Juggling Dynamite

While many commentators are calling on central banks to stop tightening and start increasing monetary slack once more as the global slowdown deepens, the fact is that current financial strife has been purchased by years of central bank slack that drove overcapacity and mal-investment through the global economy.  Economist Daniel Lacelle explains truth well in this clip.

Stop blaming the Fed’s rate hikes and alleged trade wars.

The current slowdown in China and the EU is not due to lack of stimuli, but because of them. pic.twitter.com/17K6QAyZCT

— Daniel Lacalle (@dlacalle_IA) January 14, 2019

And as I pointed out last week here historically bear market bottoms are not reached until a few months after central bank loosening cycles have been ongoing for several quarters and have cut up to 5 percentage points off of policy rates.  So far today, the most influential central banks are still in a self-proclaimed tightening cycle with little over 2% of rate room to maneuver.  Years of debt largesse have painted world markets into this corner, rate cuts from here will be no magic elixir, but significantly lower prices will be a key part of the healing process needed.

Plastic bags take 10 to 20 years to decompose pic.twitter.com/gUdn355sTk

— Business Insider (@businessinsider) January 14, 2019

Further to my article last week Highly coupled global growth engines slowing all together, weaker economic data out of China and Europe this morning are roiling world markets.

Chinese trade slumped in December, sending regional stocks and the Australian dollar lower, as an unexpected fall in both exports and imports underlined the impact of the trade war and economic slowdown.

Exports in dollar terms fell 4.4 percent from a year earlier, while imports dropped 7.6 percent. Both were the worst result since 2016, and left a trade surplus of $57.1 billion.

Here is a direct video link.

The slowdown is becoming apparent in areas as diverse as iPhone sales and labor productivity. The economy may have barely grown in 2018 and is facing “long-term and very difficult times,” Xiang Songzuo, the former chief economist at Agricultural Bank of China Ltd., said in a speech in Beijing last month.

At the same time, Eurostat data just reported that factories across the eurozone suffered their biggest plunge in output in almost three years as European industrial production shank 1.7% in November–3.3% lower than in November 2017.  See Recession fears grow as Eurozone factories stumble and China exports fall.

This is not about trade tariffs which, so far, affect about 4% of global goods; this is about a global downturn in consumption as countries, companies and households struggle under the weight of record debt and shrinking cash flows.