Is an economic storm brewing?
Are we about to feel the full force of another global recession?
Well, that’s the million-dollar question, isn’t it?
In Part One of my series, I explored the first three signs of a coming downturn:
- The turning tide in housing
- The end of the easy-money era
- The death of FANGs
And then, in Part Two, I gave you four more ominous reasons to be wary:
- Trade disruption in the US, China, and Europe
- Dissipating confidence and morose market sentiment
- The longest expansion in history
- The inverted yield curve
Today, in Part Three, I’ll outline four final signs that are impossible to ignore…
SIGN #8: Freight traffic growing sparse
One of my favourite economic indicators is freight. Why? Because it represents the heart rate of the global economy.
It’s the flow of goods from manufacturers to consumers.
If it stops flowing, the economy dies.
And right now, the pulse of freight activity is slowing. Fewer planes flying less cargo. Fewer ships with lighter loads. Shorter trains. Lower demand for road trailers.
According to IATA, air freight fell to its slowest rate of growth in close to three years.
The American Trucking Association released news that for-hire truck tonnage was down 0.2% in February of 2019.
Regarding cargo ships, The Wall Street Journal reports, ‘With China’s economy slowing and shipments taking a hit from the evolving trade war between Washington and Beijing, operators are already cutting their full-year forecasts.’
Shipping titan, FedEx, cut their 2019 forecast as well in early March 2019…
‘If you look at what’s happening right now in both Europe and Asia, deceleration, contraction of air freight volumes, it’s no surprise that FedEx, being the biggest deliverer of e-commerce and air freight is struggling to make results.’
—Donald Broughton of Broughton Capital
‘Slowing international macroeconomic conditions and weaker global trade growth trends continue.’
—FedEx CFO Alan Graf
SIGN #9: The financial sector getting comfortable…and greedy
Ahead of the 2007 Great Financial Crisis, the financial sector in the US was rife with greedy, grubby hands finding inventive ways to make a buck off customers.
Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac to name a few…
But their actions came on the back of a lengthy bull run…where regulators, business executives, and customers all grew comfortable. They began to forget the trauma of the 2000 dotcom bubble. They got greedy.
Does it remind you of what recently happened in Australia?
It should. But if it doesn’t, don’t worry — the RBA and the mainstream Aussie press have done a good job sweeping it under the rug.
Quick summary — A recent investigation in Australia uncovered that most major Aussie banks had been doing some pretty shady things…and many of these banks have satellites or subsidiaries in New Zealand.
‘The commission heard evidence of appalling behaviour, including that banks were charging the dead and institutions were badgering disabled people to buy worthless products.’
—ABC Australia
The fact that this happened and that it’s been all but forgotten just a couple months later indicates to me that today’s prosperity is blinding people to what’s really happening…just like most Americans missed the same signs in mid-2007.
‘”Serial Greed” Threatens Scandinavia’s Entire Banking System’
—Bloomberg
‘Banking royal commission condemns greed of financial sector in first report’
—The Guardian
‘Deutsche Bank will pay $205m for violations of New York banking law stemming from its foreign exchange trading business, in the latest rap on the knuckles from US authorities for Germany’s biggest bank.’
—Financial Times
SIGN #10: Central bankers anxious to charm markets
In the realm of central banks, there’s a well-known term called the ‘Draghi Effect’.
Named after European Central Bank (ECB) head, Mario Draghi, the effect describes the considerable influence that central bankers bear through words alone.
In other words, central bankers can move markets by simply saying the right things.
In 2012, Mario Draghi used his skill and managed to convince the international investing community that the eurozone wasn’t as bad as it seemed. He said:
‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’
And people believed him…and the markets turned bullish.
And since then, central bankers like Christine Lagarde of the IMF, Jerome Powell of the Fed, and our own Adrian Orr of the RBNZ have all engaged in verbal warfare against the growing tide of negative market sentiment.
Logically, they only need to deploy this weapon when there’s a need…as in there’s something going wrong in the markets that needs sweet-talking to cover up.
Jerome Powell’s recent press conference is a great example. He started off with cheery optimism stating that he expects the US economy to continue growing at a solid pace. Blah, blah, blah. Then he started running through the latest numbers and the true state of affairs became obvious.
Growth down. Less jobs. Sales down. Fixed investments down. Probably no growth above 2% ahead.
Basically, all of the economic indicators that the Fed reports were blaring the recession alarm…but Powell was upbeat because that’s how the Draghi Effect works.
When central bankers are overflowing with optimistic statements about the economy, it’s a good sign that there may be something wrong.
‘Home prices have been rising strongly since the mid-1990s, prompting concerns that a bubble exists in this asset class and that home prices are vulnerable to a collapse that could harm the U.S. economy… A close analysis of the U.S. housing market in recent years, however, finds little basis for such concerns.’
—New York Federal Reserve, 2004
(3 years before the greatest housing crash since the Great Depression.)
‘We don’t project a particular Armageddon in house prices in New Zealand because there are so many factors that are supporting that asset class at the moment.’
—Reserve Bank of New Zealand, 2019
SIGN #11: The debt bomb ticking down
In my opinion, the biggest thing we have to worry about is debt: government, corporate and household.
Debt isn’t always a bad thing. A moderate amount is okay…good even. It should mean that things are improving. Maybe the state is rebuilding infrastructure…and borrows to get it done. Or a corporation issues bonds to fund a new factory. Or a young guy takes out a student loan to get an engineering degree.
All great reasons for debt.
But since the Great Financial Crisis, interest rates have been so low (See #2 above for what I mean)…that anybody and everybody has been scooping up as much debt as they can get their hands on.
As a result, the world is now full of debtors…up to their eyeballs in easy money.
By up to their eyeballs, I mean global debt currently sits at over three times the entire globe’s GDP.
In other words, if you took every single dollar of revenue from every sale around the world — from a Coca-Cola in Djibouti to a Ferrari in Dubai — and put it towards paying off the debt…it would take over three years to pay it all off.
I don’t see it happening. Neither do folks like the IMF, Standard & Poor or the OECD.
Instead, we could look to 2007 to see what happens when the economy is flooded with financialised, poor quality debt.
It’s not pretty.
‘Paul Tudor Jones, the billionaire investor, recently posited that we are likely in a “global debt bubble,” and Jim Rogers, the influential fund manager and commentator, has forewarned of a crash that will be “the biggest in my lifetime” (he is 76).’
—The New York Times
‘The rising level of global debt is a challenge. At $182 trillion as of end-2017, almost 60 percent higher than in 2007, it leaves governments, firms, and households more vulnerable to weaker and asynchronous growth as well as higher interest rates.’
—The IMF
‘Financial market investors have grown increasingly concerned that high debt levels in the US could turn a looming slowdown for the world’s largest economy into a full-blown recession.’
—The Guardian
‘When global debt starts suffocating economic growth and liquidity, the relative Sea of Tranquility [sic] in which we have been swimming for a while could become quite stormy indeed.
‘That is why I keep harping on The Great Reset. I think we will set a new standard for what the word volatility (absent a shooting war) really means.’
—John Mauldin
Dark clouds on the horizon
As we sail through 2019…and into 2020…it’s become evident that all is not as it seems.
That the foundations of our ‘rock star’ economy may be cracked and crumbling. And a collapse — if it comes — could have destructive effects on our savings.
Of course, there’s a possibility that we’ll somehow avoid paying the piper…that the storm cloud dissipates…that the record streak continues.
But in my opinion, you’d only be postponing the inevitable…the bust that follows the boom.
As an investor or holder of wealth, you’re now at a crossroads where you must decide between two options:
- Chase after maximum returns and stay aggressive with your assets…risking losing your shirt when the market crashes.
- Get defensive and conservative…liquidating your more-exposed assets in favour of more resistant ones…but at the risk of missing out on some gains if the bull market continues.
If you consider the 11 indicators we’ve just discussed:
- The turning tide in housing
- The end of the easy-money era
- The death of the FANGs
- Trade disruption in the US, China and Europe
- Dissipating confidence and morose market sentiment
- The longest expansion in history
- The inverted yield curve
- Freight traffic growing sparse
- The financial sector getting comfortable…and greedy
- Central bankers anxious to charm markets
- The debt bomb ticking down
…I think you’ll see that the facts paint a pretty dismal picture for what’s to come.
Or at the very least, reveals a significant risk to our economy.
My recommendation?
Prepare yourself today.
Best,
Taylor Kee
Editor, Money Morning New Zealand