The third quarter and the month of October saw a lot of ups and downs in both stock and bond markets as well as currency values. We also saw many long standing leaders/parties fall from power as voters continue the worldwide trend of replacing the establishment with new parties and nationalistic/populist leaders who reject the political status-quo and put their nation’s interests first, ahead of the world community. We saw leadership change in Australia, Brazil, Italy and Mexico; we also saw what looks like a prelude to the exit of long time German Chancellor Angela Merkle and Prime Minister Theresa May.
IMF Managing Director Christine Lagarde, said in a speech last week that “the global economic weather is beginning to change.” Saudi Arabia and Russia are expected to experience stronger growth. The eurozone economy is expected to grow 2% this year, down from a 2.2%. Argentina’s economy is expected to contract sharply this year and next. The economy of Turkey is seen expanding just 0.4% next year, down from 7.4% last year.
The Australian Broadcasting Network quoted the IMF as saying: The world remains vulnerable to another financial meltdown as a result of “side effects” from extraordinary measures to prevent a repeat of the Great Depression. In its latest World Economic Outlook, the IMF singled out ultra-low interest rates and surging debt levels as potential triggers for another meltdown, saying: “large challenges loom for the global economy … The extended period of ultralow interest rates in advanced economies has contributed to the build-up of financial vulnerabilities.”
IMF Lowers Global Growth Forecasts for 2018 and 2019 (10.8.18) WSJ
https://www.wsj.com/articles/imf-lowers-global-growth-forecasts-for-2018-and-2019-1539048878
World Vulnerable To Another Financial Meltdown, IMF Warns (10.4.18) (Australian Broadcasting Corporation)
World Markets
The US economy has continued its strong growth, generating a 3.5% growth rate for the third quarter. The WSJ reported that, for the first time since 2008, the U.S. is once again the world’s most competitive economy. The month of October has been a rollercoaster ride for US markets, hundreds of points up and down, at one point wiping out all the gains for 2018. It regained some of the loss, but will definitely finish down for the first month of the fourth quarter. The S&P 500, the Dow and Nasdaq markets appear to be headed for correction territory, falling 10% from their recent highs.
According to the WSJ, “Overseas investors, traders and central bankers are buying fewer Treasurys, a potential turning point for a $15 trillion market at the center of global finance and economics. Foreign buyers now hold 41% of outstanding Treasury debt, their lowest share in 15 years, down from 50% as recently as 2013, according to U.S. Treasury data. The dollar’s share of global foreign-exchange reserves fell to 62.5% in the second quarter, its lowest level in five years, data from the International Monetary Fund showed. Goldman Sachs estimates that Russia’s central bank alone may have sold as much as $85 billion in dollar-denominated assets, a move that may have been prompted by concerns over U.S. sanctions.”
In another article the WSJ reported, “The eurozone economy slowed sharply this summer, posting the weakest quarter in five years, as the region begins to suffer from a slowdown in China and turmoil in Italy takes a toll. While the eurozone economy kept pace with the U.S. in 2016 and 2017, it has fallen behind it this year and the divergence between the two is growing more stark. There seems little prospect of an imminent escape from the country’s long period of low growth.”
Italy’s credit rating was lowered by Moody’s, from Baa2 to Baa3, citing a “material weakening in Italy’s fiscal strength” after the government targeted higher budget deficits and stalled economic and fiscal reforms. In contrast to the EU, the UK economy continues to experience an overall better economy with a stronger currency and higher growth rates. This makes it difficult to claim that being a part of the EU is economically beneficial or that nations like the UK are suffering from exiting. The EU is doing its best to propagandize, but the writing is on the wall and they fear that Italy, Poland, Hungry, the Czech Republic and other nations may soon exit as well.
The WSJ reported, “Beijing is trying to kick its habit of using big-ticket infrastructure spending to fuel the economy, a turning point from a growth model that has left many Chinese cities adorned with empty high-rises and underused highways. China bolstered economic growth for decades by pouring trillions of dollars into roads, factories, railroads and more, and doubled down to protect the economy from the global financial crisis of the last decade. Now the torrent has subsided as debt soared and needless projects blossomed.”
Turkey has created its own problems politically as well financially; it seems that Erdogan irritates his friends as much as he does his enemies. He arrogantly took on Trump for a foolish reason and was trumped by sanctions, causing the Turkish economy to falter and sending its financial markets and currency into free fall. Turkey has overtaken Argentina as the world’s worst nation for sovereign debt investors. Bloomberg reported, “Turkey’s economic outlook has deteriorated, so much that bankers and traders are starting to talk about the need for an International Monetary Fund rescue. The yield on 10-year bonds has surged to an all-time high, above 20 percent.”
Trade tariffs and the threat of trade tariffs are being used very effectively by President Trump to bring China, the EU and other nations to the table to talk and renegotiate trade agreements. The reason this is so effective is simple math; 15% of the US GDP comes from exports and 85% is derived from domestic purchases, while in a majority of other nations exports represent 80% – 90% of the GDP with domestic purchases representing only 10% – 20%. Thus, in a trade war the U.S. can affect 80% – 90% of most other nations ‘economies, while other nations can only affect about 15% of the US economy.
Eurozone Growth Stutters as U.S. Economy Powers Ahead (10.30.18) WSJ
Investors Flee Tech Stocks, Dragging Down U.S. Indexes (10.29.18) WSJ
https://www.wsj.com/articles/europe-stocks-rise-as-s-p-500-nears-correction-territory-1540803458
GDP Grows 3.5% on Consumer Vigor but Investment Slows (10.26.18) WSJ
https://www.wsj.com/articles/u-s-economy-grew-at-3-5-rate-in-third-quarter-1540557378
Dow, S&P 500 Erase 2018 Gains & Nasdaq Drops 4.4% (10.24.18) WSJ
https://www.wsj.com/articles/european-stocks-rise-after-volatile-day-on-wall-street-1540367863
Foreign Buying of U.S. Treasurys Softens, Unsettling Financial Markets (10.23.18) WSJ
Stocks Wild Swings Rattle Investors (10.22.18) WSJ
China Finds Big-Ticket Spending Is a Road to Nowhere (10.20.18) WSJ
https://www.wsj.com/articles/china-finds-big-ticket-spending-is-a-road-to-nowhere-1540036800
U.S. & EU Trade Teams Seek Fast Results and Big Savings (10. 20.18) WSJ 2
https://www.wsj.com/articles/u-s-eu-trade-teams-seek-fast-results-and-big-savings-1540123200
Ross Says Progress of Trade Talks With EU Is Unsatisfactory (10.18.18) WJS
https://www.wsj.com/articles/ross-says-progress-of-trade-talks-with-eu-is-unsatisfactory-1539792204
Italian Credit Downgrade Likely to Add to Pressure on Europe’s Markets (10.19.18) WSJ https://www.wsj.com/articles/contagion-creeps-back-into-europes-bond-markets-1539947331
In First for Europe, Brussels Rejects Italy’s Budget (10.23.18) WSJ
https://www.wsj.com/articles/in-first-for-europe-brussels-rejects-italys-budget-1540303443
U.S. Is World’s Most Competitive Economy Again (10.17.18) WSJ
China Growth Slows to Weakest Pace Since the Financial Crisis (10.19.18) WSJ
Investor Shift Triggers Stocks’ Wild Ride (10.12.18) WSJ
https://www.wsj.com/articles/investor-shift-triggers-stock-markets-wild-ride-1539384364
U.K. Economy Rebounded in Summer (10.10.18) WSJ
https://www.wsj.com/articles/u-k-economy-picked-up-in-the-summer-1539162020
Worst Hit in Global Markets Rout Tech and China (10.10.18) WSJ
https://www.wsj.com/articles/worst-hit-in-global-markets-rout-tech-and-china-1539258678
Big Lenders Make Push to Liquidate Sears (10.10.18) WSJ
https://www.wsj.com/articles/big-lenders-make-push-to-liquidate-sears-1539257424
Why Can’t Turkey Stop Its Economic Nose-Dive (8.8.18)
Central Banks
The US, Australia and the UK have raised their benchmark interest rates. Japan and the EU have discussed it quietly, but continue to print more currency and their interest rates continue to be negative. Canada is likely to raise interest rates while Mexico holds tight. At the last meeting of the Federal Reserve, they determined the US economy to be strong, raised interest rates and stated that they are planning on continuing to raise them.
Fed Minutes Point to Continued, Gradual Interest-Rate Increases (10.17.18) WSJ
Bank of Canada Likely to Raise Rates, Even if Nafta Talks Collapse (9.6.18) WSJ
https://www.wsj.com/articles/bank-of-canada-may-raise-rates-despite-nafta-breakdown-1536264597
Bank of Mexico Leaves Interest Rates Unchanged (8.2.18) WSJ
https://www.wsj.com/articles/bank-of-mexico-leaves-interest-rates-unchanged-1533236118
Carney Hikes Rate in What May Be Final Pre-Brexit Push (8.2.18)
Debt
As most global stock markets and national GDP are going up, so are most of their debt levels. At some point in the future, rising national debt levels will collide with stock markets & GDP, because you cannot continue to fuel growth with debt; businesses can’t do it and neither can governments. According to CNBC, “Unreported Chinese local government debt may amount to trillions of U.S. dollars, meaning the country’s debt-to-GDP ratio has hit “alarming” levels; S&P Global Ratings said in a report released Tuesday. The actual level of off-balance sheet debt could be several times more than what is publicly disclosed and range as high as 30 trillion yuan to 40 trillion yuan.” Pakistan, the flagship country for China’s global infrastructure building initiative, asked for a bailout from the International Monetary Fund, amid growing concerns that Beijing’s program is pushing recipient countries into financial crisis. Ballooning trade deficit and fast-depleting foreign exchange reserves left the Pakistani government no other choice.
Germany held up the final $57.1 billion bailout disbursement for Greece and did not sign off on the deal. “The International Monetary Fund agreed to boost its bailout package signed with Argentina in June, providing additional financial support and accelerating the disbursement of funds. The expanded program will aim to reduce the country’s double-digit inflation by replacing inflation targets with monetary base goals to contain the money supply, the IMF said. Argentina’s debt ratio will reach 84% of gross domestic product by the end of the year, compared with 57% a year earlier, consultancy Oxford Economics said this week. “Argentina’s debt-to-GDP ratio is rising at an unsustainable pace,” the firm said.”(WSJ). The US Court of Federal Claims has ruled that hedge fund creditors of Puerto Rico’s debt can sue the United States government for losses incurred by investors.
Simon Black wrote:
“Right now many pension funds around the world simply don’t have enough assets to cover the retirement obligations they owe to millions of workers. In the US alone, federal, state, and local governments, pensions are about $7 trillion short of the funding they need to pay out all the benefits they’ve promised. (** And that doesn’t include another $49 trillion in unfunded Social Security obligations…). In 2015, the total worldwide gap in pension funding was $70 trillion according to the World Economic Forum. That is larger than the twenty largest economies in the world combined. And it’s only gotten worse since then… The WEC said that the worldwide pension shortfall is on track to reach $400 trillion by 2050. In a world full of reckless and extreme monetary policy, Japan no doubt takes the cake. The country has total debt of more than ONE QUADRILLION YEN (around $10 trillion) pushing its debt-to-GDP ratio to a whopping 224% – that puts it ahead of financial basket case Greece, whose debt-to-GDP is around 180%. Japan spent 24.1% of its total revenue (appx. 23.5 trillion yen) last year servicing its debt – both paying down principal and interest. And that percentage has no doubt moved even higher this year. And, keep in mind, this isn’t some banana republic. It’s the world’s third-largest economy. In another Simon Black post: As of June, U.S. non-financial firms are sitting on a record $6.3 trillion in debt. AT&T alone has an astounding $180 billion of debt, making it the most indebted non-government controlled and non-financial firm in history… and more indebted than many governments around the world. And the quality of corporate debt is getting worse and worse.”
The U.S. Treasury Department estimates it will issue more than $1 trillion in debt this year as higher government spending and sluggish tax revenues push the deficit higher. The Treasury said Monday it expects net marketable debt to total $425 billion in the fourth quarter, which would bring total debt issuance in 2018 to $1.338 trillion, compared with $546 billion in 2017. That would be the highest annual debt issuance since $1.586 trillion in 2010, when the U.S. economy was still crawling out of a recession. The higher debt issuance comes as the Federal Reserve has been raising short-term interest rates following an extended period of near-zero rates in the years since the financial crisis. Fed officials lifted their benchmark federal-funds rate to a range between 2% and 2.25%. Annual home-price gains fell below 6% for the first time in a year in August, another sign that the slowdown in the housing market is becoming widespread and is likely to persist in the months to come.
Home Prices Continue to Lose Momentum (10.30.18) WSJ https://www.wsj.com/articles/home-prices-continue-to-lose-momentum-1540904603?mod=hp_lead_pos4
Treasury Expects to Issue Over $1 Trillion in Debt in 2018 (10.29.18) WSJ
$6 Trillion of Local Government Debt may be Lurking Under the Surface in China (10.16.18) CNBC https://www.cnbc.com/2018/10/16/china-hidden-local-government-debt-could-be-6-trillion-sp.html
U.S. Deficit Rose 17% in Fiscal 2018 (10.15.18) WSJ https://www.wsj.com/articles/u-s-government-debt-rises-17-in-fiscal-2018-1539626598
Sears, a Onetime Retail Giant, Now Banks on Bankruptcy (10.15.18) WSJ https://www.wsj.com/articles/sears-files-for-chapter-11-bankruptcy-1539579819
The Pension Crisis is Bigger Than the World’s 20 Largest Economies and only Getting Worse (9.7.18) SMC | https://www.sovereignman.com/trends/this-financial-crisis-is-bigger-than-the-worlds-20-largest-economies-24103/?utm_medium=email&utm_source=sm_notes&utm_campaign=notes&utm_content=201897_pension_crisis
Why Japan May Spark The Next Crisis (8.1.18) SMC https://www.sovereignman.com/trends/why-japan-may-spark-the-next-crisis-24023/?utm_medium=email&utm_source=sm_notes&utm_campaign=notes&utm_content=201881_japan_eco
The Pension Crisis is Bigger Than the World’s 20 Largest Economies and only Getting Worse (9.7.18) SMC | https://www.sovereignman.com/trends/this-financial-crisis-is-bigger-than-the-worlds-20-largest-economies-24103/?utm_medium=email&utm_source=sm_notes&utm_campaign=notes&utm_content=201897_pension_crisis
Judge Rules that Bankrupt Puerto Rico’s bondholders can sue the United States (7.16.18) WSJ https://www.theblaze.com/news/2018/07/16/judge-rules-that-bankrupt-puerto-ricos-bondholders-can-sue-the-united-states?utm_source=Sailthru&utm_medium=email&utm_campaign=Daily-Newsletter__PM-Final%202018-07-16&utm_term=TheBlaze%20Daily%20PM%20-%20last%20270%20days
IMF Expands Aid Package for Argentina (9.26.18) WSJ https://www.wsj.com/articles/imf-expands-aid-package-for-argentina-1537997055
Pakistan Requests IMF Bailout Talks (10.8.18) WSJ https://www.wsj.com/articles/pakistan-to-hold-bailout-talks-with-imf-1539018792
One of the Greatest Follies from the Last Crisis is Back (10.2.18) SMC https://www.sovereignman.com/trends/one-of-the-greatest-follies-from-the-last-crisis-is-back-24180/?utm_medium=email&utm_source=sm_notes&utm_campaign=notes&utm_content=2018102_hudson
Germany Delays Greece’s Final Bailout Payment (7.12.18) WSJ https://www.wsj.com/articles/germany-delays-greeces-final-bailout-payment-1531431927
Political Unrest
Political unrest is increasing along with most global markets and national GDPs, nationalism continues to defeat Globalism, and independent non-establishment candidates continue to defeat establishment candidates. Financial weapons like trade sanctions and tariffs are being used to pressure, force and even defeat world leaders and governmental regimes. According to the WSJ “The Pakistani request for an IMF loan could further test already-strained U.S.-China relations. In July, U.S. Secretary of State Mike Pompeo warned that the U.S. didn’t want to see any IMF lending to Pakistan “go to bail out Chinese bondholders or—or China itself.” South Africa is scrambling to shore up investor confidence as Africa’s most-developed economy has plunged into recession, its rand currency has slid and pressure is mounting from a dissident faction within his ruling party. President Trump, South African banks and white farming groups have all attacked an ANC proposal to start expropriating land without compensation—despite Mr. Ramaphosa’s assurances that this would be done without hurting the economy or agricultural production.”
Disunity continues in the European Union as Immigration, European courts, over regulation, banking problems, low growth and tight budgets continue to fracture European unity, causing many countries to challenge basic EU fundamentals. The utopian idealistic view of a united Europe with no borders and overlapping economies are no match for financial reality. EU nations are frustrated that they can’t do what they believe is best for their nation and its citizens. In one election after another nationalist/populist candidates are defeating their globalist/establishment counter parts. German Chancellor Angela Merkle, who, less than a year ago, was one of the world’s most powerful leaders, recently resigned as head of her party, and said she would not run again after her current term is over. British Prime Minister Theresa May likely will not last much longer, and a number of her cabinet ministers have already resigned. May’s former Foreign Minister, Boris Johnson (who was the main leader of Brexit), will likely become Prime Minister and lead the UK through a hard Brexit at the end of March of 2019.
Anti-establishment nationalistic leaders are growing in popularity in Poland, Hungry, the Czech Republic and Italy. Italy defied the EU by passing a budget that did not follow EU guidelines and have thus far refused to change it. Nationalist leaders are also replacing their globalist counter parts in Brazil and Australia. People all over the world are pushing back against government and multi-national corporations and technology companies. They are tired of being controlled and manipulated by these entities and told what to do, by what they perceive to be the ruling elites, who do not have their best interests at heart.
“The biggest tech companies have tremendous power over the hearts and minds of people—as much as many of the governments in countries where they operate. All over the world, citizens, bureaucrats and politicians are now pushing back against that power. Most often, the backlash is directed at America’s tech giants, such as Alphabet Inc.’s Google, Facebook Inc. and Amazon.com Inc., and how their ubiquity affects individuals and businesses. But resistance to Big Tech also includes China curbing the power of its own technology companies, and India rejecting foreign monopolists in favor of homegrown players. The worst-case scenario in China, says Paul Triolo, a technology analyst at the Eurasia Group think tank, is if Beijing were to nationalize some of its tech giants.” (WSJ)
As August came to a close Reuters reported, that China completed its own SWIFT alternative. The new system was created to combat how the U.S. has used the Belgium-based SWIFT system (the world’s biggest electronic payments system) as a financial weapon to target Russia, when Russia does things the U.S. doesn’t like. This is how the U.S. sanctions other nations who do things they don’t like, because if those nations can’t wire money in or out, their economies would be destroyed. If China and Russia implement this, it would represent a major step in nations being able to defend their economies from Washington’s ability to sanction and control international financial transactions. Russia and China are not the only ones looking at electronic transaction payment alternatives. Germany urged the EU to come up with their own system, to loosen the ability of the US to apply pressure in this manner. I think we are going to see more and more countries coming up with their own SWIFT alternatives. The world of financial transaction has radically changed in the last ten years with an additional World Bank (AIIB), crypto-currencies and alternative SWIFT systems; the next world financial crisis will not play out the same as the last one.
How the Desire for Change Might Not Be Just an American Experience (10.30.18) WSJ
Anti-Establishment Candidate Wins Brazil’s Presidential Race (10.29.18) WSJ
https://www.wsj.com/articles/brazilians-head-to-polls-in-divisive-presidential-election-1540724400
The Global Tech Backlash Is Just Beginning (10.28.18) WSJ https://www.wsj.com/articles/the-global-tech-backlash-is-just-beginning-1540476151
Italy Vows to Stick to Budget That Breaches EU Rules (10.22.18) WSJ
https://www.wsj.com/articles/italy-vows-to-stick-to-budget-that-breaches-eu-rules-1540207398
Foreign Buying of U.S. Treasurys Softens, Unsettling Financial Markets (10.23.18) WSJ
Yemen Could be Worst Famine in 100 Years (10.15.18) BBC
https://www.bbc.com/news/av/world-middle-east-45857729/yemen-could-be-worst-famine-in-100-years
Merkel, Already Wobbling, Faces Fresh Blow in Historical Stronghold (10.12.18) WSJ
https://www.wsj.com/articles/german-voters-set-to-punish-merkels-conservative-bloc-1539336600
Brazil Voters Buck Status Quo With Rise of Right-Wing Firebrand (10.11.18) WSJ
Pakistan Requests IMF Bailout Talks (10.8.18) WSJ https://www.wsj.com/articles/pakistan-to-hold-bailout-talks-with-imf-1539018792
Economic Problems Exacerbate Challenges for South Africa’s Leader (9.26.18) WSJ
Germany Urges EU Payment System without U.S. to Save Iran Deal (8.21.18) Reuters
Brief Commentary on Mid-Tem US Election Results:
Just a quick comment, I am in Israel at the ICCC Conference which just ended Wednesday. The loss of the House of Representatives means that the Trump and the Republicans will push through a lot of Legislation in the next month and a half. After that little or no legislation will get passed after Dec 31st and Trump will rule by executive order. Unfortunately, the Democrats are going to start multiple baseless Congressional investigations against Trump. This will make things even more contentious and create even a greater media circus than we have seen the last two years.
Fulton's Perspective on Global Economies, Markets & Political Events 