February 12, 2016 - GLOBAL ECONOMY - Countries across the globe are pumping money into their economies, creating negative interest
rates and buying billions of dollars in bonds. Yet experts are worried
some of these strategies will not be enough to turn around the coming global financial crash.
Is the US economy running out of gas, is there another recession coming?
Is there another U.S. recession on the way? That's a question rattling investors, worrying business leaders and shaping the debate on the presidential campaign trail. The answer depends a lot on how you measure the strength and durability of the recovery, now in its seventh year based the
business cycle dates tracked by economists at the National Bureau of Economic Research.
"There is always some chance of recession in any year," Fed Chair Janet Yellen told Senators on Thursday. "But the evidence suggests that expansions don't die of old age." To see how this recovery compares, CNBC tracked a series of economic and market data over the last eight recessions since 1960 — starting each cycle with the beginning of each downturn.
By just about every measure, the current expansion has been the weakest of the eight.
One of the main reasons has been the relatively sluggish pace of spending an investment — by consumers, government and businesses — since the Great Recession began in December 2007. Consumer spending has recovered far more slowly than past recoveries. And despite a massive stimulus program in 2010, government spending at all levels is actually lower than when the Great Recession hit.
Consumers have been slow to spend, in part, because their paychecks have been rising more slowly than in past downturns. While the job market has recovered and the pace hiring sped up in the last two years, the overall gains in employment lag past recoveries because the scale of job losses in 2007 and 2008 was much higher.
Consumer spending — which makes up about two-thirds of the U.S. economy — has also been held back by the sharp drop in household wealth that accompanied the collapse of the financial markets. To rebuild the trillions of dollars in lost wealth, American households have been stashing more into savings than in past recoveries.
Corporations have also struggled to keep profits moving ahead after the crash of 2007. While profits have recovered along with the job and housing markets, the gains lag all but the 1981-1990 cycle, when the U.S. entered a relatively mild recession brought on by a downturn in the housing market. That cycle was followed by the Roaring '90s, when a surge in profits and the rapid growth of the technology industry sparked the Internet stock market bubble.
By comparison, the latest cycle has produced relatively weak stock market gains — outpacing only the mid-'70s expansion, when rampant inflation eroded stock market gains when measured in real terms. -
CNBC.
U.S. stocks fall for fourth straight day
U.S.
stocks fell for the fourth dayin
a row as concerns about global economic weakness intensified, even as
Federal Reserve Chair Janet Yellen reiterated her confidence in the U.S.
economy. Financial stocks fell hardest Thursday as investors
worried that interest rates in the U.S. and elsewhere would remain low
and sap bank profits. Oil prices sank again, this time to their lowest
levels since 2003. While all three major U.S. indexes finished lower,
they recovered somewhat from far steeper losses earlier in the day.
The
Dow Jones industrial average fell 254 points, or 1.6 percent, to close
at 15,660. The Standard & Poor's 500 index fell 22 points, or 1.2
percent, to 1,829. The Nasdaq composite fell 16 points, or 0.4 percent,
to 4,266. The S&P 500 index has dropped 14 percent since
peaking last summer. Worries are high that the sharp slowdown in
China's growth, falling U.S. corporate profits and other downward
pressures will pull the economy back into a recession.
If a
garden-variety one is on the way, the stock market's drop isn't even
halfway done. Stocks have lost an average of 33 percent from top to
bottom around past recessions, going back to 1929, according to a
review by strategists at Credit Suisse. -
CBS News.
Investors 'go bananas' for gold bars, with lines around the block, as global stock markets tumble
BullionByPost, Britain's biggest online gold
dealer, said it has already taken record-day sales of £5.6m as traders
pile into gold following fears the world is on the
brink of another financial crisis. Rob Halliday-Stein, founder and managing director of the
Birmingham-based company, said takings today had already surpassed the
firm's previous one-day record of £4.4m in October 2014. BullionByPost, which takes orders of up to £25,000 on the website but
takes higher amounts over the phone, explained it had received a few
hundred orders overnight and frantic numbers of phone calls this
morning.
"The bullion market has
been building with interest since the end of last year but this morning
things have gone bananas," said Mr Halliday-Stein. "Some bankers in
London are placing unusually large orders for physical gold." London-based ATS Bullion added it had been inundated with orders for
the past week. The firm has sold 4,000 gold bars and coins since
February 1, a 40pc rise on the same period a year ago when it sold
1,500.
"It's been crazy - it's been the best week since 2012.
We've had people queuing round the block," said Michael Cooper of ATS
Bullion, a family run firm that trades online and also from an outlet in
the West End. Gold is currently at its highest level since May,
with prices surging 2.2pc this morning to $1,218.17 for an ounce of the
precious metal. Gold producers are among the biggest risers
on the FTSE today, with shares in Rangold Resources and Fresnillo up 6.3pc and 6.2pc respectively.
Online gold investment platform BullionVault recorded its busiest-ever
trading day on Monday, with investors buying and selling more than a
quarter-tonne of gold, worth £7.2m, and more than 5 tonnes of silver,
worth £1.7m.
The World Gold Council said this morning
that demand for the precious metal grew 4pc in the fourth quarter as
central banks bolstered their reserves to diversify away from the
dollar. Russia's central bank stockpiled the most gold last
quarter, adding an estimated 60 tonnes to its reserves. The country
bought around 200 tonnes of gold last year, 141 tonnes of which is
thought to have been snapped up over the summer.
The world can't afford another financial crash – it could destroy capitalism as we know it
They bounce back after terrorist attacks, pick themselves up after earthquakes and cope with
pandemics such as Zika.
They can even handle years of economic uncertainty, stagnant wages and
sky-high unemployment. But no developed nation today could possibly
tolerate another wholesale banking crisis and proper, blood and guts
recession.
We are too fragile,
fiscally as well as psychologically. Our economies, cultures and
polities are still paying a heavy price for the Great Recession; another
collapse, especially were it to be accompanied by a fresh banking
bailout by the taxpayer, would trigger a cataclysmic, uncontrollable
backlash. The public, whose faith in elites and the private
sector was rattled after 2007-09, would simply not wear it. Its anger
would be so explosive, so-all encompassing that it would threaten the
very survival of free trade, of globalisation and of the market-based
economy. There would be calls for wage and price controls, punitive,
ultra-progressive taxes, a war on the City and arbitrary jail sentences.
For fear of allowing extremist or populist parties through the door,
mainstream politicians would end up adopting much of this agenda,
with devastating implications for our long-term prosperity. Central
banks, in desperation, would embrace the purest form of money-printing:
they would start giving consumers actual cash to spend, temporarily
turbo-charging demand while destroying any remaining respect for the
idea that money needs to be earned.
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| Call this a protest? You ain't seen nothing yet Photo: PAWEL KOPCZYNSKI / REUTERS |
History never repeats itself
exactly, but the last time a recession was met by pure, unadulterated
populism was in the Thirties, when the Americans turned a stock market
crash and a series of monetary policy blunders into a depression.
President Herbert Hoover signed into law the Smoot-Hawley Tariff Act,
dreamt up by two economically illiterate Republican senators, slapping
massive taxes on the imports of 20,000 goods and triggering a global
trade war. It was perhaps the most economically destructive piece of
legislation ever devised, and it took until the Nineties before the
damage was finally erased.
That is why we must all hope that the
turmoil of recent days in the financial markets,
and the increasingly worrying economic news, will turn out to be a
false alarm. It would certainly be ridiculously premature, at this
stage, to call a recession, let alone a financial crisis. But at the
very least we are seeing a major dose of the “dangerous cocktail of new
threats”
rightly identified at the turn of the year by George Osborne, a development which will have political repercussions even if the economy eventually muddles through.
Investors in equities, including millions of people with private
pensions and Isas, have already lost a fortune; they won’t be too happy
when they begin to realise the extent of the damage. Growth is slowing
everywhere, and the monetary pump-priming of the past few years is
looking increasingly ineffective. Traders believe that interest rates
won’t go up in Britain until 2019, and there is increasing talk that
negative interest rates could become necessary across the developed
world, further crippling savers.
No positive spin can be put on any
of the latest developments. Banking shares have taken a beating; China’s
slowdown continues; Maersk, the shipping giant, believes that
conditions for world trade are worse than in 2008-09; industrial
production slumped in December, not just in Britain but more so in
France and Germany; energy prices are devastating Middle Eastern and
Russian economies; and sterling has tumbled.
It is always a sure
sign that panic has broken out when financial markets respond badly to
all possible scenarios. The prospect of higher interest rates? Sell,
sell, sell. A chance of lower rates? Sell, sell and sell again. A rise
in the price of oil is met with as much angst as a decline. The
financial markets remain addicted to help from central banks: they are
desperate for yet more interventions, regardless of the consequences on
the pricing of risk, the allocation of resources or the creation of
unsustainable bubbles that only enrich the owners of assets.
This is exactly the tonic that the populists have been waiting for.
Despite their dramatic emergence, they have so far failed to make a
real breakthrough. The SNP was unable to win the Scottish referendum and
the National Front didn’t gain a single region in France. Mariano Rajoy
remains Spain’s prime minister, and anti-establishment parties have
been thwarted in Germany. Even lighter forms of populism, such as Ed
Miliband’s, were rejected. Syriza’s victory in Greece was one of the few
genuine populist triumphs; but it was soon crushed by the combined
might of Brussels and Frankfurt.
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| The Republican presidential nominee often proclaims that his presidency will make America a "great" country again |
But it
is in Britain that the immediate impact could be the greatest. The
Brexit debate is already being overshadowed by the migration crisis,
undermining the Government’s attempts at portraying a Remain vote as a
safe, low-risk option; a sustained bout of economic volatility would
further ruin the pro-EU case, especially given that the eurozone, rather
than the City, is likely to emerge as one of the epicentres of any
fresh crisis. It would be hard for bosses of large financial giants to
credibly tell the electorate to vote Remain when their own businesses
are in crisis.
Britain will noticeably outperform the EU this year:
our labour market remains strong and our banks far better capitalised
than many of their eurozone competitors, too many of which are still
sitting on massive amounts of bad debt. The Chinese slowdown is worse
for Germany than for us. But while the Eurosceptic cause to which some
of us are partial is likely to benefit from the turmoil, it would be
madness for anybody who cares about this country’s future to feel
anything but dread towards the economic threats facing the world. The
sorry truth is that there is very little that governments can do at this
stage, apart from battening down the hatches and hoping that central
banks succeed in kicking our problems even further down the road. -
Telegraph.
Questions grow over banks as profit warnings pile up
Questions are growing
over the financial health of banks, particularly in Europe and the U.S.,
as they face a toxic mix of low economic growth, bad loans and squeezed
earnings. France's Societe Generale became
Thursday the latest bank to issue a confidence-shattering profit
warning, which helped trigger a new sell-off in financial stocks. The
bank saw its share price stumble 12 percent and major rivals like
Deutsche Bank and UniCredit saw losses of nearly 10 percent. European
banks are not the only ones to suffer. Japanese bank Mitsubishi
Financial fell 7 percent on Thursday. In the U.S., Morgan Stanley,
Citigroup and Bank of America are down more than 30 percent so far this
year.
Among the top concerns is that the
global economy will weaken more than expected, souring some of the loans
that banks have issued to companies around the world - particularly in
distressed sectors like the energy industry. U.S. banks have tens of
billions of exposure to loans made to energy companies, who have found
themselves unable to pay back their debts due to low energy prices.
Mike
van Dulken, head of research at Accendo Markets, says the latest
weakness in bank stocks stems from U.S. Federal Reserve Chair Janet
Yellen "warning on current financial market turbulence and suggesting
further rate hikes could be delayed, which added to already raised
anxiety about the health of the global economy." On
Wednesday, Yellen cautioned that global weakness and falling financial
markets could depress the U.S. economy's growth and slow the pace of Fed
interest rate hikes. That's a particular concern as the U.S. economy
has been one of the few bright spots in the global economy, which is
seeing a slowdown in China and stagnation in Japan and Europe.
The
slowing of interest rate increases in the U.S. is also bad news for the
big banks, which have been waiting anxiously for interest rates to
rise. Since the financial crisis, the big banks have largely grown
profits by cutting costs. Higher interest rates would mean banks could
charge more for their loans.
The fact that
many central banks keep cutting interest rates, pushing down market
lending rates, is further hurting banks by squeezing their profits.
Banks mainly make money by lending, so as rates drop, so do earnings.
Investors made big bets in the second half of last year that interest
rates would rise in the U.S., so to see that bet fail has forced
investors to dump bank shares.
The situation
is worsened in some regions, particularly the eurozone and Japan, where
the central banks charge commercial banks to deposit money with them. Analysts
at Capital Economics say that if the European Central Bank cuts one of
its key interest rates further below zero, "this could have adverse
effects on banks' profitability." Citing ECB
chief Mario Draghi's recent statements that the central bank could take
more action in March, the analysts said the ECB "seems prepared to
squeeze banks' profitability further in the short term in order to
support the economy." The Stoxx index of
European bank shares is down 20 percent in the last month, when Draghi
first mentioned chance that the ECB might try to offer more stimulus in
March to lower market rates. In some markets, bad loans are already piling up - or have not been dealt with effectively since the global financial crisis.
That's
the case in Italy, where banks are estimated to hold some 350 billion
euros in soured loans, or more than 30 percent of the eurozone's total.
The government is trying to mop up those bad loans, but the banks are
seeing their shares slide in the meantime. Banca Monte del Paschi, which
was down 9 percent on Thursday, is down 60 percent so far this year.
More
narrowly, some banks are being targeted for complex financial
investments they have made in recent years. That's the case of Deutsche
Bank, which has seen the value of its so-called contingent convertible
bonds fall sharply. The bank has some 350 million euros in payments on
such bonds due by April 30, and had to issue a statement Monday evening
assuring it had the money to pay. Deutsche Bank's shares were down 9 percent, bringing its drop this year to 41 percent. -
AP.
The New Frontier of Negative Interest Rates
When central banks start exploring strange new worlds, the results aren't always ideal. Quantitative
easing wasn't just a change in monetary policy, but a whole new kind of
monetary policy -- a journey into the unknown. It isn't over yet, but
there's already a debate about drawbacks and unintended consequences.
With that question far from resolved, another adventure in super-loose
monetary policy has begun: negative interest rates. This week, as
global markets plunged, unforeseen complications have arisen there too.
Shares
in European banks suffered especially badly during this renewed market
turmoil. There was more than one reason, but negative rates seem to be
implicated. Banks' deposits at the
European Central Bank
now pay minus 0.3 percent, and a further cut has been advertised for
next month. The idea is to encourage banks to lend more (rather than sit
on idle balances) and to lower the cost of capital for riskier
borrowers. The new concern is that negative rates have
squeezed banks' profits and put their soundness in question.
Advocates
of negative rates might be perplexed by this apparent squeeze on bank
profits. They might wonder, why should that happen? Banks simply have to
pass the negative rate on to their various customers, borrowers on one
side and lenders on the other. The spread between the two needn't
change. But it seems that banks have been reluctant to force negative
rates on to their depositors -- hence the squeeze on profits. Perhaps
the banks are worried that depositors wouldn't like it. Upsetting them
is something banks are understandably reluctant to do.
Policy
makers seem to have doubts as well. The Bank of Japan recently startled
financial markets by adopting negative rates, having previously said it
wasn't going to -- but it
structured the new policy
so that it works at the margin of the banks' balances with the central
bank, rather than applying to the total. Why? So that the banks wouldn't
need to pass the change through to depositors. Policy makers and
banks alike are embracing negative rates timidly -- and they're right to
be cautious. Substantially negative rates would be an even braver
adventure than QE. As I've previously
mentioned,
a world of negative rates is a very weird place -- one where savers pay
borrowers for the privilege of deferring consumption, and borrowers get
compensated for bringing spending forward. An
editorial in The Economist made the point well:
Small
savers would use any available form of prepayment—gift vouchers,
long-term subscriptions, urban-transport cards or mobile-phone SIM
cards—to avoid the cost of having money in the bank. That would be
only the start of the topsy-turviness. Were interest rates negative
enough for long enough, specialist security firms would emerge that
would build vaults to store cash on behalf of big depositors and clear
transfers between their customers’ accounts. Firms would seek to make
payments quickly and receive them slowly. Tax offices would discourage
prompt settlement or overpayment of accounts: one Swiss canton has
already stopped discounts for early tax payment and said it wants to
receive money as late as possible.
Well, that last part sounds quite appealing. (Everybody's favorite New Yorker
cartoon
comes to mind: "How about never? Is never good for you?") People would
adjust to the new rules, eventually. Trouble is, that calls into
question the policy's usual rationale: It's typically seen as a
temporary expedient.
Concerning the flight to cash, that could be
dealt with as well. To remind, with negative rates in place, cash is a
better place for savings than a bank account. The possibility that
people might switch to cash therefore makes it difficult to force rates
below zero. The cost of holding cash (including the risk that it might
be stolen) creates some room for maneuver. Beyond this, central banks
could further discourage the use of cash by
forcing down its value relative to electronic balances -- in effect, taxing its use -- or move to abolish it altogether. Undermining
paper currency in this way would be politically fraught, at best. Yes,
inflation undermines paper currency, so the phenomenon is hardly new.
But no central bank will want to say, "We can't get inflation any higher
with our usual methods so we've decided to undermine the currency
directly."
Suppose they did dare, thinking they could get away
with it and reckoning that the economics is correct even if the politics
is, you know, challenging. With financial anxiety running high and the
flow of credit blocked, would such a dramatic departure actually work as
intended, helping to calm nerves and incline borrowers and lenders to
take risks? It might very well do the opposite. A reckless-seeming
experiment is not the best way to restore confidence. Central
banks have shown that the lower bound for interest rates is less than
zero. They've shown that the ability to hold cash instead of electronic
balances doesn’t draw any sharp or fixed line, as previously supposed.
There's at least some room for maneuver at less than nothing.
The
European Central Bank can probably make its deposit rate a bit more
negative. In fact, it's as good as promised to do so in March.
Legal complications permitting,
the U.S. Federal Reserve could push rates slightly negative as well,
though Fed Chair Janet Yellen told Congress this week she thought it
wouldn't be necessary. The main point, though, is that this room
for maneuver is limited. There is indeed a lower bound to interest rates
-- cultural, political, prudential -- and we're close. For the moment,
we just don't know how close. -
Bloomberg View.
