Somebody is going to be wrong….

Thursday, 27th September 2018

Somebody is going to be wrong….

Last week we reported how various ‘expert’ prognosticators are forecasting doom and gloom not so very far down the road ahead….

Gordon ‘Goldfinger’ Brown, ‘Miserable’ Mark Carney, Moody’s, the British Chamber of Commerce and various economists, all of whom make their living telling the rest of us how things are going to be, were shaking their heads darkly and furrowing their brows….

The consensus is that, all being well, the next global financial crisis will come chugging down the High Street – with all the reliability of a London bus – some time in 2020….

Make a note in your diary. It’s sure to be amusing, interesting or potentially catastrophic – depending on your circumstances….

  • Worse than the Great Depression….

More experts have been out on maneuvers this week – getting in on the act, speaking to the newspapers or talking out of television sets at folk eating their evening meal….

Economic Commentator, Peter Schiff, for example. He said this to the New York Post….

‘We won’t be able to call it a recession, it’s going to be worse than the Great Depression….’

The soundbite kind of skates over the detail….

For context we need to remind ourselves of how bad the Great Depression that ran from 1929 until the late 1930s really was….

International trade plunged more than 50%. In America, unemployment rose to 25%. In other countries, that figure ran as high as 36%….

All over the globe, jobs were lost, personal incomes fell, tax revenues fell, profits and asset prices fell….

Businesses and individuals defaulted on loans. Thousands of businesses went broke….

Tens of thousands of people lost their homes. Banks failed. Many lost everything they had. Homelessness was common. So too absolute poverty. Many went hungry….

The Great Depression was a period characterized by devastation, hopelessness and misery. Ask anybody who went through it. Few would want to relive it….

Schiff says it’s going to be worse this time around….

  • Apocalypse soon….

Murray Gunn, head of global research at Elliott Wave International, is another guy with an apocalyptic vision of the immediate global economic future….

‘We think the major economies are on the cusp of this turning into the worst recession we have seen in 10 years…. Should the [US] economy start to shrink, and our analysis suggests that it will, the high nominal levels of debt will instantly become a very big issue.’ 

Gunn is talking about America. But don’t worry. If the wind changes direction there, we will soon feel the chill here. And things will go wrong….

Household debt in America is around $13.3 trillion – easily outstripping the figure ahead of the last global crisis in 2008. Mortgage lending is close to 2008 levels at $9 trillion. Student loans are double what they were a decade ago. Vehicle finance outstrips the 2008 figure. Credit card balances today are like for like with those of 2008….

Global figures provide the overall perspective. World debt is now $247 trillion compared to $177 trillion in 2008. In other words, the world has added 40% to the overall debt pile over the last decade….

In a global economic downturn, money that is due to be paid back will not materialize. That’s when the problems will start to unwind….

Gunn suggests that anybody looking for central bank bailouts to work the same magic they did in 2008 is liable to be disappointed….

‘People will look to central banks to help them out, but the authorities will be found wanting…. Our prediction is that central banks will go from being feted for “saving the world” in 2008 to being vilified for being impotent in the coming deflationary crash.’

  • Global growth has peaked….

Meanwhile, the Organization for Economic Cooperation and Development (OECD) adds season to the pot by coming out and warning that global economic growth has peaked with perfect or imperfect timing (depending on how you look at these things)….

The OECD reckons the outlook for this year and next year has deteriorated from what it had predicted as recently as May….

The economic think tank has cut its 2018 global growth forecast by 0.1%…

It’s 2019 forecast has been cut by 0.3%….

Britain has had its growth forecasts downgraded. So too France and Germany….

  • Stock markets continue to fly high….

Meanwhile the stock markets continue to fly high….

Investors don’t appear to be paying any attention to the economic backdrop of doom and gloom that you might reasonably expect to be priced into the market….

If they are paying attention, then they are patently ignoring what they see and hear….

Last week, America’s main stock indexes hit new highs. The new highs meant the Dow had risen by 7.8% since the start of the year. The S&P 500 had added 9.6%….

This bull market in US stocks has been running for a decade now. The bulls expect it to keep on going like the rabbit fitted with Duracell batteries….

The FTSE All-World Index reveals that global stocks (taken as a whole) haven’t quite managed to run on in the manner of US stock valuations….

But they are not so very far off all-time highs and are still a long way ahead of long-term medians….

It’s a similar story closer to home where the FTSE 100 and the FTSE 250 sit a little way off their all-time high-water marks – but still plenty high-enough….

  • On the verge of learning something new?

Bears sound smart but bulls make money. That’s what they say. And maybe there is something in that. The bulls are making money right now….

But somebody is going to be wrong in this scenario that continues to develop day-by-day. There is nothing more certain than that….

The doom and gloom predicted on the road ahead AND a continuing bull market in stocks cannot exist side-by-side simultaneously….

The economy cannot go backwards into recession or depression whilst the market continues its upward trajectory – as if nothing is wrong….

Or maybe it can? Maybe everything we thought we knew is wrong….

Maybe things have changed. This is 2018 – 10-years on  from when the central banks saved the world….

Maybe we are on the verge of seeing and learning something entirely new and astonishing….

  • On the verge of learning something new?

Maybe the doom and gloom prognosticators have got it all mixed up. Maybe their expertise is so way off-beam they can’t see the wood for the trees….

Maybe they don’t see things as they really are. Maybe they never really understood as much as we gave them credit for in the first place….

Maybe their expertise is bogus. Maybe they are just winging it – hoping to grab some headlines and a meal ticket. Maybe they are just misinterpreting current data….

Perhaps the market – investors with actual skin in the game – is smarter and sees something different to what the experts see on the road ahead….

Maybe the market sees a future in which stock prices are completely disconnected from the performance of the individual companies they value and the economy those companies must operate in….

Or maybe the bulls are engaged in a dangerous game of brinkmanship – hoping to squeeze out as much from the bull market as possible before exiting just at the right time – ahead of what’s coming down the pike. Good luck with that….

Or maybe stock markets have just become so complacent – so used to the good times – that they no longer see bad times, corrections or outright market crashes as a possibility….

Maybe investors have become so complacent that they see the red flags waving but have somehow forgotten what they mean and what they warn against. Maybe they have become so complacent that they dive into the boiling sea anyway – riptide running strong or not….

That’s how it looks from here….

All the best,

Money Truths