Alarm bells are ringing. No one cares. By now, everyone knows stock only go up.
For those in tune with other ideas, Financial Times writer Stephen King suggests the Global Economy is Due for a Downswing.
Jim Bianco at Bianco Research comments on synchronized growth in his report Concerted Economic Growth is in Jeopardy of Ending.
Summary
Less than 50% of the world’s economies are now producing economic data surprises. Realized economic data following suit in the months to come would remove the tailwind of ‘concerted economic growth’ for risk assets and central banks. Emerging markets may be first on the list to experience higher volatility.
Comment
We have all been discussing ‘concerted global economic growth’ since early 2017 as a tailwind to risk assets and central bank policies. The chart below shows the percentage of the world’s economies producing economic data surprises (orange line) and above-average data changes (blue line) since 2004.
Over 90% of economies were indeed posting realized data changes at above-average growth rates in mid-2017. However, reported data has slowed its ascent over the past month led by the Eurozone and Canada. The percentage of economies with upside surprises has fallen to 44%, which has been a leading indicator for actual data changes like payrolls, industrial production, and durable goods orders. Above-average data changes have also rolled over to 67%. A break below 50% would mean ‘concerted economic growth’ should no longer be proclaimed.
Economic Misses
The next chart offers the median returns by major asset classes after the percentage of economies growing above-average falls below 60%. The impact is not immediate, but higher volatility and drawdowns do ensue over the following months.
We expect U.S. Treasuries will slow their climb in this event, helping promote more steady, positive returns by the likes of municipal bonds. Emerging markets, U.S. high yield, and the S&P 500 are not necessarily expected to tumble, but higher volatility will remain the theme.
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Optimistic View
Compared to me, John Hussman, GMO, and a handful of others, Bianco presents an optimistic view. Then again, I am not watching the next 3-4 months. I am concerned about the next seven years.
What most caught my eye is Bianco’s view on the MSCI World Index and US treasuries.
Typically, rot starts at the periphery, the spreads to the core. Anyone remember subprime? Eventually, it all became subprime.
It’s going to happen again.
Arithmetic of Risk
Stocks are tremendously overvalued. In Sucker Traps and the Arithmetic of Risk I noted that some expect equities to decline as much as 67% from here.
I think we are somewhere in the box as shown.
Unlike Bianco, I won’t put a timeframe on much of anything. But note his big winner: 10-year US treasuries.
This is at a time when most of the rest of the world is screaming inflation.
My view is that Inflation is in the Rear-View Mirror.
Debt-deflation is on the way and gold will be the beneficiary. If you disagree, please read the above article before moaning.
My definition of inflation may not be the same as yours. Mine is based on real-world economics, and we are in for a world of hurt.
Mike “Mish” Shedlock
Its like the game of musical chairs, when music stops playing punch the others in the head and grab a chair.
That’s pretty neat and tidy summation of how the world has played out against Mish’s position the last ten years, and I would agree with you that we should expect stagflation going forwards for the foreseeable future, but there is one thing you have underestimated: the property market. How much control do you think the central banks have over that one eh?
“The real return on the 10yr is less than 1%, and that’s with historically low inflation? I understand that investment might be relatively safe, what does that say?” To me, it says there are no profitable investments to be made on main street.
The real return on the 10yr is less than 1%, and that’s with historically low inflation? I understand that investment might be relatively safe, what does that say?
Just in time for the doves on the FOMC to become hawks and start massive dumping of their balance sheet? Brainerd and George, for instance believe this Fed is too accommodative.
Are we really 9 years into a recovery? It hasn’t felt like that to me. We may not technically been in recession for 9 years, but 2013 & 2016 were awfully slow years. I would suggest that we are in the 2nd year of an expansion since 2017. You guys rely too much charts – this is not astrology.
Want some inflation in the EURO area? Pull the plug on the zombies that undercut healthier companies with help from the ECB. The healthier companies will gain some pricing power, more profit, pay more tax and look to expand and employ more whilst picking up cheap assets. The whole system is arse about face where saving companies causes the system to become sclerotic.
The road to hell is paved in good intentions.
Is it correct that something like 20% of European corporations are generating less FCF than interest on debt and only alive due to ECB actions? The US might hurt a lot but imagine the pain elsewhere. Once one domino topples there’s a chance of a global round robin cascade. Round and round until just survivors are left standing in the rubble. Survivors with serviceable debt, picking over the remains of the less risk averse.
In 2019, the FED is supposed to shrink their balance sheet by $600b and the federal deficit will be roughly $1.25t. That’s an awful lot of money being sucked from the markets and economy. Unless something changes, the end of 2019 will look a lot different than the way things look now.
Rising interest rates are a “headwind” to corporate profitability, in that they increase the cost of re-financing debt. The real death-blow will not be struck until the next recession hits, when sales and profits go into the sh**ter and high-profile bankruptcies begin to occur. When this happens is anyone’s guess, but we are 9 years into this ‘recovery’ and history tells us they very rarely get much longer than this.
Okay, we’ll see. I certainly agree stocks are pricey, but I think rising interest rates are the real threat to p/e ratios, not a massive recession/depression. I think a lot of pessimists are still fighting the ‘last war’.
Yes indeed, “earnings fluctuate”. And when they “fluctuate” this time – with corporate balance sheets loaded with unprecedented amounts of unproductive debt – there will be bankruptcies GALORE. The rush to get out of equities (and the resulting crash in prices) will be EPIC.
More pessimistic than John Hussman, Really? Hussman, only a year or two ago, said fair value for the s&p 500 was below 1,000. BELOW 1,000! The s&p 500 index is set to earn about $155 this year. Of course earnings fluctuate, but that is insane. Mind you, he didn’t say the s&p was worth, maybe 1,500, but typically over shoots on the way down, just as it does on the way he up so it might crash below 1000. He said FAIR VALUE had only 3 digits (I think that’s how he put it.) If FAIR VALUE is 999, certainly a crash could put it way below that. Perhaps the s&p 500 will drop to 155 and the companies can buy 100% of their shares with 1 year’s profit and the stock market will cease to exist.
how do you think the dollar will react? (if at all)
No more jokes. I promise.
If your intention is to be a troll – then keep it up – You will be gone, with cheers from the rest.
What happened after that? Gold went to 1900+
If QE comes back (it will) what will be the beneficiary. That I cannot say but I strongly believe gold
https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/pY98QOHeFE2eAof6gA5bwQ/U6JKUfu_9kWZlejWcBXyMw
Mish the last 10 years: doesn’t give a hoot.
Mish,During the 2007 debt deflation, Gold also collapsed. Why do you think it will be a winner this time?
Mish, do you then think this time it is going to be QE4EVER?
In case you did not get the idea, I am a night owl.
You clearly do not know me at all do you? Readers, please tell this person how often I am up at this hour. Here’s a hint: at least 50% or the time, and 4:00 AM is not remotely unusual. Tut tut Tut indeed
You’ve gone and called a property market crash and now you’re losing sleeping over it aren’t you… tut tut tut.
Isn’t it like 3 in the morning for you Mish?