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No, Larry Kudlow, The Recovery Is NOT V-Shaped

By Shlomo Maital

Economic Activity in the World’s Major Economies

     ImPOTUS (Trump) has surrounded himself with a battery of sycophants, including his chief economic advisor Larry Kudlow, who continues to insist the economic recovery will be V-shaped – sharp drop, and sharp recovery. The reason this is so destructive, is that much more stimulus is needed for the US economy – but the wrong-headed view that full recovery is imminent will prevent it. It is so painful to see crackpot economists running economic policy, when the US has stadiums full of truly brilliant economists, many of them Nobel Prize winners. The price for this folly will be heavy.

   According to Bloomberg, the economic recovery – after a disastrous 40-80% decline in economic activity — has stalled, and is plateau-ing at around 80% of pre-pandemic levels.

“The recovery has stalled in major advanced economies, with some countries hitting a ceiling on activity that is below their pre-crisis levels, according to Bloomberg Economics gauges that integrate high-frequency data such as credit-card use, travel and location information. Euro-area economies such as Germany, France and Italy, along with Norway and Japan, are closest to their pre-pandemic readings, with Spain falling behind slightly. The U.K., U.S. and Canada are still far below their levels of activity at the start of the year”.

   That is actually terrible — because it means we are in a deep recession and are remaining there. Historically, when the world economy fell into recession, the US economy was the locomotive that pulled it out of the mud, with large demand on the part of American consumers.   Today, the US is run by those who reject any idea that the US has a responsibility for other nations’ wellbeing – and even if they believed they did, they are impotent.

     What is the reason? There are two. First, governments, especially in the US, do not understand that in the absence of consumer demand, only government can fill the gap, and massive amounts of spending are required to rescue the economy.   Debt-phobia (fear of public debt) is still alive and well — but if we remain stuck at 80%, even the existing debt will be tough to service, and if we can get back to 100%, the higher debt will be repaid from new revenues generated. Second, people are scared, uncertain (justifiably so), and are not spending. 

     People are not stupid. They see the weak government policies, and the US political deadlock – and hang on to their money. Even when restaurants do open, people are simply not going to eat in them. They understand that 80% far better than many economists and leaders.  They fell it on their flesh.

     The message here is – if you are fortunate enough to have current income, and not everyone does, set aside a portion of it, because you will need it in future.   I have been telling people this for years, in good times, and now, in bad times, it is still valid, because the bad times can persist or get even worse.

Warning: The Next Crash is Taking Shape

 By Shlomo Maital

     In the children’s fable, a boy cried “Wolf! Wolf!” in jest – until, when there really was a wolf, nobody came to help. Economists seem to be like that boy. We are always crying “wolf!”.   Problem is, sometimes, not always, the wolf does come.

     Writing in the New York Times, Ruchir Sharma, chief global strategist of Morgan Stanley Investment Management (a Wall Street insider for sure) sounds a thousand warning bells. When an insider cries Wolf!, we should listen.

       Here is why.

      “Central banks adopted zero to negative interest rates and provided huge amounts of cash” after the 2008 crisis. Result: “global financial assets are worth over $250 trillion, up from $12 trillion in 1980, or more than 3 times global GDP.” …”The ocean of money in financial markets is so large, it’s possible that ripples on its surface could trigger the next big downturn.”

       Suppose, just suppose, as North Korea and the US square off, global financial markets fall by 10%. That implies paper losses of $25 trillion, or half again as large as the United States’ annual GDP. That could trigger widespread panic.

         Why have asset prices risen so dramatically? Because when you get to borrow free money, you are tempted to do something, anything, with it —   even when returns are low. At long last, central banks are beginning to worry about what they’ve done – create a new bubble. As Sharma notes, “asset prices from stocks to real estate have never been this expensive simultaneously.” Clue that it’s a bubble? Of course.

         Since WWII, there have been 88 recessions – and 62 of them followed a stock or housing bubble or both. So a financial crash will inevitably bring an economic crisis.

       Does anyone else agree that the wolf is on the way?   Philip Inman, The Guardian, does. He notes that the US Federal Reserve is now starting to sell its $4 trillion in bonds, bought in order to pump money into the system. In other words – soak up some of the mountain of money it created. This will require the US Treasury to raise more in tax, Inman notes. Why? If the Treasury can’t sell bonds, it has to raise taxes.  But baby boomers everywhere, those who have grown wealthy, simply refuse to pay the taxes needed to keep their governments afloat. And the Trump administration is hell-bent on lowering taxes, not raising them.   The baby boomers are “offloading the problem to younger lower-income groups, who now must borrow excessively just to make ends meet”.  

     It’s a recipe for big trouble, which now includes a war between the generations – when once, we old fellows used to try to make things better for the younger kids, and now we seem to be working hard to make them worse. And I haven’t even mentioned climate change.  

     “There is growing evidence of a slide into outright deflation even ahead of the next recession…”, notes a financial analyst, Albert Edwards. He thinks the US will soon slide into recession. And Trump is about to appoint five new Fed governors, all of whom want less regulation and less government.  

       I know a fairly wealthy investor, highly savvy, who is pulling his investments out of the US and putting them into Europe, of all places. Problem is, in a global crisis, there is no safe haven.

       These are dangerous times.   Everyone should set aside a bit extra for rainy days, and prepare at least mentally for a new global crisis.

 

World Economy: Loop the Loop!

By Shlomo Maital

 ifo

     From time to time, I answer a questionnaire distributed by a German research institute, called Ifo World Economic Survey. Based on that survey, Ifo publishes a “business cycle clock” for the global economy. The latest one is shown above.

     To explain: the X axis is the current situation: good or bad; the Y axis is the change, improving or deteriorating.   The ‘clock’ starts in 2007, just before the 2008 subprime mortgage crisis that began in the US and spread around the world.

     What we see is this: First, a huge ‘loop the loop’ cycle, stretching from 2007/8 to 2011, with a very deep recession. Then, two smaller loops, 2012-13 and 2014-15 cycling around ‘no change’ and ‘average situation’. The cause?   Weak Chinese growth, and very weak EU growth.

       Once the global economy had a powerful locomotive tugging it upward. First, the locomotive was the US economy, whose appetite for goods created enormous demand and pulled the Asian economies into high growth. Then, the locomotive was China’s economy, whose rapid growth spread to surrounding countries, as China imported components.

       Today? The global freight train has no locomotive. Not the US, not EU, not China. Until a locomotive emerges, and one may not, the world economy will continue to do these small ‘loop the loops’, like a stunt plane, around the average.

       Have you strategized this rather gloomy forecast?

Blog entries written by Prof. Shlomo Maital

Shlomo Maital

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