Living in interesting times, economically speaking

Here are a few more signs that the light at the end of the tunnel is an oncoming train.  Click each headline to go to the corresponding article.


1.  RAOUL PAL:  "There's a 65% chance of a global recession"

"If manufacturing is slowing down in America, it's slowing down in the rest of the world," Pal said, pointing out that export numbers are falling across the world, meaning that there's less trade going on.

That bodes ill for the stock market. With the ISM below 50, there's a 65% probability of a 20% fall in the S&P 500, according to Pal.

If the ISM gets to 47, it would be an 85% probability, Pal added.

2.  CITI:  65% probability the US goes into recession next year

As the U.S. economy enters its seventh year of expansion following the 2008-09 crisis, the probability of recession will reach 65 percent, Citi's rates strategists wrote in their 2016 outlook published late on Tuesday. A rapid flattening of the bond yield curve towards inversion would be an key warning sign.

. . .

In China, deflationary pressures and downside risks to growth will force Beijing to loosen fiscal policy, let the yuan depreciate and perhaps become the first major emerging market economy to cut interest rates to zero, Citi said.

3.  Railcar orders show biggest drop since 1980's

Third-quarter orders for new freight cars plunged 83 percent from a year earlier to 7,374, according to the Railway Supply Institute. That’s the biggest decline since at least 1988 and the lowest number for a quarter since 2010. A “healthy” three-month number is 10,000 to 15,000, Allison Poliniak-Cusic, a Wells Fargo & Co. analyst, said in a note Tuesday.

. . .

Weak railcar orders contribute evidence of a possible slowdown as oil industry spending has faltered along with crude prices and production of metals and other export goods suffers from a strong dollar. U.S. industrial output declined in both August and September.

U.S. rail carloads dropped 1.6 percent in the quarter on lower demand for coal, crude oil and metals.

This is further evidence to confirm earlier concerns about a global transportation slowdown.


4.  The junk bond market's early warning signs are all flashing red for the global economy

... multiple warning signs are flashing in the US high-yield market, which, true to form, is acting as an early warning mechanism for the global economy.

The first red light on the dashboard appeared in July, when analysts at Bank of America Merrill Lynch pointed out the huge gap between high-yield spreads and equity volatility – a good proxy for the level of complacency among equity investors. On August 14 the gap reached its widest level since March 6, 2008 – less than a fortnight before the financial crisis kicked off in earnest. The equity market sell-off over the summer closed the chasm a bit but not completely. The question now: was this the quake or just a pre-tremor?

The signs are not good. Yields on debt issued by US companies with a credit rating of BB or lower (and therefore not classed as investment grade) have continued to rise. Prices (which move in the opposite direction to yields) are down 2pc for the year (even when you factor in interest payments) and are on course for their first yearly loss since the financial crisis.

. . .

So far this year there have been 102 high-yield defaults around the world, according to Standard & Poor’s, up from 62 in the whole of 2014. Moody’s has 37pc more companies on its “distressed list” than it did this time last year. Rising corporate defaults are usually a pretty accurate harbinger of coming recessions.

. . .

The relatively high global equity prices point to expectations of strong economic growth; the historically very high bond prices point to expectations of weak economic growth. How does one reconcile these two wildly inconsistent worldviews? The short answer is quantitative easing, which has pumped up asset values far beyond what the fundamentals would justify. Any bad news that comes along – and there has been a fair bit of that in recent months – merely serves to highlight that growing disconnect.

Keep your powder dry, folks.  With Presidential elections next year, the economy is - at present - taking a back seat to concerns about security, international terrorism, and other factors.  However, it remains central to many Americans' concerns, particularly those who are struggling (like most of us).  If the US economy - not to mention the world's - slides into recession next year, to add to the pressures currently confronting the electorate, all sorts of interesting things might happen . . . to put it mildly.

Peter