Friday, August 7, 2015

The economy: more warning signs

Three reports this week have added fuel to the warning beacon fires.

First, David Stockman states baldly that the stock market is 'a disaster waiting to happen'.

Stockman ... believes that the excessive monetary policy from central banks around the world has created a "debt supernova," and all the signs point to "the end of the central bank enabled bubble," which could cause a worldwide recession.

"The larger picture has nothing to do with the jobs report [Friday] or even the September decision by the Fed," said Stockman. "It has to do with the the fact that the world economy, including the U.S., is heading into what is clearly going to be an epochal deflation to the likes of what we have never experienced in modern time."

According to Stockman, it's only a matter of time before the collapse in China trickles down to other markets. "The whole global economy since 2008 has been driven forward by this massive investment and construction and borrowing spree in China," said Stockman. "The point that I'm making is that it's over."

For Stockman, there's no reversing the artificially inflated bubbles created by the Federal Reserve. "I think what we are seeing is the beginning evidence that the central bank-driven credit economy is over and we are in a new era," said Stockman. "It's a huge disaster waiting to happen."

There's more at the link, including a video clip of the interview he gave to CNBC.

Second, the economic numbers being circulated by China's government are fooling fewer and fewer outsiders.  Reuters reports:

China's economy is growing only half as fast as official data shows, or maybe even slower, according to foreign investors and analysts who increasingly challenge how the world's second largest economy can be measured so swiftly and precisely.

Beijing's official statisticians reported last month that China's economy grew by a steady 7.0 percent in the first two quarters of the year, spot on its official 2015 target.

That statistical stability comes at a time when prices of global commodities, which China still hungers for despite a campaign to rebalance the economy away from investment and manufacturing toward consumer spending, have cratered.

But perhaps the biggest question is how a developing country of 1.4 billion people can publish its quarterly gross domestic product (GDP) statistics weeks before first drafts from developed economies like the United States, the euro zone or Britain, and then barely revise them later.

"We think the numbers are fantasy," said Erik Britton of Fathom Consulting, a London-based independent research firm and one of the more vocal critics of official Chinese data. "There is no way those numbers are even close to the truth."

The uncanny official calm in China GDP data may well be contributing to sceptics' exit from Chinese assets just as the authorities struggle to manage a volatile stock market.

Fathom, which decided last year to stop publishing forecasts of the official GDP release and instead publish what it thinks is really happening, reckons growth will be 2.8 percent this year, slowing to just 1.0 percent next year.

. . .

"Clearly nobody believes the data," said Sushil Wadhwani, a former Bank of England Monetary Policy Committee member and founder of Wadhwani Asset Management LLP.

Wadhwani says he also looks at various proxies of China's growth rate, which he deems are "pretty unreliable" as well and which suggest anywhere from 1.5 percent to about 5 percent growth.

"I truly don't know where we are in that range", he said.

Again, more at the link.  I remind you that China's economy is the single biggest engine of world economic growth, accounting for more than a third of it since 2010.  If that engine stalls, so does every other economy dependent on it, particularly those reliant on commodity sales to China.

Finally - and appearing to confirm both of the articles linked above - top commodity trader Andrew Hecht says that 'commodities point to a stock market correction'.

As gold, oil, copper and other commodities tumble to multiyear lows, one expert says the turmoil is far from over. In fact, he said the collapse could mean that a full-blown market correction is just around the corner.

"We're looking at real weakness in the stock market here in the U.S.," Andrew Hecht said Tuesday on CNBC's "Futures Now." "We've had a really good time in that market, and I think it's overdue for a correction."

Hecht, author of "How to Make Money with Commodities," said he's watching three commodities markets in particular: copper, oil and lumber. Hecht said copper is especially signaling a global slowdown, most notably in China.

Copper has fallen almost 17 percent this year to new six-year lows. Crude oil is down about 14 percent year to date, but saw a brief rally of 2 percent on Tuesday. Lumber has fallen about 22 percent this year.

Hecht said although August will see some volatility and bounces in commodities markets, there's still a lot more downside risk in all raw materials.

"We'll see a lot of moves like we're seeing in crude oil today, but I think once September, October settles in, we'll see another leg down in these commodity markets, and that does not bode well for equity markets in the U.S.," Hecht said.

More at the link.

(EDITED TO ADD:  Bill Gross said today, shortly after I published this article, that the global economy is “dangerously close to deflationary growth”.  Read the whole article for another warning flag from a very authoritative source.)

Folks, a lot of very knowledgeable people are raising all sorts of red flags about the world and US economy right now.  (For example, speaking about July's employment numbers, Karl Denninger says bluntly, "That bodes very poorly for the economy over the intermediate and longer term.")  I've written about them here many times before, but the chorus of warnings is becoming deafening.  I won't be surprised to see a major correction later this year - in fact, I'll be surprised if one doesn't occur.

Keep your heads down and your powder dry, and make what preparations and take what precautions you can.



Anonymous said...

Thank you for the post. I've heard many of my office aquaintances mention that not only are they refusing to invest more in the stock market, they are pulling out of it entirely until it becomes more stable. They aren't very happy putting it in the bank because they are afraid of a bank holiday.

I didn't used to hear that before. Many of these folks used to comment about how paranoid the doomsayers were. Now, it appears they are receiving a dose of reality. Shakespeare said it well - BETTER THREE HOURS TOO SOON THAN A MINUTE LATE.

Thanks again - hope you are feeling better.

Yorick said...

I've been called tone-deaf in the past; please extend appropriate gracious interpretation here:

I'm not familiar with your full posting history. Have you been warning of impending crisis for long? Have you stopped, modified, or updated your predictions? I'm growing concerned that it's easier and easier for non-professional observers such as ourselves to look at the current fundamental and derived state, say "Yup, still terrifying, throw another log on the signal fire", and thereby lose a good opportunity to make better predictions and analysis.

Peter said...

@Yorick: Yes, I've been warning about it for some time. You'll have to consult my archives for the details.

As for "making better predictions and analysis": all I (or any other commenter) can do is read the signs of the times and respond accordingly. I don't have a crystal ball.