I've said a great deal over the past few years about the inevitable correction that must come in our national and the world's economies. Mathematics is a science, not an art. Put two and two together and you must get four. If you don't, it's not mathematics, but a fraud. The current economic crisis is the fruit of years - decades - of mismanagement, both political and fiscal. The chickens are coming home to roost, and even though a large number of them have already arrived, there are far more still on their way.
The latest confirmation comes from the Royal Bank of Scotland.
RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.
The bank’s credit team said markets are flashing stress alerts akin to the turbulent months before the Lehman crisis in 2008. “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” it said in a client note.
Andrew Roberts, the bank’s credit chief, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings. This is particularly ominous given that global debt ratios have reached record highs.
“China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, and we have hardly even begun to retrace the 'Goldlocks love-in' of the last two years,” he said.
. . .
RBS first issued its grim warnings for the global economy in November but events have moved even faster than feared. It estimates that the US economy slowed to a growth rate of 0.5pc in the fourth quarter, and accuses the US Federal Reserve of “playing with fire” by raising rates into the teeth of the storm. “There has already been severe monetary tightening in the US from the rising dollar,” it said.
. . .
RBS said the epicentre of global stress is China, where debt-driven expansion has reached saturation. The country now faces a surge in capital flight and needs a “dramatically lower” currency. In their view, this next leg of the rolling global drama is likely to play out fast and furiously.
. . .
RBS is not alone in fearing trouble. UBS issued what it called a “significant change” to its house view late last week, saying policy chaos in China had unsettled markets ... Larry Summers, the former US Treasury Secretary, said it would be a mistake to dismiss the current financial squall as froth. Markets often sense a gathering storm when policy-makers are still asleep at the wheel. He has long argued that the world economy is so far out of kilter that it takes permanent financial bubbles to keep growth going, an inherently unstable structure.
There's more at the link.
This is playing out in front of our eyes in our own economy. All the signs are there for those willing to see them. To name just a few examples:
- Orders for new heavy trucks (the backbone of goods distribution in the USA) have collapsed;
- Up to half of all US shale oil drillers may go bankrupt in the face of low oil prices;
- Puerto Rico has just defaulted on its government-guaranteed debt payments - and several US municipal bond funds are holders of its debt, and therefore affected by this step.
I think the economic unraveling we've seen recently is just the harbinger of more to come. It's going to be an interesting year.