AEP: Global recession builds

Readers will know I always take Ambrose Evans-Pritchard with a big grain of salt. But today he is onto something is an examination of the current dynamics in the global economy:

The benefit of Donald Trump’s $US1 trillion ($1.4 trillion) fiscal stimulus is fading before China comes close to touching bottom. We have hit a global vacuum.

…The 10-year German bund yield crashed below zero on Friday after IHS Markit’s gauge of manufacturing orders dropped to slump levels of 40.7, last seen in 2009. Can we now stop pretending that Germany is in rude health, briefly held back by new car standards (last September) and low water levels on the Rhine?

The eurozone has no lender of last resort. The ECB can act only in union with the bailout fund, which requires a Bundestag vote [a vote in the German parliament]. The sovereign/bank “doom loop” never left us.

…The markets are hoping the Chinese will come up with a fiscal bailout for the world. This is to court fate. China is in the grip of a combined cyclical and structural slowdown.

Capital Economics says its proxy measure of the Chinese economy points to growth of 4 per cent to 4.5 per cent over the course of 2019. Output will stabilise but there will be no roaring rebound.

Can the Fed save the day for us all? Its frantic retreat from the December policy blunder is certainly a sight to behold. The Fed has taken all rate rises off the table for 2019. Credit markets have gone a step further, pricing a rate cut this year.

…Patrick Perret-Green, from ADMacro, says the last time the Fed did such a pirouette was in late 2000 at the end of the dotcom boom, when it switched suddenly from a hawkish posture to a half a percentage point emergency cut and then another half a percentage point cut the same month.

…This time the damage from Fed tightening has been amplified by the world’s US-dollarised financial system. Rising three-month dollar Libor rates are acting as slow torture for global borrowers with $US4 trillion of debt priced off this contract.

Quite right. This is why the MB Fund is so long bonds today. The dynamic of a slowing China dragging down Europe which, in turn, sinks the EUR and boosts the USD, feeding back into more pressure on China can only be short-circuited if either the Fed cuts deeply and sinks its currency, or China hits the gas in a major way.

But China does not want to do it. And the Fed can’t move unless or until something breaks the tearaway US labour market. The only obvious candidate is the stock market which Donald Trump is doing everything in his power to juice.

It’s an accident waiting to happen.

David Llewellyn-Smith
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