2016/01/07 Commentary: Meltdown Time? (early)
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COMMENTARY (Non-Video): Thursday, January 7, 2016
Meltdown Time?
Even if not as bad as all that, the tripartite confluence of impacts from different areas conspires against any upbeat expectation for the global economies and equities markets. Those include still weak data that we are surprised anybody else is surprised to see. We have been highlighting the atypically downbeat expectations from the typically more upbeat OECD (Organization for Economic cooperation and Development) for many months.
That is especially pernicious regarding weak world trade that OECD Secretary General Angel Gurria highlighted as only weakening to the current degree five times over the past 50 years. And in each instance it coincided with a marked downturn in global growth. (More on our analysis which includes that below ‘Read more’.)
And then there is the Fed. It is not necessarily a mistake for the Fed to want to get back to ‘normal’. That includes pushing up the US base rate from the ZIRP (Zero Interest Rate Policy) ultra-low yields. However, we are not the only ones who have questioned whether the FOMC might have missed the rate hike window back in late 2014. If the economic cycle was already turning down into this period, the current rate hike attempt might be misguided. Is this just the Fed’s ‘Normalcy Bias’? (More on that below as well.)
The last factor is the geopolitical disarray stemming to some degree from US President Obama’s weak US foreign policy stance. We discussed that in Monday’s Commentary: Special Alert, and refer you back to that for more details. Suffice to say that the real problem is that these factors seem to be sustained now.
[NOTE: We are providing this brief Commentary: Meltdown Time? in lieu of a full TrendView Global View video analysis this morning in order to provide a more fully articulated technical trend view once the dust has settled after today’s US Close. That will be accessible prior to tomorrow’s US Employment report to provide the most current views before the last critical macro influence this week.]
Authorized Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review your options and join us. Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to also access the extended trend assessment as well.
NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of this year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out last month that in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? (even though the actual crash was deferred into 2008.)
▪ Key multiple negative factors are finally aligned. We are always quick to point out that one negative factor alone is rarely enough to foment a down trend in equities. At present however, the magnitude of each negative and the degree to which they are not likely to be addressed any time soon (other than a possible volte face by the Fed) means there is suddenly no reason to feel good about either the global economy or equities.
▪ The underlying weakness brewing throughout last year in the wake of the lack of any meaningful structural reforms since the 2008-2009 Crisis is not surprising. As we noted since last January’s It’s Lack of Reform, Stupid (Part 1 & 2 on the 19th and the 24th), the political class has taken all of the extended QE as a giant gift allowing it to avoid any of the tough choices necessary to support the extended global recovery. We highlighted the looming negatives for the global economies and equities in our May 2nd Extended Perspective: Tail Risk is Back!, and accentuated that after the August 19th release of the previous meeting’s FOMC minutes in Commentary: Tail Risk Now Mainstream? (obviously a rhetorical question.)
▪ And since the ensuing mid-late August meltdown we remained bearish on the global economic outlook and equities. In that Will 2016 be 2007 Redux? post on December 8th we refer to a key global economic indication as the “OECD Trade Fade”. After the strong early November US Employment report it was a fairly striking to see the OECD (Organization for Economic Cooperation and Development) Semiannual Economic Outlook the following Monday morning (November 9th.) It was quite downbeat, mirroring the slippage into atypical negative outlooks in all of its recent monthly CLI.
And two areas which seem most crucial to the anticipation out of 2015 into at least the early part of 2016 are economic weaknesses we have noted previous. The first is the telling sharp contraction in international trade. The second is the political class’ lack of desire or ability (take your pick) to provide the structural reforms necessary to complement the previous and ongoing massive Quantitative Easing programs of so many central banks.
Especially of note is the slideshow (enlarge to full screen) and the video of the Outlook presentation. Of particular interest in the press conference video discussion by Secretary General Angel Gurria and others is the focus from approximately 03:00 on the extreme weakness of global trade (we have noted previous), and (from 05:15) the fact that structural reform we have been so focused on all year is the only policy lever left after monetary and fiscal tools have been mostly exhausted.
▪ That global trade weakness is increasingly important in the context of the likely impact on overall economic activity. Global trade that had been growing slowly over the past few years now it seems to have gone completely stagnant, growing only 2.00% in 2015. The rule of thumb is that trade grows at double the rate of global economic growth.
And here’s the rub:
Over the past 50 years there were only five years where trade growth was 2.00% or less. Each of those coincided with a marked downturn in global growth. 2016 may turn out to be the exception, but the historic context is not propitious, especially as future growth is expected to be subdued. Even the extended outlook into 2017 and 2018 is not very strong. And that is the sort of thing on which businesses base investment and hiring decisions. There is also little chance that the political class in the US will engage in any constructive compromise on badly needed structural reforms into an election year.
▪ So all of the reasons we have for being negative toward the global economy and equities are already out there in the anticipatory analyses at many junctures last year. That was all also exacerbated by what we see from the US central bank as the Fed’s ‘Normalcy Bias’ Continues (posted after the December 16th FOMC announcements and press conference.) Needless to say, the equities did not like that either. Note the reaction from that Thursday morning into the end of the week’s previous test of the 1,990 area.
And what else have we heard since that time? Repeated indications from the Fed’s minions on their determination to put through an additional four 25 basis point rate hikes this year. While they will claim they are data dependent meeting to meeting, the strong indication they are very much inclined to see things as ‘normal’ once again in the face of obvious indications things are not so normal is disconcerting.
Cleveland Fed head Loretta Mester even went so far as to say that there is no need to see further signs of inflation to feel comfortable hiking rates. This seems as out of touch in the current context as Ben Bernanke’s lack of desire to raise rates when the DJIA exceeded the 11,750 Dot.Com Bubble all-time high back in October 2006. You can review much more on this in the December 16th Fed’s ‘Normalcy Bias’ Continues post.
▪ The FOMC December meeting minutes released yesterday actually showed a bit more flexibility in the form of some members’ dissent than had been expected. Yet that is not of much assistance to markets when Federal Reserve Vice Chairman Stanley Fischer goes on CNBC Wednesday morning with the view that there will still likely be at least three further FOMC rate hikes this year.
As both Richard Bernstein and Jim Grant (two people whose economic analysis and trend assessments we respect) have noted in recent CNBC appearances, the Fed’s current path in the face of the deteriorating global economic situation is “unsettling.” Grant has noted since right after the December 16th hike that it is “likely to need to be reversed.” Bernstein was also a key focus in our December 8th ‘Redux’ post. And his message was much the same this week: global manufacturers like China are too pressured domestically to close industries and cut employment. They are engaging in a currency depreciation ‘war’ instead.
Grant even went so far in a more recent Wednesday CNBC interview (unfortunately for which no video clip is available) to say, “(paraphrased) …this is as if the Fed has a new diet program with its own unique bathroom scale. And that consistently displays your weight as being 10 pounds less than what you actually weigh.”
Instant success!! Another very nice metaphor for the ‘normalcy bias’ the Fed is afflicted with at present. Just because the Fed says ‘normal’ doesn’t make it so any more than a faulty scale means you are making weight control progress.
The COMMENTARY Extended Trend Assessment is accessible below.
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