That’s not me talking, by the way. That’s the Organization for Economic Co-operation and Development (OECD), a pan-national research group based in Paris. It has an annual budget of more than $400 million, and like the International Monetary Fund (IMF), its mission is to advise high-level policymakers around the world.
In a strongly worded forecast released today, the OECD warned that “trade and investment are weak” … “financial instability risks are substantial” … and that a massive government response is “urgently needed.”
It also slashed its growth forecasts for the U.S., Japan, and Europe and all but begged for policymakers to do something. The money quote:
“Governments in many countries are currently able to borrow for long periods at very low interest rates, increasing fiscal space … Many countries have room for fiscal expansion to strengthen demand. This should focus on policies with strong short-run benefits and that also contribute to long-term growth. A commitment to raising public investment collectively would boost demand while remaining on a fiscally sustainable path.”
The report also implicitly admits that central banks can’t “save” the world anymore. Or in dry econo-speak, “Experience to date suggests that reliance on monetary policy alone has been insufficient to deliver satisfactory growth.”
|Can government do enough to spur demand and production?|
There’s just one problem with all of this. Large-scale economic stimulus isn’t even on the drawing board, much less in practice. Not in many parts of the world, and certainly not here in the U.S. Widespread disappointment remains over the ROI from President Obama’s Great Recession-era spending program. And none of the current presidential candidates are talking about launching huge “shovel-ready” stimulus programs the day they get into office.
Ironically enough, it would probably take sharp stock market declines or a deep recession to provoke Congressional or presidential action. Alternatively, the Federal Reserve and its counterparts in Europe and Asia could come out and say, “We’re done. The ball is in your court now.” But in this era of overly aggressive, anything-goes monetary policymaking, that just isn’t going to happen.
|“It would take sharp stock market declines or a deep recession to provoke action.”|
Long story short: The OECD is projecting weaker and weaker growth … and its proposed solution has no chance of happening. If that’s not a reason to worry about stocks and other risk assets, I don’t know what is.
Now, let me hear from you. Is the OECD right? Is the only solution to the weak global economy a massive amount of pan-global government spending? Can central banks help the matter, or are they out of juice? Is a recession baked in the cake, and coming no matter how policymakers respond? These are important questions for stock market investors like you, so please take some time out to answer them.
Stocks suffered their worst start to a year ever in January … but in the past few days, the Dow Industrials have tacked on almost 1,000 points. What gives, and what’s coming next? Several of you weighed in on that topic and what you’re watching now.
Reader Steven said he’s keeping an eye on the action in the bond market. His take: “I’m watching the 10-Year Treasury rate very closely. The rate was down to 1.64% after being at 2.25%+/- for almost all of 2015. Now the rate is up 18 basis points in a move that is almost in tandem with the NYSE.
“It would appear that the large-scale investors are looking for the mule that will pull the cart the fastest and the longest (and possibly the cheapest). I would expect measured volatility during the next six months, with stocks and bonds riding the proverbial seesaw until one or the other collapses. I would be VERY careful where you put your investment, and I would NOT go long term on anything until after we find out what kind of president we will have.”
Reader Ed suggested stocks have a lot further to fall because profits don’t justify current levels. His comments: “Since current earnings do not even remotely support even a 12,000 Dow valuation, what has really changed since the Dow was over 18,000? A bubble is a bubble is a bubble. And, eventually ALL bubbles burst or deflate in a slower manner to the level of their value.”
Reader Chris G. said political uncertainty is helping create market uncertainty: “In an election year where there are serious differences between the candidates, and the lead keeps jumping between people and parties, the only sure thing is uncertainty. Volatility is the only winner for 2016.
“Investing? Buy a little more of your long-term favorites on big dips, and mostly just keep your powder dry until the dust settles this November. Trading actively? Be on your toes, and don’t hold anything for long.”
When it comes to specific stocks and sectors, Reader Chuck B. said weakness in a particular group of stocks is a worrisome sign: “I notice that the share prices of many REITs, MLPs, BDCs, and other investment companies have fallen sharply, even as they often report earnings that support dividends of over 10%, even 20%. This can’t stand.
“Either their earnings must suddenly drop sharply, killing those big dividend payments, or the stock prices must recover to bring P/Es and dividends into more rational levels. In a generally deflationary environment, you know which I think will happen.”
Finally, Reader Tom R. said he still sees a couple areas of opportunity: “I got out of stocks completely over one year ago and concentrated on options trading. About four months ago, I got completely out of options except for gold, silver and derivatives of those commodities. I’ve done very well, up over 50% in four months.
“If I had a ton of money, I would put some of it into physical gold and silver. But given the leverage that options trading based on these commodities provides, it seems to be a no-brainer. As the European Union experiment unwinds, gold will explode in value.”
Thanks for all of the insights. It’s interesting to me that stocks have rallied, but that the Japanese yen, gold, Treasuries, and other “risk off” assets are holding the lion’s share of their January and February gains. Unless they start to break down, confirming the advance in stocks, this move will continue to look like just another oversold bounce – the kind we saw time after time in the last bear market on the way to lower prices.
If you have additional insights to share, please take some time out to post them in the discussion section.
Chinese companies are going shopping here in the U.S., with the latest deal being a $6 billion purchase of technology supplier Ingram Micro (IM). The purchaser is Tianjin Tianhai, a company that’s part of a larger conglomerate known as HNA Group. Other recent Chinese acquisitions include the $44 billion purchase of Syngenta (SYT) and the $5.4 billion purchase of General Electric’s (GE) appliance division.
First, Iran said it wouldn’t commit to freezing production as part of OPEC’s latest oil price plan. Now, Iraq has done the same thing. While both countries say they support the idea, it’s going to take concrete cuts to give the recent bounce in crude oil any legs. We’ll have to see if the deal holds together or not.
Wal-Mart Stores (WMT) warned that sales will flatline this year, rather than rise to 4% as it previously expected. The company blamed the strong dollar and the closing of disappointing stores. It’s planning to shutter 269 outlets worldwide.
Stop the insanity! A developer wants to build a 73-story apartment tower in Brooklyn, one that would be twice the height of anything else in the New York City borough. Several record-tall towers have already been built or are under construction across the East River in Manhattan.
It’s worth noting that thousands of units have already been built in Brooklyn and more are under construction or in the planning stages — and that rents are already starting to slip thanks to the burgeoning supply glut. This process is playing out in several other parts of the country as well — a key reason I’m concerned about the outlook for Real Estate Investment Trusts (REITs) in general, and apartment REITs in particular.
So what do you think: Is New York getting overbuilt, and are other metropolitan markets in similar trouble? What’s holding Wal-Mart back? Will the OPEC deal hold together, or fall apart thanks to cheating and non-participation by several countries? Let me know your thoughts in the comment section below.
Until next time,
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