As Predicted, The Global Recession has Arrived, Will Depression Be Next?

A permanent lowering of the interest rate can only be the outcome of increased capital formation, never the result of any technical banking measures. Attempts to achieve a long-term lowering of interest rates by expanding the circulation credit of the banks ineluctably result in a temporary boom that leads to a crisis and to a depression—Ludwig von Mises

In this issue

As Predicted, The Global Recession has Arrived, Will Depression Be Next?

-The Wile E. Coyete Moment: From China to the World

-We Live in Interesting Times! Negative Oil Prices and Worst US Job Losses Since the Great Depression

-The Unseen Consequences from the Uncharted Global Fiscal and Monetary Bailout! Depression Ahead?

-The Bernanke Doctrine in Motion!

As Predicted, The Global Recession has Arrived, Will Depression Be Next?

The Wile E. Coyete Moment: From China to the World

When about 760 million or 50% of China’s population had been immobilized and placed under home quarantine by their government in response to the COVID-19 epidemic, I predicted that this would spur a global recession.

Back then*, I called this China’s Wile E. Coyote moment.

*Batten Down the Hatches! Global Recession Ahead: The New Coronavirus Pushes China’s Economy to a Freefall! February 16, 2020.

Figure 1

In the fulfillment of this watershed moment, last mid-April, China’s first-quarter GDP reported a 6.8% contraction, its first in a few decades!

And considering that the lockdown, which began on the 23rd January in Wuhan, Hubei which spread to over 80 cities in nearly 20 provinces and municipalities that lasted mostly through March, many analysts have come to dispute the reported GDP’s accuracy. The Wuhan lockdown was lifted on April 8th.

Nevertheless, the record economic contraction has prompted the Chinese government to rethink about setting up GDP targets for 2020. According to a report from the Bloomberg/Economic Times, “China’s leaders are considering the option of not setting a numerical target for economic growth this year given the uncertainty caused by the global coronavirus pandemic, according to people familiar with the matter.” Is this a facing saving measure for an embattled ruling class, the CCP?

In the meantime, the rapid transmission of COVID-19 across the globe has eventually prompted the World Health Organization (WHO) to admit on March 11 that this was a pandemic, more than a month after declaring a public health emergency on January 30. Given the speed of transmission, why did it take so long for them to consider?

The pandemic character has been so obvious that even this layman** can distinguish!

**The Coronavirus Pandemic: Who is Panicking? More From the Year of the Rat: Will History Rhyme? February 2, 2020

To “flatten the curve” by social or physical distancing, many countries embraced the authoritarian approach of epidemic containment by forcibly shutting down significant segments of or the entire country, although at varying degrees.

By early April, about 3.9 billion people or half of the world’s population were under home quarantine (house arrests?)!

Figure 2

Hence, the Wile E. Coyote moment wasn’t limited to China; it became a worldwide phenomenon!

As such, in the 1Q, the Eurozone’s GDP shrank 3.8%, its fastest rate on record, while the US GDP reported a 4.8% decrease, its steepest contraction since 2008!

Bloomberg estimates that the Global GDP in April plunged by 4.8%!

But there is more behind the headline numbers.

We Live in Interesting Times! Negative Oil Prices and Worst US Job Losses Since the Great Depression

Things that could not seem to happen—have actually been happening!

And here are just a few of them.

 

Figure 3

With a sharp decline in demand, which came in the face of a dearth of storage space, oil price futures fell to negative in the third week of April! Depressed prices put in peril debt-ridden oil companies and oil-producing nations with untenable welfare systems.

In the US, a record 20.5 million people have lost their jobs last April, sending the unemployment rate to 14.7%, the highest since the Great Depression! Yet, there were 33.5 million people who have filed for unemployment or jobless claims in the last seven weeks!

Minneapolis Federal Reserve Bank President Neel Kashkari in a CNBC interview recently said that though the reported unemployment rate could be as high as 17% — a brutal number, no doubt — but he says the true number may be as high as 24%. “It’s devastating.”

April’s job losses have virtually erased job gains of the last two decades! That’s Nassim Taleb’s Turkey Principle in action!

The US private sector employment-to-population, a measure of the number of people employed against the total working-age population (Investopedia), crashed to a harrowing 51.3% last April, the worst since, again, the Great Depression!

The highest unemployment rate during the Great Depression was 24.99% in 1933, according to the Balance.

Again, that’s only a piecemeal of the overall picture.

And because the great Wile E. Coyote moment has only scratched the surface, governments around the world backed by their respective central banks launched a series of unprecedented measures to bailout both their financial systems and the economies.

The Unseen Consequences from the Uncharted Global Fiscal and Monetary Bailout! Depression Ahead?

Figure 4

Governments around the world have collectively unleashed at least USD 8 trillion worth of subsidies to cushion the impact from the economic shutdown caused by both COVID-19 and the political response to contain its spread. Bank of America’s Michael Hartnett estimates that fiscal spending support has reached $16.4 trillion, about 19% of the 2019’s USD 86 trillion Global GDP!

With depressed economies, spending at this scale translates to massive fiscal deficits, which will require extraordinary amounts of borrowings and or support from the central banks.

And as a result, in 2020, 107 rate cuts have been imposed by about 78 central banks as of May 8th.

And to ensure liquidity, global central banks have engaged in balance sheet expansion by financing their respective governments through asset purchases.

Since surging fiscal deficits signify a global phenomenon, debts and central bank assets have exploded.

Despite the Trump government’s unleashing an accrued $2.4 trillion of spending support for the main street, backed by about $ 2.41 trillion of asset purchases by the US Federal Reserve, which has been faster than the Great Recession or the Financial Crisis (GFC) of 2007 to 2008, the yield of US 2-year Treasury note dropped to a RECORD low, while Fed Fund rate futures turned NEGATIVE before bouncing above zero late last week! The Fed’s balance sheet has soared to a milestone USD 6.712 trillion and has been expected to rocket to $10 trillion by early next year!

The details of the USD 2.4 trillion spending stimulus and the various support programs bankrolled by the US Federal Government can be found here and here.

And rumors of the second phase of support from the Federal Government have been afloat due to the recent job numbers.

Yet the carrying costs of the subsidies from the Great Recession or Financial Crisis of 2007-2008 has been immense. It lowered the trajectory of the rate of economic growth, increased dependency towards leveraging or debt for financing, redirected financial activities from the economy towards debt financed asset speculation, thereby, fueling asset market bubbles, nurtured the rise of zombie firms and industries, which siphoned resources that contributed to maladjustments that decreased economic productivity, promoted the widening of inequality, and entrenched economic structural imbalances, where central bank emergency policies became the norm that ultimately increased systemic global financial and economic fragility. 

Thus, COVID-19 fundamentally exposed such embedded vulnerabilities!

And here is the thing, the US signified the epicenter of the Great Recession or Financial Crisis of 2007 to 2008 (GFC) that spread to the world.  Hence, using domestic policies and international cooperation, much of the world was able to erect defenses against the contamination.

But this time is different.

In 2020, the IMF expects about 170 nations or 90% of its 189 members to register negative per capita income growth! Over 100 countries have approached the IMF for emergency financing. Though the IMF brags that it has USD 1 trillion in lending capacity, the irony is, some of the sources of financing may be from countries that are presently in need of it!

While access to bridge financing for countries undergoing economic stress had been made available from bilateral or multilateral sources during the GFC, that’s unlikely the case today.

Moreover, today's bailouts will be like funding deadbeats, where a financial blackhole exists to continually drain resources. For instance, Argentina received a rescue package from the worth $57 billion in 2018, the biggest loan from the IMF ever. Today, or less than two years from the rescue, Argentina is on the brink of its ninth default!

Furthermore, while it took over 10-years to expose the embedded costs from bailout policies of the GFC, the imbalances built from the present simultaneous fiscal and monetary support will extrapolate to the acceleration of capital consumption.

Besides, the economic shutdown has seriously impaired the availability of capital and capital goods in the global economy!

Yet to surface and be accounted for are the second-, third- and nth order from the current ambit of socio-economic and political events, which means, the current crisis is at its incipient phase!

A prolonged recession could morph into a Depression!

The Bernanke Doctrine in Motion!

Figure 5

And imbalances?

Since the GFC, US Federal Reserve policies have greatly influenced the direction of the US stock market. In a single month, the Fed’s USD 2.4 trillion asset expansion has encapsulated such rescues!

The financial markets have been 'totally' detached from the economy, the Mainstreet, or from “fundamentals”.

Mr. Ben Bernanke penned the below, even as a professor in 2000, or before to his entry to the US central bank. He would eventually assume the highest post as Fed Reserve Chairman from 2006 to 2014:

There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Central bank policies today continue to hallmark the Bernanke Doctrine and throw gasoline to the fire!

And because of this, millions of people have been hurt, and more are to suffer. This policy-induced pain represents its consequence, a somber reality of the business cycle.

US Stocks: Disappointing Job Reports Spurs Frantic Buying on Expectations of Monetary Heroin; Atlanta Fed’s 3Q GDP Chopped to .9%

US stocks experienced an incredibly wild round trip yesterday.

(from stockcharts.com)

For instance, the Dow Jones Industrials was sharply down at the early session (by 259 points), but rallied furiously back to close the day at the session high with an astounding 200.36 point advance.

The report from Reuters gives us a clue on what transpired and inspired the day’s action: (bold mine)

Bond prices climbed on Friday after a weak U.S. employment report increased worry about slowing global growth, while global equities were able to rebound from an initial selloff to close with strong gains.

The economy created 142,000 jobs in September, well short of the 203,000 forecast, and August numbers were revised sharply lower to show only 136,000 jobs, the U.S. Labor Department said.

Bond prices jumped, with benchmark U.S. Treasury yields falling to their lowest level in slightly over 5 months. The 10-year U.S. Treasury note was last up 17/32 in price to yield 1.9824 percent.

U.S. stocks managed to rebound from sharp declines, buoyed by gains in the beaten down energy and materials sector.

"These numbers are weaker than expected, but not alarmingly weak," said Brad Lipsig, senior portfolio manager at UBS Wealth Management in New York.

"The risk is that they continue on a weakening trajectory. This could mean that weakness in overseas economies is now affecting the U.S. economy."

Years of cheap central bank cash after the 2007-2008 financial crisis have supported asset prices, but recent signs of a slowdown in global economic growth, and the Fed's decision last month to postpone raising interest rates, have unnerved investors betting on a return to more normal policy. 

The weak jobs report likely pushes out the timeline for the Fed to raise interest rates for the first time in nearly a decade. Fed funds futures implied traders see nearly no chance the U.S. central bank would end its near-zero rate policy in October, according to CME Group's FedWatch program, with a hike likely to occur in March 2016.

So the initial response to the disappointing job reports had been a sell down. Apparently, the stock market realized that such bad data entailed that the FED will backed them up. This means that bad news will push back the Fed's liftoff farther down the road.

Thus, BAD NEWS is GOOD NEWS! That’s because the Fed’s monetary heroin provided by ZIRP, in support of stocks, will prevail. (add to this: Asian currencies also rallied strongly)

Nonetheless, here is what bad "job" news looks like based on Wall Street Journal’s report and charts

JOBS: 142,000

U.S. employers added a seasonally adjusted 142,000 jobs in September, well below economists’ expectations for a gain of 200,000 jobs. Payroll readings in the prior two months were also revised down by a total of 59,000. Employers added 136,000 jobs in August and 223,000 in July. The average job gain over the past three months was 167,000, a marked slowdown from the August three-month average. September marked the 60th consecutive month of job gains, the longest stretch on record.

JOBLESS RATE: 5.1%

The headline unemployment rate was unchanged at 5.1% last month, holding the jobless rate at its lowest level since April 2008. But that partly reflects a shrunken labor force. The unemployment rate is down from its peak of 10% at the end of 2009, and is just above the 5% reading recorded when the recession began in late 2007. The current rate is within the range Federal Reserve officials view as the likely long-run average.

WAGES: $25.09

Average hourly earnings of private-sector workers declined by 1 cent to $25.09 last month. That’s a 2.2% increase from a year earlier. The average work week also decreased by 0.1 hour last month, to 34.5 hours. Wages had been advancing at a modest 2% pace or barely higher during much of the expansion. Many economists blame the slow gains for lackluster consumer spending and sluggish economic growth.

LABOR-FORCE PARTICIPATION: 62.4%

The labor-force participation rate fell last month to 62.4%, after registering at 62.6% for the previous three months. The latest reading is the result of the labor force shrinking by 350,000 people last month. The participation rate—the share of the population either working or actively looking for work—has been dropping for several years and is near levels last consistently recorded in the late 1970s, a time when women were still entering the workforce in larger numbers.

Let me add the other day’s data on job cuts from Challenger, Gray & Christmas last September

From the firm’s Press Release

The third quarter ended with a surge in job cuts, as U.S.-based employers announced plans to shed 58,877 in September, a 43 percent increase from the previous month, according to a report released Thursday by global outplacement consultancy Challenger, Gray & Christmas, Inc.

The September total was third largest of the year behind July (105,696) and April (61,582). It was 93 percent higher than the 30,477 planned layoffs announced the same.

The Top 5 industries plagued by job cuts as shown above.

All these jobs data--the seeming inflection on the rate of jobs growth, declining wages, the sharp reduction of labor participation (at record), slowing gains in employment to population ratio--hardly supports a “robust” economy or even earnings growth.

Add to this last night’s August factory order report which slumped by 1.7%. The drop, according to CNBC, accounted for the largest amount in eight months, led by a drop in demand for commercial airplanes and weakness in a key category that tracks business investment spending.

Moreover, the Zero Hedge points out that: (bold italics original): For the 10th month in a row, US Factory Orders dropped year-over-year - the longest streak outside of a recession in history. Against expectations of a 1.2% decline MoM, August dropped 1.7% which is the worst MoM drop since Dec 2014, with a 24% drop MoM in defense new orders and capital goods. Most worrying however is the rise in the inventories-to-shipments ratio once again to cycle highs after a hopeful dip lower in July.

The slump in factory orders compounds on the US manufacturing conditions based on several survey conducted by the FED.

Bloomberg notes (October 1) that “America's Manufacturers Got Crushed in September” as “Seven of these surveys have been released over the course of the month, and only one, the Dallas Fed Manufacturing Index, has exceeded economists' expectations. All these regional surveys pointed to shrinking manufacturing sectors, with some prints coming in at their worst levels since the Great Recession:

The Bloomberg explains: The Empire State manufacturing index earlier this month indicated back-to-back months of contraction, with the employment sub-index and six-month forward outlook hitting multiyear lows. In part due to a market retreat in new order volumes, the Richmond Fed's Manufacturing Survey posted its lowest reading since the start of 2013. The Kansas City Fed's index has been stuck in negative territory since March, with new orders, shipments, employment, and exports all declining in September…On Wednesday, two regional indices confirmed that the pain is widespread.”

All these points to the periphery to the core in motion where emerging market troubles have now spread to affect the core (developed economies).

And a domestic periphery-to-the-core dynamic have likewise become evident in terms of job cuts, as well as on manufacturing. Job losses have now diffused to technology, retail and industrial goods.

Incidentally the Atlanta Fed abruptly chopped their projected 3Q GDP from 1.8% to just .9% as of October 1.

Why? The Atlanta FED explains (bold mine)

The GDPNow model nowcast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 0.9 percent on October 1, down from 1.8 percent on September 28. The model's nowcast for the contribution of net exports to third-quarter real GDP growth fell 0.7 percentage points to -0.9 percentage points on September 29 following the advance report on U.S. international trade in goods from the U.S. Census Bureau.

Periphery to the core.

As I wrote in February 2014: 

Even when the exposure would seem negligible, if the adverse impact of emerging markets to the US and developed economies won’t be offsetby growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages.

The above only reveals of the unsustainable divergence in motion—the seeming deterioration in the real economy relative to actions at the financial markets.

Eventually soon, divergences (internal conflicts) will be resolved as convergence.