All signs point to a global economic crisis (Davos meeting)
All signs point to a global economic crisis
The first three weeks of 2016 began with a cold shower for the financial market participants. It was the worst start of the year for decades, although last Friday a significant recovery took place. A good omen for the whole year, this is not. What's behind it? Diagnosis: A recession in the suit - and emerging markets crisis.
The American stock market showed last year a split image. Many sectors and titles were already in a severe bear, but the indexes were upheld by fewer and fewer titles. Especially the four CATCH-Title Facebook, Amazon, Netflix and Google (Alphabet) showed extremely strong gains and could support the market due to its high capitalization. These four titles show all the signs of a violent overvaluation. Amazon was valued at year-end with a price / earnings ratio of about 300, the other three titles in the order of 60 to 90. Amazon is not noticed in the past, with a particularly high earnings momentum. The aggregate corporate profits of listed companies in the US have been declining for several quarters, mainly due to the strong dollar and the drastic drop in profits in the energy and mining sector.
The strong dollar suppressed when converting the profits of foreign subsidiaries of corporations international, and proposes partly on the profits of exporting companies. Various leading indicators point to a further weakening of the economy, especially in the industry in the USA. Too high a rating, with clear signs of a bubble and a slowdown in earnings momentum is the first reason for the stock market weakness.
But above all, raised the Fed in mid-December at virtually illiquid markets, the Fed Funds target rate by a quarter percentage point to 0.25%, pointing to a further four rate hikes in the current year. The initial interest rate hike was expected, but the promised additional quarterly repricing but explicitly rather surprising. Over the holidays, this had no effect, but delayed just now. The announced further monetary tightening by the US Federal Bank is the second important reason for the stock market slump.
Two other negative points were added. In China the approach of the authorities aroused little confidence, neither the equity nor the foreign exchange market. The SEC led to the beginning of an a Stabilisation Mechanism for the stock market, which itself was in the very first days of the year for the cause of a renewed price fall. The Chinese stock market itself is overrated hopelessly at today's levels, with a price-earnings ratio of more than 60. In addition, the heavyweights in the index state companies with negative earnings momentum - or more correctly - potential loss of momentum and little hope or prospect of improvement in medium to long period. In order to support the offshore exchange rate of the yuan, the Chinese authorities raised the overnight lending rate in Hong Kong up to 80%, which promptly caused a crisis in the interbank market and the stock market in Hong Kong. The confused, ill-conceived and communicated market intervention by the Chinese authorities sparked fears of a possible hard landing for the Chinese economy and a yuan devaluation. This is the third reason for the stock market slump.
In addition, the oil price came under pressure again violently and fell to Wednesday, January 20 at $ 30 to $ 26 per barrel for WTI and Brent. The actual prices paid are even lower. Saudi Arabia and other countries offer their crude oil at a discount up to 4 dollars per barrel for the reference variety. A battle for market share is kindled in Asia and in Europe. The fundamental factors remain negative: rising and record high storage and production, exacerbated by the re-entry of Iran after the lifting of sanctions as well as the lifting of the export ban on American crude oil. What has changed, is the prospect of a severe winter weather in the northeastern United States. It will increase the demand for oil abruptly. The mild winter had previously worked really oppressive.
As such, consolidates a fall in oil prices, the economy in the US and - mitigated by the effect of high fuel duty and VAT - in Europe. But the negative effects on the economy are the course opposite, and this time the net effects are negative: The demand of the oil-producing countries will be in 2016, unlike 2015 compressed dramatically. Many oil and other commodities producing Emerging markets are heavily in debt, in the boom years of a secondary credit-financed boom in the domestic economy have had. Your ability to service debt is brought by the fall in oil prices and by the dollar appreciation in arg problems. This interdependency is the fourth reason for the stock market slump.
The recovery at the end of the week is mainly due to hopes for further monetary stimulus. ECB President Draghi assured the distressed globalization elite in Davos that the ECB would have a lot of instruments at its disposal in order to return inflation to its target level - in the face of negative interest rates in the money market and well into the longer maturities of bond yields into a somewhat daring assertion. A high volatility with sharp corrections is typical of such phases of a stock market crash.
A survey of the internals of the stock markets from a longer perspective, it is noticeable that the classic cyclical stocks groups are in free fall since 2014 and, since June 2015th Since the summer of 2015, there are the financial values, first and foremost, the banks, the cyclical consumer stocks such as automakers or the producers of luxury consumer goods. Since 2014 already, the material values, mining and energy stocks had suffered huge slumps. On a relative basis well keep defensive stocks such as pharmaceuticals groups, Telecom, Utilities and Consumer Staples stack, even if they had to leave feathers considerably now. Looking at the relative performance of various title groups, one can not avoid the statement that the stock market is a striking slowdown, maybe even anticipating a recession. Not the classic image fits so far the development of technology-title. You keep exceptionally well for such a phase, at least as measured by the experience of 2000 or 2007/08. In this regard, I have to correct myself. I had all dies1 predicted in detail, but the catch-titles as well as SAP is not in sight.
This perception of a looming striking slowdown in growth on the border of recession is also reflected in the bond market again. Since mid-2015, the high-yield sector - the junk bonds - in a bear market is akzelerierenden. Yields in these corporate bonds and leveraged loans (leveraged loans) are rising sharply. When energy segment they have reached the historic high of of 2009. In the other market segments, the risk premiums likewise from wide swiftly, but are still far removed from the former highs, just like the Yields on bonds with investment grade. The rise in risk premiums signaled in other words, the same as the stock market, a catastrophic deterioration in sectoral energy and mining area, and a marked slowdown in growth for the rest of the market.
Expands to the perspective of the financial markets of OECD countries also to the emerging economies of the picture is even less encouraging. There is a bad crash in the suit, which covers the equity and currency markets. The currencies of major emerging economies have gone into a free fall, foremost of just been released Argentine peso, the South African rand and the Russian ruble. This in turn sets the currencies of other, economically linked to these States countries under pressure, ie about the Brazilian Real. Major stock markets like in Brazil or Hong Kong are under severe pressure. The forward rates in several currencies such as the Hong Kong dollar or the Saudi Riyal signal that the fixed rate is on the line. The winners are not only the dollar but also the euro and especially the yen in the currency. Many carry trades in yen have been resolved, so that the Japanese stock market suffered a massive slump because of the accelerated yen appreciation.
This combination of factors that led to the fall is not going to just go away. However, the individual factors do not affect the period of time equal to about. Some will disappear, others even intensify.
The first rate hike announcement accompanying the Fed further four rate hikes in 2016 must be described as miserable. You should eliminate uncertainty, but has strengthened immediately and abruptly the expectation of further dollar appreciation in the real world. Therefore, the pressure on the Chinese yuan, as well as in the currencies of other emerging economies. In reality, the Fed will probably not make the four rate hikes. The tightening of monetary policy, in this communication rather about the exchange rate and - continued over the deterioration of conditions in the credit markets - as a result of impact. The US Federal Reserve has committed a series of policy mistakes-in the past few years. She has held too long at the zero interest rate policy and its effects exacerbated by quantitative easing. Not only the short, but also the long returns were so compressed. Then a long theater to the abandonment of the zero interest rate policy and for the first rate hike, and finally equal to the announcement of five rate hikes. This could have been done also skilful.
In this context, it must be pointed to the missed, newly introduced exchange rate regime of the yuan. This regime corresponds to a requirement of the International Monetary Fund. China was the access to the illustrious club represented in the currency basket of Special Drawing Rights currency granted only if the country targeted the international capital mobility and a floating exchange rate. But this demand is completely counterproductive for China and globally:
China is structurally a surplus country in the current account, and a country with a net inflow of direct investment. No other big country benefited as the fall in commodity prices since mid-2014 as China, its terms of trade in foreign trade (eng. Terms of trade) to improve thereby massively. China is the workshop of the world, imported raw materials and semi-finished and assembled, manufactures and exports them. The following graph shows the monthly trade surplus from January 2010 to December 2015 and with the blue line reflects the original values that meaningful red line shows the seasonally adjusted values. The seasonally adjusted monthly surpluses have swelled from around 15 to 20 billion USD until summer of 2014 to USD 50 billion. So you have risen by 150% since the summer 2014th With the fall in commodity prices in the second half of 2015. They are expected in 2016 delayed further to between 60 and 70 billion USD to rise. But this is not all: In China since the devaluation of the yuan there in August 2015, capital flight at the latest. The company is the simplest form of the overbilling in the import and export under-invoicing. An additional portion of net exports is expected to be landed as easy in Hong Kong or in Singapore at a holding company or intermediate trading company or offshore accounts elsewhere.
The balances of the current account are dominated by China in the trade balance. This means that the current account surpluses since mid-2014 significantly swell again. For 2015, there are only data on the trade balance, but not those of the current account. 2016 expected trade and current account surpluses to rise again in order of magnitude as in 2006 to 2008 because the imports cheapen dramatically and begin to benefit from the devaluation of the exports. By just the biggest surplus country in the global economy against the dollar, the euro and the yen depreciates and falls into a devaluation, this country exported its internal overcapacity as global deflation. China today has industrial producer prices, which consistently fall by 6% yoy for a year. In individual industrial products, the decline was 20-30%. There are also the effects of continued devaluation, the OECD area is faced with a massive deflationary shock in foreign trade. The hope of an industrial revival in the US, for years an issue due to the relatively lower energy prices, is now gone. Even in Europe and Japan exports cheaper Chinese industrial products is first decimating core sectors in industrial production chain such as steel or aluminum industry, metal industry, basic chemicals and others. In the longer term are also mechanical and plant engineering and not-too-when Apple and Google can cost in distance their cars in China manufacture of Taiwanese and Chinese contract manufacturers, destroy the auto industry in the old industrial countries.
Source: National Statistical Office China
A second direct effect is that it crashes the currencies of other Asian countries and indirectly those of the other emerging markets in a downward spiral. These countries have industrial capacity, and their products at reduced prices can have on the world market. Global deflation is thereby enhanced.
Conversely throttles the crash all these currencies, imports of these countries and thus to export from the United States, from Europe and Japan. The industries of these countries and economic areas are also decimated.
All this contributes to the fact that the credit risk to rise in emerging markets and will explode in exposed cases. The private sector is in debt historically high, and this is not just in foreign currencies, almost exclusively in US dollars. Indirectly therefore the banks, particularly in Europe, but also in the US will be taken. You will need to make high copyists. Your equity is reduced thereby limit their capacity to lend domestically.
The decoupling of the yuan from its depreciation and against the dollar have triggered or intensified a global devaluation spiral. These are powerful global deflation and destruction mechanisms. They are industries, jobs, nominal income, bank balance sheets and all the industrial and economic regions in Europe, destroying in the US and in Japan and lead to a global viewpoint, beggar thy neighbor 'policy in the style of the 1930s into it. The newly introduced exchange rate regime of China is a destabilizer of the world economy par excellence. If experts and global analysts China put a further devaluation of the yuan by 10 to 15% close to solve its problems, this reflects a fundamental misunderstanding of the inherent interdependencies and risks.
These points deserve to be executed anything. China has since 1998, still had massively increased since 2009 to peak in 2013 a credit-financed boom in construction and real estate sector as the peripheral euro-zone countries between 1995 and 2007. These countries have invested far too much in new homes where they are not needed, in infrastructures that were built double and triple, in projects that enriched the local, regional and national elites, but never be able to generate an economic income. China is the same in green, no gray: Because the country has its poisonous carbon emitting industries and coal power plants being built in an unfavorable position around the huge faceless monsters cities around. In China stand empty around 70 million homes, not in Beijing or Shanghai or other tier 1 cities on the coast, but especially in far too quickly grown Tier 2 to Tier 4 cities in the interior. Real estate developers, provinces, regions, cities, the large state-owned companies in the infrastructure and the supply sector are under enormous pressure and partly to insolvency.
The banks and shadow banks in the country have aligned their loans to these customer segments out. Therefore, they are caught by a wave is not serviced and bad loans. To date, the banks make do with the fact that they extend existing loans, roll over, give new loans to pay the interest on the old can, Pretend and Extend 'as first in the peripheral countries. Meanwhile, companies outside of those segments increasingly difficult to obtain credit. Here it would be important for the transformation of the growth model from export and investment towards services and consumption.
The reasons for the exodus of capital are numerous: Transport policy in the major cities is much too focused on large highways as feeders, which are constantly blocked. The soot, the exhaust gases poison the population. Another reason why the desire for physical change of air. The party leadership has also proclaimed a fierce battle against corruption and personal enrichment of Party cadres. No one can be sure that it is not detected. Several billionaires are already on, discussions' with the person in charge has been taken, and some not resurfaced. The depositors with their bank accounts, and investors in, Wealth Management 'products are concerned and rightly so. Furthermore, the crash in the stock market indicates that the party leadership has lost control. Investor confidence is gone. In a Price to Earnings / ratio of about 60 and miserable prospects for the mostly state-owned enterprises listed is another very sharp decline probably inevitable. Experience has shown that then comes the yuan under pressure.
No wonder then want including party cadres at all levels to create their money abroad wealthy Chinese. Chinese companies and foreign multinationals anyway, as long as they can. In order to stabilize the shaky banking sector and avoid a collapse, the Chinese central bank will have to cut interest rates aggressively, which will increase the pressure on the yuan to increase. With the transition from fixed exchange rate to a floating exchange rate, the IMF and China have opened a Pandora's box. A fixed exchange rate is a lot easier to defend as a flexible, especially when a country like China had foreign exchange reserves of 3500 billion US dollars. The initial administered devaluation devaluation expectations and the desire for global diversification of investments in domestic companies and wealthy Chinese people have been awakened.
Since August, the currency has depreciated by around 6% against the dollar. No wonder there is in this environment a flight of capital abroad, or simply the desire for currency diversification. The pressure on the yuan does not come from the trade and current account, but of financing the balance. In this environment impose a liberalization of capital movements, and other market reforms, and more flexible exchange rate still is a recipe for a perfect storm. This will accelerate the capital flight yet. The old industrial countries would have to pay him with a tsunami, which smashed many of their industries and value chains.
In this context, provide but a few questions about the managerial staff at the IMF. The IMF has advised China in this matter and urged in this solution or even forced into. The managing director Christine Lagarde is seen from the marketing of their self and led by their institution establishes a gifted actress. She has again proved elegant in Davos. From in substance imposed by the IMF solution is a disaster for the world economy, including the industry in Germany. Therefore, it is strange that Mrs Lagarde is apparently ported to press reports by the governments of industrialized countries Germany, France, United Kingdom for a second term as IMF chief. An old proverb says: "Only the stupidest calves choose their butcher yourself." Ms. Lagarde and former chief economist Blanchard will appear not only in the case of China in any too good light. Under both lead the IMF has already sent a wrong levied balance of payments statistics and with a cross false analysis of current account balances and the consequent policy of indirect devaluation of the peripheral countries a part of Europe into a downward spiral with no end. Masochism in the political leadership of Europe apparently knows no bounds. Now the whole thing is to be repeated again at a global level. Note: This is about the core interests of the German economy. And it's about being or non-being of many export-oriented medium-sized companies and self-established large companies.
The following graph illustrates, in what a Herculean task, the leadership in China and Instititutionen as the IMF are available. It shows the per capita consumption of cement of different countries for long periods. The per capita consumption of concrete is a good proxy indicator of construction activity, and indirectly the Bauinvestitionsquote. The peripheral countries of the euro zone recorded a huge increase between 1995 and 2007. Only a few countries have installed per capita in history the more than one ton of cement. Saudi Arabia and Dubai belong to this exclusive club. In yet other dimensions contrast, construction activity in China has risen. The graph also shows where the peripheral euro zone countries have landed after the climax. Here, too, the International Monetary Fund has played a key role. Is the 'success' of this policy, a reference for a second term, in the handling of the crisis in China and its potentially earth-shaking shockwaves of the global economy will be the focus?
The switch from an exaggerated investment boom is extremely difficult and historically almost nowhere succeeded. But if such a simple mistake such as the exchange rate regime of China be made, it's impossible. The country with the largest foreign trade in the world and skyrocketing surpluses in the trade and current account followed a devaluation strategy to boost the domestic overcapacity and deflation around the world. Without prejudging want, but the world will have to pay this experiment with a second term Ms. Lagarde with a global Greece '. Here nothing is said against Ms. Lagarde as a person, but very well against the attributable to the end of their policy.
The world is not doomed to watch the serious failures of the Chinese leadership and the IMF stand by. Without a full stop but the cold shower is expected to proceed to the beginning without any longer interruptions in a ice hail on the financial markets.