Juggling Dynamite

The cyclicality of Chinese electricity output is shown below year over year in blue since 2006.  Now in a significant cyclical (and secular) decline, China’s economy has major implications for industrial commodities like copper (in red), which spiked from March 2020 to March 2021 on unprecedented cash injections into households, businesses and financial intermediaries globally.  The mean reversion in Dr. copper (the Ph.D. in economics) and many other economically sensitive commodities is likely just begun.
At the same time, global economic growth peaked in the second quarter of 2021 and has turned lower since.  The I.M.F.’s latest update estimates 2022 global economic growth will be 17% lower than in 2021.

As shown below in blue, an optimistic consensus forecast for U.S. G.D.P. began June above 7%, before dipping to 5% in September.  The Atlanta Fed GDPNow forecast began August above 6% and is now tracking at 1.3% (in green).

As shown below (upper panel), financial market optimism also appears to have peaked with parabolic stock prices in the second quarter.
In the lower panel, we see that global stock prices, ex the U.S. in brown since 2000, have rolled over near their 2008 cycle highs once more.  This is how secular bears move.  Only when valuations have collapsed back below long-term means and laboured there long enough to crush animal spirits does the next secular expansion begin from the ashes of investor pessimism.

We also can see that U.S. stocks (lower panel in green) have so disconnected into a world of their own dreaming that a 30% retracement from present levels would not even violate their 2009 uptrend.  History suggests that a loss of twice that much is likely.

“Disruption” is when existing methods are replaced by new, better-performing technology. Research Fellow, Dr. Adam Dorr’s recent TEDx talk called ‘Climate Optimism: Building Our Future With Better Tools’, explains the implications of ReThinx’s recent report How Humanity Can Choose to Reduce Emissions 90% by 2035 through the Disruption of Energy, Transportation, and Food with Existing Technologies’.

Here is a direct video link.

Also, see the illuminating video How Many Solar Panels are Needed to Power the ENTIRE World for some big picture insights.

Inflation fears and a belief that the U.S. Fed will start tapering its bond purchases in November and hiking policy rates in 2022 have caused bonds to sell-off over the past two months (yields rising).  It’s likely to be short-lived as even modestly higher rates weigh on a slowing global economy and any tightening resolve will prove transitory when animal spirits slump once more.

Even if central banks delay action, receding fiscal injections from governments in 2022 will equivalate to several percentage points of tightening.  And, as shown below, the negative stimulus impulse is set to detract some 7% of GDP from the world’s largest economies. A. Gary Shilling reviews the hard place of monetary policy amid present asset bubbles in The Federal Reserve Confronts an almost impossible task:

The Fed risks tightening to the point that it precipitates major financial problems and a recession. Also, a big rate hike could well reveal bankruptcy-inducing excess debt levels in a number of financial sectors, while areas that have seen excessive speculation, such as cryptocurrencies, SPACs and individual investors tied to Robinhood Markets Inc. are vulnerable.

With emergency income benefits ending and payment deferrals expiring, higher interest rates, energy and shelter costs have already round-tripped consumer expectations back to the pre-vaccine lows of last November (as shown below).  Some note that the extent of this deterioration suggests that the U.S. is already back in recession if the history of consumer confidence repeats.  It makes sense that the fastest most artificially inseminated recovery in history could be followed by one of the quickest returns to recession.  Of course, recession declaration only takes place months after the fact, in retrospect.

Either way, from the grotesque stock valuations today, a spectacular downcycle looms.  As shown below in blue since 1900, the aggregate of four historically informative S&P 500 valuation metrics stands an eye-popping 166% above the long-term mean.  Simply breathtaking.  Lesser overshoots have been followed by brutal mean-reversion periods lasting years thereafter.
It’s hard not to be both horrified and cautiously excited for what opportunities will be afforded in the next financial implosion.  The fuses have already been lit.