Year End Global Economic Report – Running Out of Runway (PART 1) (#16)

For the last five years the Federal Reserve has given it all, going to extraordinary lengths to try and lift the damaged U.S. economy and make it fly once again. It is not happening. Additionally, the crash of 2008 did not only damage the U.S. economy but it had also damaged all the other major global economies. And each major damaged economy became a drag on the other economies in this semi-integrated economic world of ours. So unless there is a serious coordinated effort by all governments, to move in tandem to fix the basic structural flaws that are hampering the recovery, there is not going to be a general lift-off, - instead everyone is running out of runway.

However, listening to governments, central banks and their economists, their policies are working fine, and it is just a matter of time before everyone is flying along.

Economists are the first to claim that ‘Economics’ is an imperfect science. Perhaps it is because they are wrong so often when they attempt to put their theories into practice, in attempting to steer national economies in the right direction. Or, when they indulge in prognostications of where the economies currently are, or where they are heading. The greater percentage of economist look like weather forecasters of old, that never seemed to get it right. Immersed in their academic theories and complicated computer models, at times they simply forget to look out the window at the weather. We are being facetious of course, but most of the times it would seem to be just about that silly an explanation, for the inexplicable difference between stated economic policies and assessments, and just plain reality outside the window.

We on the other hand, try and look out the window, and while parsing diverse, far-flung and at times conflicting data, our analysis is based primarily on a lifetime of personal front-line local and international business experience, healthy suspicion of disseminated government information, financial market and special interest group data, and the consistent nature of human behavior regardless of race, religion, culture and political persuasion. But it is really looking out the window at the reality and discounting the propaganda that has allowed us to be a tad more ‘accurate’ in our assessment and prognostications, than most standard economists and analysts.

It was last September (2012), at the start of QE3 (Quantitative Easing 3), or some form of it in all countries, when we first wrote about the unlikelihood of sustainable global economic recovery regardless of the amount of money that was going to be spent. And we gave detailed reasons for our firm prognosis. All our subsequent ‘Economic Analysis Reports’, ignored all official data to the contrary, and remained consistent in our assessment that no real economic recovery was underway in-spite of the additional Trillions spent, and the odd flashes of ‘green shoots’ that materialized every now and then, only to weaken or entirely disappear next month or next quarter.

So far, it seems that we were absolutely right. As we had said, sustainable global economic recovery was not possible under the recent and current policies of most governments, regardless of the additional stimulus. The current reality seems to prove it. At the end of 2013, the global economies are far from healthy, and the global financial system is unstable, and may not be sustainable under the current conditions.

The following charts graphically confirm what we had stated previously, that the strong economic rebound from the bottom, at the end of 2008 and early 2009 to its high in 2010 was a “dead-cat bounce”. And, that the GDP growth rate and general global economic activity would decline from that point on regardless of the extent and duration of the stimulus funding deployed, as the changed dynamics and the structural imbalances in the global economies were just not being addressed.

CHART I below shows the steady decline of the global GDP growth rate to 2013. It also shows that the decline is across the board - in the Developed Countries, the BRICS and the smaller Emerging Markets - some of which are growing at relatively healthy rates, but still lower than the highs in 2009-2010.


Right now, at the dictate of governments, almost the entire global economic and financial system is being held up by the prodigious effort of Central Bankers relentlessly pumping liquidity into their respective economies, in the hope that recovery takes hold. Secondly, interest rates have been held at record low levels in the advanced economies (to near zero percent), with the same hope of engendering and boosting economic activity. We make this observation that almost all the economies are being held up by the Central Banks, because after almost five years of record low interest rates, and record high financial stimulus, any talk whatsoever of withdrawing the liquidity or raising of the interest rates, send deep shudders through the economies, and violent spasms of panic through the World Financial Markets (that have been gorging on the excessive liquidity). Any semblance of real economic and financial stability would not engender such violent tremors of anxiety. Therefore, apart from the data, we know from the reactions, that there is no real recovery or stability in the global economies, or the global financial markets.

The chart below (CHART II) shows the steep rise in the balance sheets of global Central Banks, as they print vast amounts of stimulus money for asset purchases. The monetary stimulus is having less and less impact on stimulating economic activity globally. (Source IMF, National Data, Haver Analytics & Fulcrum Asset Management)


If the extraordinary monetary stimulus (shown by the steady and dramatic rise in assets on Central Banks balance sheets in CHART II above) was abruptly removed by all governments, and interest rates globally were allowed to find market levels, today, the global economies and the financial markets would collapse, today.

We cannot call such global conditions any type of recovery, let alone a sustainable one. At this time, with no ability to survive on their own, the global economies and the financial markets are living (in the case of financial markets, thriving) strictly because of the continuous and exceptional support, through the extraordinary monetary stimulus, and record low interest rates.

The above stated reality then begs the most crucial of all questions. How long can this extraordinarily supportive but highly unusual, and eventually unsustainable, financial and low interest rate environment be sustained by today’s beleaguered governments and their Central Banks?

While the answer is: Perhaps for years. Yet, we should consider that five years have already passed, over $20 Trillion spent, governments are extraordinarily indebted, and their strategies are increasingly ineffective (as shown by the steadily declining global economic growth rates since 2010, in CHART I). Additionally, imbalances and bubbles are being fed globally by the ongoing stimulus, more than the economies.

In the latest ‘World Economic Outlook, October 2013’ by the IMF, the second line in the opening paragraph of the FOREWORD states, “Advanced economies are gradually strengthening.” On the face of it, and by the most technical of approaches and indicators, it may be argued that the above statement is correct. But in reality, knowing as we all do that the most anemic positive growth numbers in “Advanced Economies” are only being eked out by the most prolonged and unprecedented financial stimulus undertaken in history, and that without it there would be an almost immediate regression, the above statement by the IMF is, in our opinion, ‘optimistic’, to say the least. [This year the IMF has had to make a number of embarrassing ‘U Turns’ as it seemed to get its assessments of global economies and their direction wrong. It’s not so much that their data is wrong; it’s just that they seem to get the interpretation of it wrong, frequently.]

Most large public and private institutions, influenced by the very nature of their ‘raison d'être’, are handicapped. There is enormous pressure on them to produce the ‘right numbers and conclusions for their sponsors, be they private or public, or to satisfy their own internal agenda. That natural compulsion makes their numbers and statements a bit suspect to us, and we try and weed out the possible bias from them.

But a clear picture emerges of the current state of global economies in the Charts below (Sources: IMF, Stock, Citi Research). The first Chart shows unequivocally that the GDP (economic) growth rates of Global Economies (both - Advanced and Emerging Economies) are in a steep decline since 2010 in spite of strong and continuous stimulus and record low interest rates.

These declining growth rates include China and India, both of which continued to slow visibly in 2013. China from an estimated 8.5% to 7.5%, and India from an estimated 6.5% to 4.6%, (we feel both numbers are still optimistic)). Nevertheless, both the Advanced Economies and the major Emerging Markets have been steadily declining over the last three years, putting additional downward pressure on global economic output.


The declining global economic expansion is reflected in the prolonged and steep decline in the Baltic Dry Index (the Chart below CHART IV), which shows the continuing diminishing demand for dry bulk carriers in the past 3 years. The ‘Baltic Dry Index’ is indicative of the increasing, or in this case decreasing volume of dry bulk cargo shipments in the World at any given time. It is considered a leading economic indicator as it shows raw materials needed for economic activity, being shipped in either increasing or decreasing volume. Steadily decreasing volumes over years (as below), speak of the potential of further declining economic activity in the near future.


In today’s world where exports are crucial to most economies for sustained growth and prosperity, the rising or falling export activity, is a good indicator of the general health of the global economies. As Chart V below shows the world export activity has diminished significantly from pre 2008 levels, and continues to remain depressed.

CHART V - World Export Volume

CHART V above, and the ones that follow, speak to our assertion that global exports are going to remain challenged going forward, as no country is economically robust enough to ‘buy’ boldly and with abandon, as in the past, but in-fact most countries will try and curb imports, while trying to boost exports, leaving a paucity of buyers (importers), and an overabundance of sellers (exporters).

CHARTS VI - Advanced Countries

It is also important to note that the continuing and dramatic curtailing of ‘imports’ by the United States, Europe and most other economically Advanced Countries (with the most buying power), bodes ill for the heavily export dependent countries like China, Japan and South Korea, because of their overall dependence on exports for their growth trajectory and prosperity. Their relatively smaller internal (consumption) markets cannot make up for the loss of consumption by the West. This curtailed import reality by the West has already manifested itself through the declining GDP growth rates in these countries, although Japan has had other longstanding internal structural problems (some cultural) that have exacerbated the problem. These are internal structural problems that usually develop after a decade or more of extraordinary development and growth (Japan in the 1980s – China in the 2000s). To a great degree China is now facing similar issues, and more, due to their politics.

Conversely, the diminished ‘export’ volumes of all the countries shown, bodes ill for their economies, significantly and negatively impacting internal economic activity. It is a conundrum that we had highlighted in the past as our reason for believing that global economic activity cannot be sustainably increased under the current policies because if every major economy needs to ‘export’ - to spur economic internal activity, (as indebted and weakened consumers, especially in the Advanced Economies, consume less than prior to 2008 crash), then who is going to ‘import’ - for exports to increase in all countries?

This reality will bring further deflationary pressures to the Advanced Economies of North America, Europe and Japan, having exactly the opposite effect of what the Central Banks and Governments of these countries are trying to achieve, with their massive stimulus spending, as they try desperately to boost inflation and avoid a prolonged deflationary cycle, like Japan’s last two ‘lost decades’. And this is the reason why in the West and Japan, in spite of their enormous stimulus spending, the Central Banks are having such a difficult time reaching and sustaining their target inflation numbers. In an environment of greatly diminished demand, and increasingly competitive global ‘export’ markets, and in spite of massive stimulus (affecting only certain asset classes), the prices of goods and services are, in general and in the near term, going to continue to soften. India and China, and most other developing countries with large populations, are in a different situation because of their massive internal demand for basic consumables. While they also need to increase their exports desperately, to regain their lost economic growth momentum, which isn’t returning anytime soon, particularly for China, they are battling serious and stubborn inflationary pressures in basic consumables such as food and energy. This conundrum of needing to boost economic activity through stimulus, while at the same time trying to fight inflation in certain sectors through high interest rates, makes for a difficult high-wire act for those governments to perform.

CHARTS VII – Europe Economic activity in two of the strongest economies in the Euro Zone has been less than robust and is in fact diminishing.

The other four economies shown below, Italy, Spain, Greece and Portugal - are and have been an actual threat to Eurozone integrity. While the European Union and the European Central Bank struggle to keep these countries afloat, and in the Union, and so far with enormous political and financial commitment they have managed to, their combined economic drag and ultimate financial cost of recovery may still end up fracturing the Eurozone.

Japan’s Prime Minister, Shinzō Abe has undertaken desperate measures to try and break Japan out of its decades long economic malaise. His economic strategy, now called “Abenomics”, is to print and spend enough Yens (no limit set) to significantly devalue the Yen to make Japan’s exports more competitive, and deliberately create inflation to break the economy out of its prolonged slump. The end result is uncertain, but Japan now exceeds Greece, Italy and other OECD countries in government debt.


CHARTS IX – BRICS The rapidly developing and emerging economies of “BRICS”, Brazil, Russia, India, China and South Africa, were supposed to pull the rest of the global economies out of the prolonged 2008 recession. We had doubted that conventional prognosis as we had stated that the rapid development of BRICS, previously, had been in a large part due to the investment from the West and the unprecedented spending binge of the Western consumer, which had triggered and sustained a couple of decades of export induced riches for the emerging economies. Once the West slumped and the ‘dollars’ and ‘buy’ orders dried up, the BRICS stalled and started to rapidly decline. The following charts show the damage (We have included the Chart for South Korea as it is also a dynamic Asian exporter/importer).

...END OF PART 1 - please see more in PART 2

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