U.S.
and Global Growth Disappoints Yet Again; Negative Interest Rates?
by the Curmudgeon with Victor Sperandeo
Introduction (Curmudgeon):
U.S. economic growth decelerated sharply in
the second half of 2015, with GDP up only 0.7% at an annual rate in the fourth
quarter. That's down from gains of 2% in
Q3 and 3.9% in Q2, according to the BEA
report released on Friday.
“The deceleration in real GDP in the fourth quarter
primarily reflected a deceleration in PCE (Personal Consumption Expenditures
price index) and downturns in nonresidential fixed investment, in exports, and
in state and local government spending that were partly offset by a smaller
decrease in private inventory investment, a deceleration in imports, and an
acceleration in federal government spending.”
Real GDP increased 2.4% in 2015 (from the
2014 annual level to the 2015 annual level), which was the same annual rate as
in 2014. In Q4-2015, non-residential
fixed investment fell 1.8%, its first decline since Q3 2012. The energy sector
continued to slash capital spending due to falling oil prices while other
businesses haven’t increased CAPEX to make up the difference. Please see charts below.
Inventories subtracted 0.45 % from GDP
growth in the 4th Quarter, after reducing growth by 0.71% in Q3-2015. Inventory
levels remain high, suggesting they’ll remain a drag on growth in early
2016.
Exports slumped, as a strong dollar and
weaker overseas economies sap demand for U.S. made goods. Indeed, it's a global
economic slowdown with no country growing strongly.
Consumer spending, which accounts for ~ 70%
of GDP, rose at a 2.2% rate in Q4, though that was less than in the prior two
quarters. Economists are perplexed as
to why consumer spending growth hasn’t been much stronger, given the collapse
in crude oil prices since June 2014.
[The NY Times tried to address that issue in a January 21st front page
article titled: “This
Time, Cheaper Oil Does Little for the U.S. Economy.”]
Separately, several U.S. regional
manufacturing reports have signaled economic contraction, including those from
the New York, Dallas, Kansas City and Philadelphia Federal Reserve
districts. Please see John Williams,
ShadowStats remarks below, which imply a national contraction.
Overseas, there were disappointing economic
reports last week from Japan (which now has negative interest rates), Taiwan
(adversely effected by China's slowdown), Russia (oil price collapse), and
several other countries. When Apple
announced lower iPhone sales last week, it blamed weakness in oil-dependent
economies like Russia, Brazil, and Canada.
It's not a pretty picture for those who
believed in robust global growth almost seven years after the last recession
ended. The economic stagnation since
then has been unprecedented.
ShadowStats
Commentary on Fourth-Quarter GDP, Consumer and Monetary Conditions:
Annualized Real GDP Growth Slowed to 0.69%
in Headline Reporting,
In Commentary No. 783 to subscribers, John
Williams wrote (bold font emphasis added):
“The 'advance' estimate of 0.69% annualized growth in
real fourth-quarter 2015 Gross Domestic Product (GDP) was no more than
statistical noise. Simply put, there was
no statistically-significant difference between the “advance” headline
quarterly gain and an outright quarterly contraction. An outright contraction likely looms in
the first (GDP) revision.
Given the accelerating downside trend in most near-term,
headline economic reporting, including the durable goods orders detailed in
yesterday’s Commentary No. 782, the consensus outlook for broad economic
activity should be shifting rapidly to the downside. Negative expectations for the first
revision to fourth-quarter GDP on February 26th, and the actual reporting of
same should follow.”
Discussion (Victor):
The economies of countries in the world
that are not already in recession are heading lower. The monetary policy tactic most used to
combat economic weakness is best exemplified by a Saturday WSJ article titled:
“Bank
of Japan (BOJ) Launches Negative-Rate Policy”
“The Bank of Japan will adopt a negative interest-rate
policy for the first time as a sputtering economy, stubbornly low inflation and
turbulent financial markets world-wide threaten to undermine Prime Minister
Shinzo Abe's revival plan. The central bank said it cut the deposit rate paid
on cash parked at the BOJ by commercial banks in excess of legally required
reserves to minus 0.1% from the previous plus 0.1%."
The BOJ policy board voted 5-4 to cut
rates. This looks like the U.S. Supreme
Court decisions of late, or the reality of the "fifth fool."
Selected
excerpts
from a similar article in the Saturday NY Times are worth noting:
“With
the global economy looking increasingly fragile, Japan is now taking a more
aggressive step by cutting interest rates below zero on Friday…Moving to
negative rates reflects a measure of desperation on the part of central banks. Their
traditional tools have been largely exhausted, as most countries’ interest
rates have been pushed to almost nothing.
With
weak prospects for economic growth in many countries, businesses are reluctant
to borrow for practically any new projects…In a global marketplace, Japan’s
decision could have ripple effects, further clouding the outlook for the world
economy. The move to negative rates, for
example, weakens the yen. That, in turn, creates a potential problem for China
as Beijing struggles to contain outflows of money and prop up its own currency.
The People’s Bank of China, the
country’s central bank, said last month that it was shifting away from pegging
the value of its currency, the Renminbi, closely to the dollar. Instead, it
preferred to link the renminbi to a basket of currencies, with the yen playing
one of the largest roles after the dollar. If it ends up doing so, it could
result in a weaker renminbi, as the yen falls.”
Let's examine what this BoJ negative
interest rate action means to a typical Japanese saver. We'll use U.S. dollars (rather than Japanese
Yen) for simplicity. Assume you have $100,000.00 ($100K) in Japanese "Bank
Sake." After Friday's BoJ announcement on negative interest rates, your
account would be debited 10 bps over one year. So to hold cash at a bank would
now cost the Japanese saver $100 per year in this example. The BOJ is doing
this to stimulate savers to "spend your money" and for businesses to
increase capital spending.
But will a charge of $8.33 (=$100/12) per
month do that? If not, the BOJ will
accomplish nothing. It is intended to be psychological. The implication is that
if you don't spend your money we will charge you more of a penalty until you do
so. Do you think that will work?
It's astonishing that "negative
interest rates” are being used by many central banks to counter the economic
declines all over the world (instead of tax cuts which would be a refreshing
change from austerity based fiscal policies, especially in European countries
with high debt/budget deficits).
The European Central Bank (ECB) became the
first to cut deposit rates below zero in June 2014 and now charges banks 0.3%
to hold their cash overnight. The ECB was followed by Denmark, Switzerland and
Sweden. Government bond yields in Europe
and Japan fell further below zero on Friday. Negative yields now account for a quarter
of JPMorgan’s index for government bonds.
...............................................................................................................
Sidebar:
Cashless Society
Of course, you can take your money out of
the bank, as this central bank's absurd method of thinking believes it can
create greater penalties until you spend. The government's answer to you taking
your money out of the bank is to create a "Cashless Society." That was first promoted by Andrew G Haldane who
is the Chief Economist at the Bank of England and Executive Director, Monetary
Analysis and Statistics. He is a member
of the Bank’s Monetary Policy Committee. He also has responsibility for
research and statistics across the Bank.
A Cashless Society would prohibit you from
countering the government from charging greater fees and thus force you to
spend at some point. If you wanted your cash, you could only get a check to
deposit in another bank. This is being talked about in several countries,
especially Socialist dominated countries.
Note:
David Haggath, A Curmudgeon reader, has written a blog post on this
topic which you can read here.
Only a politician would think of this form
of controlling the masses. It would never work, and would rather lead to the
purchase of gold, silver, real estate, precious stones etc.
...............................................................................................................
As the Curmudgeon reports above, U.S. 4th
quarter GDP ('advance' estimate) was only 0.7% at an annual rate. The price
index for gross domestic purchases increased 0.3% in 2015, compared to 1.5% in
2014. Note that the CPI Core rate was + 2.13% for 2015.
The U.S. economy is weakening in almost all
areas and forecasters have taken notice.
"The chance of the U.S. sinking into a
full-blown recession now stands at 18%,” according to a CNN
Money survey of economists released this week. That's nearly double what the nation's top
economic policymaker predicted only a month ago. Federal Reserve chair Janet
Yellen put the probability of a recession in 2016 at about 10% during her
December 2015 press conference after the Fed raised interest rates for the
first time in years. The above
referenced CNN article states: “Yellen has said repeatedly that she thinks a
recession is not on the horizon. The
U.S. has enjoyed two years of incredibly strong job growth -- the best since
1999 -- and the economy is expanding at a healthy pace of around 2% a
year."
In addition, negative nominal rates have
not worked for the EU and won't work for Japan.
However, it does drive currencies down and stocks up (temporarily). For example, the S&P 500 rallied from an
oversold condition on Friday to be up 46.88 points or 2.48%. The yen was down
1.91% vs the dollar.
This mentality of trading reminds me of the
late 1970's when we all watched Money Supply, which the Federal Reserve was
trying to control. Increases meant “buy
stocks” while decreases said “sell.” This led to "higher interest
rates," which was OK as long as money supply expanded. It eventually ended in a painful death as
higher rates helped bring on the double dip recession in 1980 and 1981-82.
Today, "lower rates" means “buy,”
the Fed/ECB/BoJ doing nothing means “sell.” This is all ridiculous because
after 6+ years of lower/negative rates global economic growth is extremely slow
(or negative in some countries).
Slow growth leads to economic declines,
until a central bank lowers rates. Then markets rally, while the economy
yawns. Yet nothing changes economically.
It should be stressed that the U.S. 30 year- long term government bond yields
are 2.75%, which reflects a recession.
The fact that the equity markets are
disconnected from the economy has been pointed out by us many times. Several
years ago, the Curmudgeon called it “the great disconnect.” Eventually, both
the economy and stock market will be back in sync (on the downside).
Are there any countries whose economies are
doing well? China, the EU, Japan, the U.K., the U.S., Brazil, Canada, Russia,
emerging Asia nation's, most of South America and Australia are all struggling
or already in recession. A great deal of
the cause is declining commodity prices especially oil and gas. This is scaring
many creditors to believe that defaults are on the way. The high yield and corporate
bond markets also reflect this. It is
a risk the Fed will have a tough time fixing.
The earnings picture for the S&P 500 is
not bright, according to David Stockman's January 28, 2016 blog post titled “Death
Throes of the Bull." Here's an excerpt:
Reported GAAP earnings peaked at $106 per share on the
S&P 500 more than a year ago for the LTM period ending in September 2014.
By the most recent reporting period they were down by
14.4% to $90.66 per share, and there is no reason to believe that this slide
will rebound when the Q4 numbers are actually tallied.
Here’s the thing. This exact pattern occurred during the
2007-2009 collapse. While the Wall Street hockey sticks were projecting
earnings of $120 per share or more for 2008, actual GAAP earnings starting
falling in the June 2007 LTM period, and kept plunging until they hit bottom at
$7 per share in June 2009.
Victor's Conclusions:
I've been a bear on the U.S. economy to the
point I believe it cannot be fixed. The equity markets in the U.S. have a rally
left in them, which will end when the Fed sings "it will not be raising
rates," which everyone should know by now, despite Yellen's rhetoric. That day will be fully discounted and will
cause an intermediate high. The market will top that day and fall 10-20% before
the Fed has to come up with another scheme to cause a rally. After all, it's an election year.
To best describing the current economic
situation everywhere you look here's a quote from a well-known book titled
"The Law," which was
written by Frederic Bastiat, in 1850:
"...when plunder is abetted by the
law, it does not fear the courts, your police, and your prisons. Rather, it may
call upon them for help." – Bastiat
Good luck and till next
time...
The
Curmudgeon
ajwdct@sbumail.com
Follow the
Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a
historian, economist and financial innovator who has re-invented himself and
the companies he's owned (since 1971) to profit in the ever changing and arcane
world of markets, economies and government policies. Victor started his Wall Street career in 1966
and began trading for a living in 1968. As President and CEO of Alpha Financial
Technologies LLC, Sperandeo oversees the firm's research and development
platform, which is used to create innovative solutions for different futures
markets, risk parameters and other factors.
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