The State of the Economy – Conflicted (#64)

The economic noise now-a-days is, as with everything else, dominated by America’s current economic status, followed by the distant rumblings from China. But there are rumbles that are more world wide, with Europe, South America, India and others flashing warning signs that are being obscured by the apparent strength of the indefatigable American economy, and its record setting stock markets. With economic indicators increasingly lighting up, warning of a possible global recession on the horizon, the roaring stock markets portray a sense of well-being that is conflicted with the underlying fundamental realities.

America, and the majority of the other countries, have been in a prolonged economic expansion cycle that has now persisted since the financial crisis of 2008. And while there is the possibility of the expansion continuing (certainly if the Fed and the other major Central Banks have anything to do with it) yet, there are enough signs that point to the cycle nearing its end, globally.

One of the primary reasons is just the sheer longevity of it taking a toll on demand and earnings. China, India, Russia, Europe, Latin and South America are already showing the strains, some quite markedly, like China, Russia and Europe, while some of the countries in South America like Brazil, Argentina and particularly Venezuela are in the ‘basket case’ category at the moment.

Plus, in America there is a bitter partisan civil war on, which Trump has fueled and fanned with great delight. It is what he does best, purposely divide and antagonize. And he has not confined his chaos generating politics to America, but has gleefully taken the role internationally, sowing discord and confusion among friend and foe alike, till the global economic and geo-political status is in unprecedented turmoil.

In the ensuing raging battles, nationally and internationally, the quiet analysis of the efficacy of his political and economic policies are becoming drowned out in the noise, and crowded out by the daily new crisis that are generated by him at will.

So, it’s been difficult for a cohesive economic consensus to develop among economists and analysts as the battles rage, and economic policies have become knee-jerk reactions to the political requirements of the day, rather than the well-considered long-term strategies that they are supposed to be. So, his reactionary ad-hock policies-making style is taking a toll on planned strategies of governments, their planners, and their Central Banks, including the US Federal Reserve.

Regardless, economic global indicators, including an increasing number in the US, are steadily pointing to a global slowdown and perhaps a recession, imminently.

And there is no avoiding or ignoring the darkening clouds that have been gathering globally for years now, kept only at bay by the determined efforts of all the major Central Banks intervening in their economies consistently, since the Great Recession of 2008. And as the rumbles of the coming recession grew louder in the past months, the pressure on the Central Banks of China, the EU, and North America, including the most powerful of all, the US Federal Reserve (the Fed) ‘to ease’, have grown once again to the point of inevitability.

Now, additional rounds of Quantitative Easing are once again the political call-of-the-day and the marching orders-of-the-day, from Trump and other world leaders globally, as they try and force this over-extended economic expansion to continue.

And, as the Fed and the Central Banks respond with increasing dovishness and then start another round of ‘Easing’, the stock markets have rallied in euphoric anticipation of unprecedented monetary support, towards the stated goal of creating and maintaining at all costs, ‘the wealth effect’, with inflated assets prices.

The ‘wealth effect’ is the Fed’s and Central Banks’ policy of purposefully inflating asset prices to create seeming ‘wealth’. This policy has greatly favored those with the greatest ownership of assets (the few), making them immensely wealthier in the past decade, while punishing those with fewer assets (the majority); and most importantly, severely punishing those with savings, be they the average person, or the insurance and pension funds, with historically low interest rates.

This penalty exacted of the savers has pushed all ‘returns’ seekers into riskier and riskier assets to the point that stock markets have set new records, while in Europe ‘Junk Bonds’ are in such demand that they are now paying negative returns.

The great risk of creating the wealth effect through the purposeful inflation of asset prices is that a point is reached where the valuations of assets are no longer rational, justifiable, or even affordable, and then the snap-back towards rationality and affordability can be a rude and unceremonious retreat of the carefully crafted decades long wealth effect, wiping out those ‘easy money’ gains for years.

That moment of return-to-the-mean is not predictable, but it seems to be increasingly threatening as the seeming strength of the US economy possibly mutes the coming Fed’s rate-cuts, and weaker than expected corporate earnings coupled with rising geo-political tensions, with China and Iran, could weigh on and dampen the euphoria of the ‘Dovish Fed’ fixated Market investors.

Then there is the reality that the anticipated China and US trade deal has not materialized. And in fact, the possibility of the two countries coming together has in fact receded after the much-ballyhooed meeting between Trump and China’s President Xi at the G-20.

There are again the usual reassurances by the Trump officials such as Mnuchin, that there have been ‘telephone calls’ between the negotiating parties, and that the possibility had arisen, that the two leaders might actually talk again!

Meanwhile, no material progress has been made between the two countries, certainly not on any of the ‘sensitive’ issues of intellectual property theft, industrial technology spying, reciprocating greater access to the Chinese markets for American companies, transparency in international dispute resolutions, etc.

Meanwhile Trump is doing everything to antagonize the Chinese leadership by selling arms to Taiwan, backing Vietnam in its battle against China for ‘territorial rights’ in the South China Sea, and generally being more assertive in the South China Sea with its own claims of ‘freedom of navigation’ rights, in the busiest trade routes in the world.

So, while on the one hand Trump is looking for a positive resolution to trade disputes with China, on the other, he and the US are adopting policies that are sure to antagonize the Chinese leadership, and make it harden its stance on all its negotiations with the U.S. ...Talk about conflicted.

The geo-political tensions between Trump’s America and China, Europe, Mexico, Canada and just about everybody else, including the constant pushing for a fight with Iran, don’t bode well for the North American and the global economy, and the strain-fractures are starting to show. Additionally, assets valuations (along with the Stock Markets) are at nose-bleed levels, and while there may be still some upside left, the possibility of an imminent snap-back are significantly greater. And there is enough conflict, both economic and political, to make it a reality sooner than later.

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