The international forecasting, advisory and lending group now expects the world economy to grow just 3.2% this year. That’s 0.2 percentage points less than it forecast in January.
If you feel like you’ve seen this movie before, that’s because you have. This is the IMF’s fourth straight outlook cut in the past year.
Regionally, the IMF cut its forecast for U.S. growth by 0.2 points to 2.4%. It lowered its outlook for the eurozone by 0.2 points to 1.5%. It slashed its projection for Japan by 0.5 points to 0.5%, and its forecast for the U.K. by 0.3 points to 1.9%.
Chief Economist Maurice Obstfeld also seemed to wake up on the wrong side of the bed, judging from his language in the release. He warned that the world economy was reaching “stalling speed,” coping with “widespread secular stagnation,” facing a “return of financial turmoil” and a “self-confirming negative feedback loop,” and having “no longer much room for error.”
|The IMF slashes its global economic outlook.|
So clearly the IMF believes that seven-plus years of interest-rate cuts, ZIRP, NIRP, QE-infinity, currency devaluation, LTROs, TLTROs, and all the other monetary hocus-pocus has worked, right? Er … no. If it did, we wouldn’t continually get gloomy talk and downgrade after downgrade to their growth forecasts.
Why isn’t any of that stuff working? Simple. We’re at the wrong point in the economic and credit cycle! Several years of easy-money policies have already inflated all the asset and behavior bubbles they can, and those bubbles simply can’t be pumped up anymore. We’ve reached – or actually, passed – the tipping point.
Lenders don’t want to lend aggressively anymore because loan losses are rising, borrower credit quality is starting to deteriorate, and collateral values in sectors like autos and commercial real estate are beginning to fall.
|“Lenders don’t want to lend aggressively anymore because loan losses are rising.”|
Meanwhile, businesses don’t want to borrow aggressively because inventories are surging, sales are slumping and profits are hurting. And investors don’t want to gorge on more junk bonds or emerging-market debt or high-risk stocks because they’re nursing significant losses from past speculative bets.
Or to put it another way, neither central bankers nor fiscal policymakers can make the sun shine past sunset, or rise three hours earlier. They can’t keep the tide from coming in or going out. And they can’t make the global economy grow forever without a cleansing, recessionary down cycle … no matter how hard they try or how much they may want to.
The IMF’s latest downgrade only further confirms that view. So as an investor, you should ignore misleading comments and exhortations from politicians or policymakers. Instead, stay focused on the twists and turns in the credit and economic cycles – and how they can help you build wealth in a sustainable fashion. I will have lots more guidance on that topic in the days and weeks ahead, so stay tuned.
Should you invest in currencies? Dividend paying stocks? And what is the outlook for the market and economy going forward? Those were just a few of the issues you discussed online in the last day.
Reader JP F. said: “I don’t play in the currency markets. I buy good dividend payers when they’re ‘on sale’ and utility sector ETFs when they’re ‘on sale.’
“My utilities hit new highs recently, so I sold most of the position. Materials are recovering quite well, so I may sell some there soon. Oil is up but, not near enough to get excited. Another day, another dollar made!”
Reader Al mentioned the benefits of buying stocks that pay reliable yields, saying: “Safe yield stocks with pristine balance sheets and expected continued growth are ideal investments until we see a sustained bull market. Currently stocks are behaving on such ridiculous news such as: ‘Under Armour took a hit because Jordan Spieth had a meltdown at the Masters.'”
Reader Hults warned against the risk of getting too negative, saying: “The doomsday sayers are buying the pessimistic guesses of a few negative traders. I’m tired of reading the guys or gals who say the end is coming so buy my advice and I’ll save you. This is all bull, and I’ll stay the course. Good dividend stocks with solid cash flow and good value (on the pullbacks).”
As for policy and the economy, Reader John P. said: “I needed to offer a quip about the meeting of the Fed chairmen. There was a reference to them ‘being at the helm of the world’s greatest economy. I offer the opinion that they are at the helm of the Death Star. Oy!”
Lastly, Reader Thomas C. said: “Real money represents actual work to obtain. It’s shorthand for the man-hours put into a given service or product. If both products and currency expand at the same rate, prices stay constant. If, on the other hand, production outpaces currency expansion, prices decline from which everyone benefits.
“Currency not backed by any goods soon will not be trusted. Hence America’s reduction in production, but increase in currency, means inflation is coming — or worse, no one will take the dollar in exchange for anything.”
Thanks for sharing. Or if you haven’t done so yet, I encourage you to add your comments to the mix in the comment section.
Yet another mega-bank is paying yet another mega-fine for yet another mega-scandal. This time it was Goldman Sachs (GS), the penalty was $5.1 billion, and the scandal was its processing and selling of mortgage-backed bonds during the housing crisis. But as with other banks, Goldman will likely get off with less financial pain than the headline figure suggests, according to this New York Times story. I’m sure you’re all shocked to hear that.
China’s construction of a “Great Wall of Sand” in the South China Sea is a fascinating, and potentially troubling, geopolitical coup for that country. The Wall Street Journal does a good job today of explaining what China has done, what it’s planning to do, and how its efforts make it very tough for the U.S. to respond effectively.
Brazil’s President Dilma Rousseff is increasingly at risk of impeachment, thanks to ongoing probes of administration corruption and protests in the Brazilian streets. In the country’s Congress, a committee has voted to proceed with impeaching La Presidente. But a key vote by the wider legislature this weekend will determine whether things get even more serious for the embattled leader.
You know that glut of high-end real estate construction? The increasing glut of apartments in many markets around the U.S. that I told you about months ago? Looks like the problems are getting worse.
One indicator: The developer of the luxury One57 tower in midtown Manhattan is giving up on a plan to lease 38 unsold units as apartments. It already failed in one effort to lease units on one floor last year, and it failed in another attempt to sell all 38 units in one bundle in the fall. Now it’s going to attempt to sell the units as condos that start at $3.45 million … undercutting prices of previously sold units.
Another bank, another multi-billion-dollar settlement? Shocking, I know. What do you think about Goldman’s deal with the government? How about the political crisis in Brazil? Also, do you think the problems we’re seeing in high-end real estate markets like New York City are going to spill over into more markets in the U.S.? What impact will that have on stocks? Share your thoughts in the comment section.
Until next time,