinces where the police are entirely ineffective. Since Mexico is the second largest importer of American goods, it is only a matter of time before recession infects our own economy.
The Russian economy is sinking from recession into depression. Western sanctions, crashing oil and gas prices, import embargos, widespread government corruption, and economic woes ad nauseum are all contributing to the ongoing downturn, even as Putin meddles ambitiously and militarily in the Middle East.
Currently, more than half of all publicly traded U.S. stocks are down more than 20 percent from their record highs earlier this year. In addition, one seventh of our economy, the energy sector, remains in full-blown recession and the stagnancy of oil priced below $60 per barrel is expected to continue for a year or two. For the tenth month in a row, factory orders in the US have been downand that’s never happened before outside of a recession. Ominously, Caterpillar just cut their 2015 year-end revenue forecast, as well as 10,000 jobs – another clear sign of worldwide industrial slowdown.
Two months ago, our government decided to once again modify the way it calculates GDP (i.e. the pace of growth of our domestic economy). The numbers for the first quarter, not surprisingly, were revised from -0.7 percent to +0.6 percent, and the second quarter was recently revised up to 3.9 percent. Last week, the Atlanta Fed shocked markets with a prediction that third quarter GDP is likely to come in at a pathetic 0.9 percent, which would bring the average pace of growth for the year to only 1.8 percent, well below the preferences of any safety-conscious investor. Further, when one considers that this tepid 0.9 percent growth has been exaggerated by seasonal accounting such as Q3 defense spending on large items, our economy is currently flat at best. More importantly, it is moving in the wrong direction and is more likely to be pulled further and harder that way by the slowing and already recessionary economies of the rest of the industrialized world.
Last Friday’s disappointing jobs numbers (142,000 when economists were expecting 205,000—atop another 60,000 downward revision for July and August) sent markets reeling, with the DJIA down 260 points at the open. Then something unique to the Era of QE happened: Several mainstream economists suddenly reversed themselves on when the Fed was finally going to raise rates, from the Nov/Dec timeframe to no sooner than March of next year. Markets loved it, rallying over 400 points since on the expectation that continued easy money will save the day and the year.
As Peter Schiff points out here, “There is a good chance that the barely positive growth rate for Q3 could turn negative …(given that) jobs reports have been revised down in six of the last eight months. What makes economists think this trend will suddenly reverse? …A negative GDP print in the third and fourth quarters of this year would qualify as a recession, a possibility that Wall Street has not even considered, let alone prepared for.”
As a former mentor once pounded into me some 26 years ago, “The only thing we learn from market history is that investors continually refuse to learn from market history.”
Thomas K. Brueckner
President & Chief Executive Officer