There has been a marked increase in the deterioration of global economic statistics in the last few weeks. Despite the central banks still stimulating (or attempting to) with record low rates and $17 trillion worth of bonds now trading with negative yields, the data just gets worse. A few charts to ponder:
The trade war is really starting to bite as US manufacturing export orders collapse. Auto sales in India are also collapsing:
Chinese auto sales are not looking very rosy either:
Chinese industrial production for August was also a new 17 year low with only 4.4% growth. This was the lowest since February 2002.
There is a sense that companies are preparing to “batten down the hatches” in preparation for a prolonged slow down. And this is a global phenomenon as shown below in the global manufacturing survey. Anything above 50 implies economic expansion while below 50 implies contraction:
A separate indicator from the OECD is also implying impending increased recession threats:
As a report from the research team at Deutsche Bank state: “the data speaks for itself, the trade war is having a serious negative impact on the US economy”.
One final economic chart. This one sums up nicely where the economy is in more historical terms with Jim Bianco Research stating: “The bottom panel shows the percentage of countries whose policy rates are below that of the United States. For the first time since 1982, the U.S. policy rate is the highest in the developed world. This tends to be a decent signal of an impending recession, much like the yield curve.”
It is thus unclear how effective having rates so low really is in helping an economy. It certainly pushes asset prices to new highs as we have seen in gold, property and stock market indices. Indeed, Chinese property appears fairly resilient at present:
But what is the point and end game of all this stimulus and low rates if just to keep asset prices going higher? Surely the “wealth affect” of these measures is just predicated on the belief there will be more stimulus further down the road, with increasing (and not decreasing) efficacy. And to think of all that capital flowing into unproductive assets such as huge loss-making tech unicorns like WeWork (which had to cancel its IPO this week because the valuation halved from the last funding in January) or the massive government bond bubble with negative yields. There are so many warning signs at the moment. The following piece from the BlackRock blog is certainly food for thought:
The other big stories this week were the return of volatility in the repo market and the oil price. Starting with the latter, it seems absurd that Saudi Arabia cannot defend itself against a few drones. For a country that invests so much in its military, it looks like something has gone seriously wrong. Oil had its largest spike since the outbreak of the first Gulf War and this time the blame is being firmly pointed at Iran. Whoever carried out the attack, the fact that it happened with much ease is deeply worrying and destabilising for an already fragile global economy and an already fragile geopolitical situation.
A war between Saudi Arabia and the US on one side and Iran on the other would be catastrophic on human terms and would also shoot Oil over $100 per barrel plunging the world into a deep recession.
The return of repo market volatility also brought back memories of darker times, this time however to the global financial crisis.
While this story is still developing there are some worrying parallels with 2008 and 2009 when intervention in the repo markets was required as funding dried up. This lack of liquidity is, so far, unexplained, with a number of theories circulating. Whatever the reason however, the fact that this is the first time this intervention has been required since the global financial crisis is very concerning for the market.
As shown, the news refuses to get better and the only policies that are being implemented remain stimulus from central banks as well as some trade protections. As rates have moved higher Gold has come back, which no doubt many will use to add to their positions. Counter-party risk, geopolitical risk and economic risk are all extremely high and any flight to safety in panic will see both the US Dollar, US Treasuries and Gold all move up.
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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.