Over the past several weeks it’s become clear that the global economy is turning down …
*Japan returned to recession last month. So did Denmark.
*Malaysia, Botswana, Ireland, Australia, Portugal and Norway all posted negative GDP growth in the most recent quarter.
*The euro zone, laden with insolvent countries, is growing at just 0.8 percent. And Germany, the star of the euro zone, is only growing at 1.5 percent — well below its trend growth.
*And there is an increasing likelihood that Europe is in store for a destabilizing economic shock — through a euro member sovereign debt default or a member departure from the monetary union. At best, euro-zone countries could get another extension to put off those aforementioned scenarios, through even more stifling austerity measures.
Given that backdrop, Europe could be quick to follow Japan and Denmark into recession.
As for the UK: The new coalition government came in last year slashing spending and raising taxes in order to curtail its bulging deficit. Yet its deficit has barely budged. Nor has its economy. In fact, it’s flat lined for the past six months — no growth.
How about the Largest
Economy in the World?
This was expected to be a gangbuster year for the U.S. recovery, many private economists were foreseeing above 4 percent growth — some estimates were as high as 5 percent. But it’s turning out to be quite different …
The annualized growth for the first quarter is coming in at just 1.8 percent! That’s not only well below expectations, but well below the country’s historical growth trend, even following unprecedented government stimulus.
That was last quarter. This quarter is looking even worse …
- The U.S. housing market is at new post-bubble burst lows, exceeding the decline marked in the Great Depression.
- Manufacturing activity just recorded the worst slide since 1984.
- Confidence has plunged to six month lows.
- And employment growth has now slowed sharply.
At Least We Have China
to Lean on, Right?
Not so fast.
Throughout the global financial crisis where more than 60 countries were simultaneously in recession, China’s economy still put up solid — in some cases, eye popping — growth. Of course, it took the largest fiscal stimulus package in the world (relative to GDP) to produce that growth. But it was in China’s direction where the rest of the world looked, to spearhead a global recovery.
This time, this downturn, China won’t be there to open up the spigot of money on its economy. Nor will China have such easy money to spread around the world. Its economy is already overheated. That’s why the Chinese have been in a fight to shut the spigot and mop up the money. And it’s proving a difficult fight.
Moreover, this time a recession would be accompanied by a sovereign debt crisis that could make the fallout that followed the failure of Lehman Brothers look like just the opening act.
But the next wave of economic pain shouldn’t take anyone by surprise. In fact, history shows us it’s exactly what we should be expecting following a widespread synchronized global financial crisis and global recession … more booms, more busts, more shocks and a long bumpy road to recovery.
In sum: If the recent data is truly signaling another round of recession, and if the crisis in global sovereign debt does, in fact, play out according to history (i.e. defaults), then expect this round of economic downturn to be worse than the first. After all, the global government ammunition that created the first technical recovery has been all but exhausted.
With that scenario in mind, the answer on whether global investors should be in “risk-on” or “risk-off” mode is pretty simple.
Regards,
Bryan
{ 29 comments }
What then is “risk-off” mode? The US dollar?
Stimulus money has been the driving force of the global economy the past two years.Now,that money is drying up,global growth is collapsing,employment is collapsing,the housing market is collapsing,China growth is slowing,which means,watch out for commodities and stocks.Not to mention banks are extremely tight with their money.Where is the growth? Why buy commodities and stocks when there is no growth.Very good job telling it like it is.
It seems unfair that the savers of the world have to worry about such stuff as inflation etc, when the selfish sub-culture that lives off benefits in the UK does not. However, with fiat currency ruined by continual money printing, with continuing tax increases hammering the taxpayer and with all assets at an all time low, my advise is this. Rent out your house, sell all your stocks, even the high dividend payers, and buy some gold and gold miners (leave siver alone). Next buy a good sized sail boat for next to nothing and set sail for the Caribbean and have the time of your life. Before you know it, (my bet is another 5 years) property values will be on the way back up, it will be a good time to get into dividend paying stocks and to sell your gold. Start buying wrecked houses to renovate and do this for about 7 or 8 years and thenb go back to plan 1. It worked for me in 1989 and again in 2009
We need to immediately eliminate the federal income tax on the first $50,000 to releave the devastation on the bottom 80%. At the same time, income taxes on incomes between $1 and $5 million need to be increased to 40% and to 45% on incomes exceeding $5 million. The rich got their estate tax exemption expenaded but the rate should not have been reduced to 35%. Increase that back to 45%. The rich and truely wealthy have greatly enjoyed and benefitted from the two Bush tax cuts for over a decade. That holiday needs to end for the sake of the country and responsible fiscal management. Also, the fee income for Hedge fund managers and the PE crowd needs to be treated as ordinary income and taxed accordingly.
Hey Leo – You just don’t understand economics. There is no problem with the government’s revenue. The problem is with spending. They are spending money they don’t have on things we don’t need. As far as punishing the wealthy, you’re nuts. They already pay most of the taxes collected by the government. Also, they buy more things which means they pay more sales taxes and because they buy more things, more people are working. Stop picking on those that have money. You seem like an extremely jealous person. And by the way, I have an income of $48,000 a year.
Leo: With earned income tax credits, work credits and retirement credits etc; anyone making less than $50K is probably getting refunds. With the loss of personal exemptions and reduced itemized deductions and AMT the $1 million and up are already paying that rate plus a state rate. You, (like Warren Buffett and Bill Gates who are leaving the majoriy of their estates to their Personal Foundations, which is excludable from Estate Taxes) want others to fund you? When Jimmy Carter went into office and the day he left office the top Federal Tax rate was 70%. Tax rate reduction equals increased tax revenue that is ipso facto. Get your envious head out of the sand. By the way; if Buffett and Gates want to pay more to gov’t just write a check and sent it in. It will not be retured as unwanted. I am just a woking stiff but the upper income earners already pay their fair share.
The end result will be a domino chain reaction of debt implosion. If the economy goes into financial shock, the wave upon wave of homeowners unable or unwilling to pay their home mortgages will be a tsunami sweeping over the country.
One nurse I know has not been able to make payments on her $500,000 mortgage for 2 years with the bank thus far making no effort to foreclose on the property. Imagine if we multiply her situation into the tens or the hundreds of thousands? Is the government willing or prepared to allow banks to foreclose on these properties and send these annoyed people into the streets?
I think Leo has some interesting ideas.If we tax the rich until they are middle class or poor we could end all this class warfare.Of course we would end all job creation in this country,which might be a negative.
From the articles I have read, the rich do not create jobs. If it were so, then nearly a decade of Bush tax cuts would have produced millions of jobs. But as it turned out, the Bush regime produced the lowest number of jobs since the Great Depression. Should keep up with current events, not myths perpetuated by the media and Republicans.
If the 91% top rate in the 50’s did not damage the rich why would a 45% rate ? Stop crying for the rich. Like the poor they will always be around.
If you rob Peter to pay Paul, you can always rely on support from Paul.
At Weiss Research the sky is always falling. We heard the same arguments one year ago when the economy hit a soft patch. The Chinese economy has been falling apart for the last 30 years but it still grows at 9-10% a year. Meanwhile the oil market is not anticipating a sustained worldwide economic slow down as oil stubbornly keeps it’s head above $100. a barrel.
King, I agree with your comment about always-falling skies. However, Bryan’s been the notable exception. His articles often directly contradict all the biblical hyperbole of the other writers. (It’s been so notable that I often wondered how he remains at Weiss.). When Bryan says things are dire, that’ has some credibility (IMO).
PS: I Agree with your other comment that this is very much different than ’29. The difference is like losing your job without a credit card, and with. When you have something to tide you through the rough patch, the patch won’t be as rough. On the other hand, if you never return to your former earning potential (and ability to repay the creditor), the result will be worse than tightening your belt during the rough patch and accepting a job at McD’s instead of holding out for your former line of work.
That’s why I disagree with the minimalists who criticize fiat money and stimulus. It’s a valuable tool. OTOH, like a stopped clock, they may be right *this* time. My analogy to job loss is more than an analogy.
For the past 30 years we’ve undermined American workers and the American way of life through the pursuit of “everything’s a free market.” We’ve forced Americans to pay for sewers and trash pickup, animal and child welfare, air and water quality, building codes and zoning laws. All those things *cost*. Then we tell them “it’s just a free market, compete with people who use their gutters as sewers, burn their trash in the front yard, eat free-roaming pets, and pimp their pre-teen children to supplement the family income.”
There are no jobs left. Without jobs, there are no consumers. This time may be very different, and the useful credit card (fiat money) may be a millstone (as we continued to offshore jobs while running up a debt waiting for the illusion of prosperity to return).
Unless something substantial happens by way of foreign trade, or progressively shifting the cost of our standard of living to those who are less affected by foreign trade, I believe we’re looking at an unrecoverable circumstance.
These are great and amazing times in my opinion. We can see what is happening, social unrest, political strife, economic chaos, food shortages, population, incredible natural disaster. Wow, what a new world we live in. The world always goes through its growing pains. Wold war one, growing pains, world war two, growing pains. We all know what these type of world growing pains can lead to. In the mean time, lets all make as much money as we can, increase our wealth, look for the opportunities to buy, acquire and grow our assets. Lots of opportunity in these times. As human beings, throughout time, the human spirit prevails. Lets all come out of these times richer and smarter.
Spoken like a true egalitarian Samuel… As long as I get mine before everyone else then all is well. What’s all this nonsense and concern about the future!
Bryan is right on here. Based on my economic fundamental, technical and cyclical, fact based, analysis of the world and US economy, I believe that the US (and possibly a good chunk of world) economy is mirroring the Great Depression or the declined Japanese economy OR a hybrid of the two. IF this is the case, then, I expect to see the stock & commodity markets correct, similar to 2008 as we come off this bear market “bull rally†from March 09. And, guess where i believe this capital will flow, just like in 2008, thats right, US Treasuries and US Cash. Why? because this is the “perceived flight to safety tradeâ€. Why? because this is EXACTLY what happened during the Great Depression. Scientist and Financier Alfred Lee Loomis and his Brother-in-law Landon Thorne sold their equities in 1929 and invested in Long Term US Treasuries and did extremely well as the Bond Market returned an average of 6.03% during the 1930′s. You could also have done well with Gold (ie. Homestake Mining Going Up). IF we are mirroring the Japanese Market, you know that the Nikkei is down over 75% over 22 years!. But, guess what, not if you invested in JGBs over this timeframe. And the story gets even better, by having the equity markets and commodity markets (excl. Gold) get sacrificed ,either implicitly or explicitly, this will bring down the cost of food/energy and all great for the poor and middle class america and world. By the way, most of the middle class is not heavily invested in equities like 5-15 years ago, so they and the poor would not be effected by a stock market correction. Also, it gets better, by having capital flow into the US Treasuries, this will keep interest rates low, also great for residential/commercial real estate and for businesses. Looks like this is already in play, as Treasuries have been going steadily up for 3 months now, while equities are past peak heading down. Also, even better yet, it takes the pressure off of the Fed to raise interest rates and issue big a QE3 at least not for 6+ months,allowing time for the government to get right sized AND allow the private sector to grow us out of this “Great Recessionâ€. The Fortune 500 ARE SITTING ON A TON of cash. The EU and the EURO are THE problems RIGHT NOW. Also, Japan is now even worse off with the natural disaster, China has a big bubble in residential/commercial real estate that WILL burst and, of course, we have the Middle East Crises. So, guess where the intermediate and long term place to invest will be? You got it, the USA and probably Canada, as we will be the first to recover. Remember, the bond market is 2-3x the size of the stock market, so a bond market crash would put the whole world into a depression within weeks, so I don’t see this happening and I dont think the Lord will want this either. To prove my point with FACTS, every time over the last several years the down plunges by over 150 points, the US Treasuries do the best. I see this time and time and time again. And if we get a big correction,(deflation-risk off trade) like we did in 2008, this is EXACTLY what I see will happen. This is the best way out of this great recession and least painful way out of this recession for the US. Thus, as I have said for 18 months now and counting, we will NOT have a bond market crash. However, I would strongly use caution to invest in City/Muni/County/State/Sovereign Bonds of other countries as they are going thru austerity right now and either dont have a printing press AND/Or are not the world’s reserve currency.
There are a few major differences between 1929 and now. 1) In 1929 the U.S. was on a gold standard. Today the government can print as much money as it wants. 2) Credit was tightened during the early 1930’s making the condition worse. That is not the case today with interest rates near 0. 3) In 1929 there was no social security, unemployment insurance, medicare, medicaid, workers comp nor any other type of governmental support. All those are available today. 4) The U.S.government didn’t have the massive debt bomb it has today. Unless the government can get it’s financial house in order, it’s unclear that anyone is going to be piling into treasuries as a safe haven. Gold however should do well under any circumstances.
King Ralph, I agree there are differences,as you explain above, between the 1929/Great Depression and today, but those differerences are not that significant to make much of a difference in forecasting today’s capital markets. When you look at boom/bust cycles and human psychology, human/social/financial behavior is VERY predictable over thousands of years. Greed/Power/Speculation/Denial/Fear/Panic etc. trends have ABSOLUTELY NOT changed since before Roman Empire days. I have used analog analysis to help me predict the capital markets with solid accuracy. The only challenge I have had is not in identifying the new trend, but the TIMING of when the trend change/tipping point will occur. I am fairly certain that from a human financial/social/psychology standpoint, the 2007/2008 capital market/real estate crash rhymes with the 1920’s and 1930’s capital market boom/bust cycle and the 1980’s and 1990’s/2000 capital market boom/bust cycle of Japan. Every month that goes by reinforces this thinking based on factual global capital market actions and consumer economic activities and actions. Once this comparison or analog is accurately established, it is then fairly easy to predict the intermediate/longer term trends. Sort of like looking at a bad hurricane or blizzard, looking at all the parameters and activities that lead to the creation of that storm, then going back in history to see when it last occured and do the activities add up. Once you find the analog, you will see amazing consistencies. I know I digress here, but this is the key to it all and I have benefited very well from this. Right now, I see the EU as the next financial ground zero, just like sub prime was here in US 3 years ago, the global elites all said subprime was contained, etc. etc. etc. but it was not, it spread to ALT-A, then Prime, then from residential to commercial, then to mortgage back securities, then to credit default swaps, to Lehman collapse etc..etc.. Now, the analog situation is the European Sovereign Debt Crisis, oh, if you remember, it started with Dubai, then went to Greece, they said it is only contained to Greece, now its going to the PIIGS etc…etc..etc… see the similarity? Ok…Now, watch how this plays out. If we lose Greece and the other PIIGS, the Lehman collapse will look like a picnic compared to this because of the integration of all the global banks. You watch the capital will flow to Gold (as you say) as well as US CASH and TREASURIES. Its already happening right now. Go check the Treasuries performance since their lows in Feb. Now look at the equity markets since then, they are topping out. Also, one thing about gold. I have a solid position in core gold, gold stocks and gold coins BUT, most of this I purchased 5-8 years ago when gold was between $250 and $400 an ounce when NOBODY wanted it….also a predictable situation. My point on gold is this: if this next deflation/risk off trade is anything like 2008, you can expect hedgefunds/money managers to liquidate gold, just like end of 2008,to handle margin requirements, so gold could correct, but not nearly as much as gold stocks and of course silver. Back to the Japan analogy, if you invested in JGBs over the last 22 years since the Nikkei crash, you did MUCH better than the equities over this time. King Ralph, dont just focus on the valid issues you bring up. You have to look at human social psychology on a country and global basis over hundreds of years and when you do, you will find much similarities between the Japanese boom/bust cycle, the Great Depression and what is going on today.
thank you,thank you, for the great information.
What about the US dollar being replaced ? This is coming to the surface quickly with France,Russia,China & the United Nations. Set up for the the anti-christ happening now?
Phil, it is entirely possible the dollar could be replaced as the world’s reserve currency…maybe the global elites will call it the “Globo”, maybe if its done on a regional basis, they will call it the “Amero” for the North American Union…In any event, it wont happen at this point in time. It most likely will take years to happen. It could be made up of a basket of world currencies etc. Since, it too would be a fiat based currency, I would assume it would be inflationary, just like the dollar was/is today. I mean, since the founding of the Federal Reserve, the dollar has been debased like over 96%. Not sure what change this will bring the poor and middle class. So, for time being, I see this yo-yo effect of deflation/risk off trade, then QE 3, then inflation/risk on trade, then peak and deflation/risk off trade, then QE4…etc. etc. for the next couple of years…If the dollar then really does crater, then expect the Bilderbergs to bring out….tada……the Globo….
jrj,
The rich got their big tax cuts in the early years of Bush. Where are all those jobs they were suppose to create with that extra money? That is a myth. It doesn’t trickle down. We just get peed on.
Martin N, The Trickle-Down Theory HAS been proved to work – the trouble is, most of the Trickling-down has been to Asia and South America.
Beyond the Bursting of the Housing Bubble, the decline in the economy has been due to the mountain of regulations that add to the costs in time and money to do business.
So successful businesses and industry would rather pay overtime than hire full-time employees.
And who would pay those massive added costs to build a New factory in a country with a Corporate Tax rate second only to Japan?
The result is an economy propelled by deficit spending from Bubble to Bubble.
“Soak the Rich” taxes would just convince the remaining successfull small-business leaders that there isn’t any future for them in the USA, driving more of them to stable, prosperous tax havens overseas.
The 40/45% Income Tax cap Leo recommended could have a positive outcome if it were combined with permanent reduction of Corporate Taxes to a competitive level. A Short-term incentive would just be another Corporate Bonus, not achieving any real benefit to the Nation.
In addition to a major Long-term reduction of Corporate taxes, we need to slash the burden of pervasive regulation that has continued to crush the competitiveness of our industry over the past 30 years.
And by reducing the costs of manufacturing we could recapture more of the consumer spending that flows overseas.
I agree with pat of Leo’s remedy. The USA government should make a new amendment creating a standard deduction of the average USA wage for everyone (including everyone is fairness- which is about $64,000) for all income taxes (federal, state and local). This way everyone get to keep about $64,000 of their income tax free giving them money to spend – it’s is not the rich that creates a good economy but the people spending their extra income. So we need many people spending for a better economy which means we need these people to have money to spend (not some pathetic tax break that gives some taxed money back to the tax payers). Of course the real problem is with free trade so we need to repeal NAFTA,GATT,CAFTA since we cannot compete with slave labor and regulation free work countries. USA buying more than selling is leading to bankruptcy.
Fully agree,
Countries are swimming in debt and it aint pretty. I think asset markets worldwide will be under pressure for the rest of the year..
Too many many babies made. Too many people and not enough jobs being made (the world over) corresponding corresponding to population growth. We must have better way of distribution of birth control pills. GOP should have solutions if they want to stay Pro-Life.
stsinVA, You are correct. Population like economies can’t grow forever. We have a finite earth.
The failing economic growth model we follow in the US will lead to, what Joni Mitchell once sang, “Paved paradise, put up a parking lot”. We will end up, coast to coast strip malls.
You guys that live in the investment world are pretty smart. You see all kinds of stuff and make money when everything is collapsing. I live in the world of poverty. I don’t even make 600 bucks a month. So when I am looking upon the economy I am always looking up, out of a foxhole. I don’t see a double dip recession. I see one great big gaping maw. I don’t see world economics, I see Americans having to compete against slave labor. The US can only go on so long before every floor collapses, everything that seems solid must crash down.
The idea of silver and gold as having some kind of value in a mad max world is ludicrous. It will all come down to food. Does anyone up there recognize that close to seven billion people will all be in the same boat at the same time? The financial system won’t even exist.. Gold and silver won’t have any value. The bible speaks about that day as when silver and gold will be thrown out onto the streets, because precious metals will have no value. Hide-aways-and guns won’t make any difference.
The government keeps talking about trillions of dollars as if they were just a couple of hundred bucks. Never before in history has the financial system come even close to what we are facing now. Every nation in the world is in a fight for its life. If we aren’t facing Armageddon now what would be a more propitious time frame?
I don’t know where you are getting your statistical information.
According to the latest data from “the Economist”, the Euro area grew year on year (y/y) at 2.5% or 3.8%, annualised, in the 1st quarter 2011; Germany grew at a whopping 5.4% y/y or 6.1%, annualised, in the 1st quarter 2011.
The latest figures year on year growth figures from the Economist has India at 8.2%; China at 9.7%; Turkey at 9.2%; Malaysia at 4.6%; Russia 4.1%; Indonesia at 6.5%; Sweden at 7.3%; Brazil at 5.0%.
Not too much sign of a global recession in those numbers!