“Policymakers in Shanghai say they face a global economy more fragile than it has been since the European debt crisis risked derailing the global economy earlier this decade. Two of the world’s largest emerging markets, Brazil and Russia, are in the second year of recessions; China’s slowdown has hit Africa, Asia and Latin America. Rich nations like Saudi Arabia are experiencing their first-ever budget deficits during the global oil slump, while falling prices for other commodities are taking the wind out of exporters from Australia to Gabon.”
I could add several more challenges to that list, and indeed I have. So at this point, the key question isn’t: “What do monetary and fiscal policymakers WANT to do?” It’s: “What CAN they do to fight this slowdown?”
As part of the search for an answer, let’s look to the big conference in China. We’re starting to see some draft versions of the G-20 communiqué that will be issued when policymakers wrap things up in Shanghai tomorrow. If one thing is most apparent, it’s that nobody seems to be able to agree on what to say or do, or whether any of it will work anyway.
The OECD and IMF claim massive fiscal/deficit spending on things like infrastructure will succeed. China also wants some increase in deficit-financed spending and stimulative monetary policies.
|Policymakers face a global economy more fragile than it has been since the European debt crisis.|
But France and Italy are talking down their ability to spend more, while Germany’s Finance Minister Wolfgang Schauble threw a shovel full of dirt on the idea of huge fiscal stimulus. His quote: “The debt-financed growth model has reached its limits” and just risks “zombifying of the economy.”
As for monetary policy, even central bankers are admitting they’re at the end of their rope. One example: The governor of the Bank of England just knocked negative-interest rate policies as misguided and likely to foster a “zero-sum game” environment, despite the fact that’s exactly what the Bank of Japan and European Central Bank are using.
Why do I keep harping on this topic? Two reasons:
A) It’s at the forefront of investor minds, and therefore dominating market-trading activity right now. But more importantly …
B) I believe we’re at a critical juncture. We’re passing the point of no return, the point where investors realize the futility of trying to use even more monetary- or fiscal-policy ammo to fight a down-phase in the credit cycle that’s all but inevitable.
|“We’re at a critical juncture … passing the point of no return.”|
Look, we had a six-and-a-half-year easy-credit bacchanalia. It fueled booms and bubbles in just about everything. In junk bonds. In emerging-market debt. In auto loans. In commercial real estate. In IPOs. In M&As. In stock buybacks. In artwork. In collectibles. In trophy Manhattan and Miami condos. Heck, the Journal just published a story about the “most extreme high-risk condos on the market,” discussing how palaces in the sky are piling up all over the U.S. as buyers balk.
Will another dose of QE or negative interest rates push off the era of reckoning for that?
Will a few billion, or even tens of billions, of dollars worth of bridges and high-speed trains change the path we’re on?
I maintain the answer is “No.” I believe we’re hurtling toward a future that no amount of G-20 talk, or action, can prevent. So we might as well accept it, deal with it, and invest in a way that helps us protect and build our wealth in that environment.
Yesterday, I told you I’m participating in a webinar that’s designed to help you do exactly that. It’s called “Finding Profits as Markets Falter and Gold Soars,” and it’s scheduled for Monday, Feb. 29 at 2 p.m. Eastern. I estimate it will take about 45 minutes of your time, and is entirely free to attend.
If you already registered, great. If not, you can do so using this link. I’ll be joined by noted gold and market experts Brien Lundin, Brent Cook, and Peter Schiff, and I expect it to be extremely valuable to you in these volatile times. Can’t wait to “see” you there.
Meanwhile, what do you think about my “inevitability” thesis? Are we past the point of no return, or is there still something policymakers can do to boost growth in an effective, lasting manner? What are you doing with your investments now that the G-20 gathering is going to wrap up? Hit up the discussion section to let me know.
It’s almost the weekend. But that doesn’t mean you’re taking time off from weighing in on the issues of the day.
Reader Joe brought up the truthfulness (or lack thereof) of global economic data, saying: “The Chinese have been lying about their economy for quite a while now, much like the U.S. government and their media lackeys (New York Times, Washington Post, etc.). Hopefully the Chinese will reject the failed solutions of the IMF, OECD, and the hopelessly incompetent Jacob Lew. It’s obvious that the banksters only care about their survival and to heck with the people of Japan, Europe, the U.S., etc.”
Reader Howard also picked up on the China theme with these comments: “China is a work in progress with almost insurmountable challenges. Their foreign-exchange holdings won’t be helped without a continuing export drive into the future. To be perfectly honest, I wouldn’t like the Chinese leaders’ job.”
Reader Peter offered a quick take on what investors may want to do here, saying: “Buy bullion gold and stash it somewhere safe!” Reader Anthony G. also added a short verdict on the latest market action: “The bulls are back. The G-20 troops have saved the day or stocks are overbought again.”
As for interest rates, Reader Nels said: “Is the real interest rate 25 basis points or 300 basis points? Who knows? And what difference, at this point, does it make?
“The Fed can’t tighten because they will blow up too-big-to-fail borrowers, like Uncle Sam and most corporations. The Fed can’t NOT tighten because they will blow up too-big-to-fail lenders, like pension funds and insurance companies. 25 bp? 300 bp? Either way, there will be big trouble. There is no good way out of the mess that the Fed has enabled.”
Great insights all around. In the spirit of Peter and Anthony G.’s comments, let me again offer some quick takes: Gold is overbought and likely to correct in the short term, but it may finally be breaking out of its long-term bear-market trend. The bulls are throwing a party now, but a major letdown could be looming once the G-20-hype fades.
China is going to keep massaging the truth as long as they can because they have no other good options. And when it comes to interest rates, the market is already taking matters into its own hands and driving yields higher on everything from junk bonds to emerging-market bonds to leveraged loans.
So it doesn’t matter what central banks do or say. The credit cycle has turned, and the consequences are already baked in. So get prepared for them. Monday’s webinar is a great start, and as a reminder, you can register for free here.
Easy credit has been the lubricant for the boom in M&A. But the gears are really grinding down now. The Wall Street Journal reported today that Goldman Sachs Group (GS) is having trouble helping raise money to finance Vista Equity Partners’ $6.5 billion purchase of Solera Holdings (SLH).
The investment bank is trying to sell around $2 billion in bonds to pay for the deal. But some buyers are balking and others are demanding higher and higher yields – more than 11%, according to the Journal.
Marco Rubio and Ted Cruz tried to derail Donald Trump’s campaign for the Republican nomination in a raucous Houston debate last night. Whether the newly aggressive push to challenge Trump is too little, too late remains to be seen with Super Tuesday primaries looming next week.
Global trade collapsed by almost 14% in dollar-terms last year, according to a Dutch-based organization that monitors the movement of goods between countries. That was the worst slump since the global financial crisis in 2009. China and emerging markets were most responsible for the slump, according to the Netherlands Bureau for Economic Policy Analysis.
U.S. GDP grew at a 1% rate in the fourth quarter, compared with an earlier estimate of 0.7%, according to the Commerce Department. That was still half the growth rate from the previous quarter, however, and consumer spending growth was revised lower.
So what do you think: Is the economy weakening or strengthening? Will the slump in global trade, and tightening credit markets, continue to put pressure on growth going forward? Any thoughts on last night’s debate? Speak up in the comment section below.
Until next time,
P.S. Boris and Kathy are EXTREMELY close to getting the green light on the two trades they are most excited about for 2016.
But when the moment comes … the minute they get a green light on this trade … they will rush complete trading instructions to members of their Global Currency Investor service.
They would hate to see you miss out on these trades — and they know you would, too: There is simply too much money that could be made at stake — and since your membership is fully guaranteed, you can join now with confidence!
Click this link now to get on board before you miss out on these all-important recos.