Helping you navigate the new normal
We don’t often use the word “impossible” in the newsletter. But in this case, it is clearly impossible for GDP to continue to grow in the major Western economies.
investors are hoping Fed Chairman Jay Powell will soon signal a dramatic interest rate cut. And so they are positioning for a ‘Santa Claus’ rally. But most adults know that Santa Claus doesn’t really exist.
Last week, the Japanese yen fell through the US$ : ¥150 level for the first time since 1990. It has now fallen by nearly 50% against the US$ in the past two years. The currency is behaving as if Japan were a 3rd world country – whereas it is actually the 3rd largest economy in the world. Clearly, something is very wrong.
Unfortunately, the problems look set to get worse rather than better. And the oil price rise caused by the Israel/Gaza crisis adds to the problems caused by the Ukraine invasion. A difficult winter, and 2024, lie ahead.
300+ years of Bank of England data shows that interest rates are typically inflation plus 2.5%. At today’s level, this would imply – US rates would be 3.7% + 2.5% = 6.2%: Japan would be 3.2% + 2.5% = 5.7%: Eurozone rates would be 5.3% + 2.5% = 7.8%; UK rates would be 6.7% + 2.5% = 9.2%
Most Americans can’t qualify for a mortgage today with prices and interest rates at generation-highs. Yet housing starts average a post-2007 record of 1.5m/month. Logic therefore suggests the US housing market is heading for a repeat of the 2008 crisis
Bubbles are great fun while they last. But they are much less fun when they burst. For the past 20 years, central bank stimulus has created some of the largest bubbles ever seen. But now, led by developments in Japan and China, they are bursting
The losses sitting on central bank balance sheets are starting to soar to eye-watering levels. The US Federal Reserve is sitting on a “mark-to-market” loss of $911bn. The UK taxpayer has already handed over £150bn ($192bn) to cover the Bank of England’s losses.
Taylor Swift’s concerts are creating massive short-term demand as people reconnect after lockdowns. But the chemical industry is warning that deflation could be round the corner, due to the over-capacity created by 20 years of stimulus
Either chemical markets are wrong or the financial markets are wrong, and obviously we think it’s the latter. People thought China was going to bounce back rapidly after Covid but China’s growth since 2008 was the product of massive stimulus and property speculation which couldn’t go on forever.
Central banks have spent 15 years telling us that debt and demographics “don’t matter”. They claimed they could always create demand via stimulus. But now the policy has run out of road. Homeowners who thought mortgage rates would stay low forever, will be the ones to suffer
Food prices have stayed high due to the disruption caused by the war. They are unlikely to fall back quickly as the war continues and economic volatility intensifies.
The Presidential Cycle is now over. Instead, worries about the recession and the US debt ceiling talks are moving centre-stage. But Asian currency markets are sending a warning signal. A rising US dollar and US interest rates, and a falling yen and yuan, could soon raise the risks of a major Asian debt crisis.
Chemicals are telling us that all the world’s major economies are in a major downturn. And the downturn is starting to accelerate as companies cut back spending and fire people. Real estate, autos and other key areas are already suffering along with the banking system.
It seems highly likely that the Rebound rally is ending, and the market Downtrend is about to resume. Time spent on researching the paradigm shifts that will take us into the New Normal will likely prove very profitable for the future
The problem is that most economic models were originally built in the 1960s/70s, when people still died around pension age, and are out-of-date
“You can’t run the most reckless monetary and fiscal experiment in history without the bill eventually coming due. The first invoice arrived as inflation. The second has come as a financial panic, with economic damage that may not end with Silicon Valley Bank.”
Companies and investors need to invest time now on having a genuine debate about the risks ahead. The regulatory failures of the past few days highlight what can quickly go wrong, if one hasn’t war-gamed out potential risks. As the saying goes, “Failing to plan, equals planning to fail”.
‘Business as usual’ has been a great strategy for the past 40 years. But nothing lasts forever. It has now – like the central banks’ stimulus policies – hit the inevitable brick wall.
Now, we are all starting to suffer for the central banks mistake in adopting Bernanke Theory. The bubbles they created are finally starting to burst as interest rates return to more normal levels. This will be very painful for all those who trusted them to manage the economy.
Nobody knows how markets will develop. But past performance is the best guide that we have. This is why our Sentiment Index is my Chart of the year for 2022.
Underlying growth has been slowing since 2000 as more people joined the Perennials generation. Now, the bursting of the central bank stimulus bubbles – combined with the impact of Russia’s invasion – will likely cause the global economy to go ex-growth.
Apple symbolises the major changes underway in the economy. Its stock price is in decline as central bank stimulus disappears. And its profits are threatened as pressure builds on its supply chain and pricing.
US inflation was last at 8.3% in January 1982. And then, the 10-year yield was 14.6%. History may not be a perfect guide, but it is the best we have. So it might be worth planning for rates to go much higher than most “experts” expect, now that they have broken out of their downtrend.
Most commentators chose to ignore the warnings on inflation and recession provided by chemical industry data. As a result, they have been blindsided by the speed and scale of the S&P 500’s downturn. But the Sentiment Index has proved far more reliable.
It’s going to be a very difficult winter. Most of the world will be impacted as Europe bids up energy/food prices to keep its people warm and fed. And it would never have happened if policymakers had recognised the importance of geopolitics, energy markets and demographics.
As the head of Germany’s Employers’ Associations warned last month: “We are facing the biggest crisis the post-war Federal Republic has ever had. We have to be honest and say: First of all, we will lose the prosperity that we have had for years”.
We are facing a perfect storm of global food, energy and financial crises set off by the war in Ukraine. Analysts need to stop focusing on monetary policy and the inversion of the yield curve. They need to look out of the window and start dealing with the geopolitical reality of Putinflation.
Social and political issues were always more important than economics before the SuperCycle. And now they are resurfacing again. Does an individual woman have the right to choose what to do with her body? Or can judges tell her what she can, and can’t do? It is early days, but many women may choose to vote Democrat because of this issue in November.
Markets have returned to the 1970s. They have to cope with “Putinflation”, recession, rising interest rates and energy prices – as well as geopolitical and nuclear risk. Unfortunately, today’s traders do not even have the experience of the 1960s as a guide, having lived in a different world for 20 years.
Central banks and investors believed stimulus programs had created a “New Paradigm” where asset prices would always increase. Now they are starting to realise that stimulus is irrelevant against the 3 Horsemen of the Apocalypse – China’s continuing battle with the pandemic, Russia’s invasion of Ukraine, and potential famine as rising gas/fertilizer prices mean farmers can’t afford to grow their crops or feed their animals.
The seeming genius of many private equity funds in recent years has been based on this ability to borrow at cheap rates during the ‘up’ part of the business cycle. Now we are heading into the ‘down’ cycle. And the central banks have abandoned Bernanke Theory and are back to worrying about inflation. So today’s excess leverage means many over-leveraged companies will go bust.
Problems in the housing market aren’t just confined to the US, UK, Germany and China. The average house price/income ratio is now back to the highest level since records began. And the problem for homeowners is that potential buyers are already starting to disappear as mortgage rates rise – and affordability reduces.
The issue is simply that investors are in a state of Denial. And so there is a growing risk of a financial crisis as reality finally dawns on them.
The central banks are now abandoning the ‘Bernanke Doctrine’ set out in November 2010 – that what was good for markets, was good for the economy.
It is time for the central banks to give up their outdated economic models, and focus instead on the science of demographics. Their efforts to create economic growth by ‘printing babies’ have simply created a debt bubble. This will likely now burst as Evergrande goes bankrupt.
Recession may also burst today’s asset price bubbles in stock markets and housing prices – and even in more obscure assets such as art markets.
The Federal Reserve can’t control the fallout from the bursting of China’s ‘subprime on steroids’ real estate bubble
As with Lehman’s bankruptcy in September 2008, there is a real risk that an Evergrande default could cause a stampede for the exits around the world.
Central banks thought they could overcome demographic pressures from ageing populations by printing bucket-loads of money at zero interest rates to support housing and stock markets. Now they are finally realising this was wishful thinking.
Wall Street is focused on central banks’ response to the pandemic, whilst Main Street focuses on its actual impact.
The Hertz rental car bankruptcy in the US highlights the risks to the economy
Financial markets are treading water as they wait to see what happens next
Financial markets have sharply diverged from events in the real world
A month ago, we forecast that oil prices would go negative in Q2
Markets are being driven by speculators funded by the central banks, rather than long-term investors.
Many indicators are now pointing towards a global downturn in the economy, along with paradigm shifts in demand patterns. CEOs need to urgently build resilient business models to survive and prosper in this New Normal world, as I discuss in my 2019 …
Tariffs are not a “silver bullet” and cannot solve the two key issues facing the US auto industry
The blog has now been running for 11 years since the first post was written from Thailand at the end of June 2007. And quite a lot has happened since then: There was the 2008 financial crisis, one of the …
The blog’s 11th birthday – and a look forward to 2021 Read More
Western central bankers are convinced reflation and economic growth are finally underway as a result of their $14tn stimulus programmes. But the best leading indicator for the global economy – capacity utilisation (CU%) in the global chemical industry – is saying they are wrong. The CU% has an 88% correlation with actual GDP growth, far […]
One thing is certain about the 2017 – 2019 Budget period. ”Business as usual” is the least likely Scenario to occur. The IMF chart above highlights the key issue: for the past 5 years, all its forecasts of a return …
