Markets Changed from Fear and Pessimism to Optimism
At the beginning of the year, fears were widespread that recession was heading toward the U.S. -- and, indeed, the rest of the world. Even the perennially-optimistic Wall Street Journal survey of economists put the odds of recession in the coming 12 months at 21 percent, twice the level anticipated a year earlier and the highest reading since 2012. On balance, I believe the pessimism over the economic outlook and in financial markets was overdone early this year -- but so too is the more recent euphoria.DYI Quick Comment: I've stated numerous times the U.S. economy dances on the head of a pin between slow growth and recession. No doubt this recovery(what little there is) has been going on for a long time since June of 2009 to be precise.
So here we are with stocks prices along with junk bonds in bubble land valuations.
Early this year, major country central banks and world leaders in effect acknowledged the impotence of monetary policy in what I call "the age of deleveraging." They called for labor market and other structural reforms, infrastructure spending, and more business-friendly tax structures. For China, they recommended shutting down zombie companies such as steel mills wallowing in excess capacity, and slashing the huge stockpile of excess housing.
Investors, meantime, were worried about big unknowns including whether the Fed would keep raising interest rates, whether China would continue to devalue the yuan, whether Britain would leave the European Union, and whether the next U.S. president would be Donald Trump on the extreme right or Bernie Sanders on the far left.
I've never been shy about forecasting recession when the conditions are ripe, as I did emphatically during the dot com bubble of the late 1990s and in 2007 as the collapse in subprime mortgages began to unfold. But this year, I simply didn't see a trigger for a business downturn (although I did allow that if crude oil prices dropped to my target of $10 to $20 per barrel, the resulting financial fallout would probably precipitate a global economic downturn). Instead, I noted that recessions have typically resulted from substantial Fed interest rate hikes or major shocks.DYI Quick Comment: Unless the Saudis decide to go all in for market share as opposed to restriciting supply to elevate prices, oil could possibly drop to the $10 to $20 per barrel range. What is more probable is for a combinations of oil producers pumping like mad AND a U.S. led world wide recession. If oil prices do go down to the level of a teenager then lump summing into the Adams Natural Resource Fund symbol PEO is warranted for oil/gas/service companies will be on the give - away - table setting up massive profits 5 to 10 years later.
Sure, the Fed raised interest rates in December and planned four more hikes in 2016; but it had cried wolf so many times about accelerating growth and a resurgent labor market that if it did nothing last year, its credibility would have been further eroded.
Then a funny thing happened on the way to that widely-forecast recession. China didn't massively devalue the yuan and turned, as it has in the past, to infrastructure spending to stave off a collapse in economic growth, despite the predictable result of more debt and more excess capacity.
And with inflation running well below the Fed's 2 percent target and deflation still a danger, the U.S. central bank scaled back its rate-raising plans. At the March 16 meeting, it halved the number of expected quarter-point rate hikes this year to two, and reduced its 2016 year-end inflation forecast to 1.2 percent from 1.6 percent. The S&P 500 Index, which dropped 5 percent in January, has been rising since the second week of February and is now about 1 percent higher for the year.
Even so, many of the reasons to be cautious about the outlook for growth have not changed in the past month or so of optimism. First, commodity prices will likely continue to fall as slow global demand growth meets the huge supply resulting from past over-investment and the tendency among many commodity producers to further increase output in the face of falling prices. This is especially true for oil as OPEC (led by Saudi Arabia) is in a deadly game of chicken to see which major producers will slash prices to eliminate excess supply.
Second, the world is still working off the heavy debts and other imbalances accumulated during the 1980's and 1990's. As one example, total U.S. household debt as a percentage of disposable (after-tax) income has declined to 104 percent from its 130 percent peak, but remains far above the earlier norm of 65 percent. The household saving rate has rebounded from a 2 percent low in 2005 to 5.4 percent in February, but is still well below the 12 percent level of the early 1980's to which I expect it to return.
Furthermore, the three-decade-long era of globalization is over. [DYI Quick Comment: Completely agree with Gary!] It transferred manufacturing and other production from North America and Europe to China and other developing countries and drove economic activity there. But just about everything that can move already has; there's little manufacturing capacity left to export.
So, from the depths of despair and fears of global recession in January, hope and investor confidence returned in February and March. But has anything fundamentally changed, on balance?
End of Globalization Economic Cycle Hurting China Now
Globalization is the greatest economic factor of the last 30 years. And what that meant is you were transferring mainly manufacturing from Europe and North America to China and other developing countries. That gave a tremendous burst in trade. But that globalization is over. You've reduced manufacturing pretty much to an irreducible minimum and that process is over. That was what was really pushing China. Plus they were exported back to Europe and North America. It didn't really change much overall, just where it was being done and you a lot more ships all over.
Another thing driving China was infrastructure spending, because their trade exports has been slipping. Because you got to have customers and where are the customers ? North America and Europe. So they covered it up with infrastructure spending. But what did they get ? Huge debt and ghost cities.
Chinese consumers account for about 37 percent of GDP. in the US its about 70 percent of GDP. They got a long way to go. you look at charts of G7 and the BRIC countries and nobody has a lower ratio of consumer spending to GDP than China.
It doesn't mean they wont get there but we are talking about decades, you are not talking about anytime soon.DYI Quick Comment: Don't look for additional world wide growth from China, they will have to do it the old fashioned way through internal growth. Is this why they are buying so much gold? A reduced or non inflated domestic currency would certainly bolster consumer spending in the long haul.
It may be a good time to short global markets | Huge problems ahead in few yearsCentral banks have again loosened their purses and put in more money. All that money has come into the markets and that’s all there is to this rally. I am not optimistic about the global economy for the next couple of years. Japan is already in recession and some parts of Europe are suffering. All this will get worse, as there is nothing to make the world get better. I expect a downside just about everywhere.
I like agriculture as an asset class and believe it is a good time to short global markets. There will be problems worldwide in financial markets in the next few years. I expect wild stock market swings, interest rate increases, currency swings and bankruptcies to impact world economies over the next couple of years.DYI Comments: The only problem with shorting, especially with world wide central banks doing everything in their power to levitate the markets, this massive overvaluation can remain far longer than one can remain solvent!
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