by Michael Roberts
The US stock market turned volatile this week and has now erased
all the gains made up to now in 2018 in just a week or so. So much for
Trump’s boast that things for rich investors have never been better.
The fall in the US market has been matched by similar drops in the
European and Asian stock markets. The all-world index has had its worst
performance since the Euro debt crisis of 2012.
Now this fall could just be what market traders call a ‘correction’
and not a full ‘bear market’, when the prices of shares enter a long and
deep decline. But it could be that investors are beginning to fear
that the boost to profits and sales that the Trump tax cuts generated is
soon to be over, while interest rates (the cost of borrowing to invest
or buy back shares to boost prices) are rising significantly. CitiBank’s ‘global economic surprise index’ — which measures how
often data comes in better or worse than expected — has been in negative
territory since April. That is the longest sub-zero stretch in four
years.
A slowdown in growth is pretty clear in Europe, where the measures of
business activity are showing a significant drop in the pace of
expansion. The IMF in its latest report has already signalled the
coming slowdown but lowering its forecast for global growth by a couple
of notches. And within sectors, there are serious declines; the global
materials sector (manufacturing basic inputs for production) is down
20%. ECB chairman Mario Draghi said in his press conference yesterday
that there was a “weaker momentum” in Europe, but this was just
temporary and really just to do with German car sales and Italy’s
budget. Next quarter will be better.
And it is not just Europe that is slowing. China’s growth rate has
been slowing since 2014, as the government tries to reduce debt in local
authorities and industrial firms. In Q3 2018, the real GDP growth rate
slowed to 6.5 per cent, the slowest reading since the 2009 post-crisis
nadir. Falling profitability and the trade war with the US is beginning
to have some effect.
And South Korea also appears to be slowing down with Q3 real GDP
growth of 2% being the slowest expansion rate in nine years. Investment
dropped 6.5%. However, unlike the rest of the world, the US economy still looks
better. The latest business activity surveys showed steady expansion.
And globally, the price of copper – a good leading indicator of global activity – remains above the ‘recession’ level it fell to in the growth trough of 2015-6.
However, investors are beginning to fret that the corporate profits
growth seen earlier this year is as good as it will get, given rising
wage costs, interest bills and materials prices. Moreover, the impact of
the 2018 tax cut will make this year’s results hard to beat in 2019.
The third-quarter results of 3M and Caterpillar, two US industrial
bellwethers that reported last Tuesday, feed this concern. 3M cut its
earnings forecasts. While Caterpillar’s profits beat forecasts, its
warnings of rising materials costs rattled investors.
The US may have reached a new trade agreement with Mexico and Canada
to replace the Nafta deal reviled by President Trump, but Washington
remains at loggerheads with China, slapping $250bn of tariffs on Chinese
goods and demanding sweeping changes to the country’s economic
policies. After occasional hints of a thaw, the imbroglio appears to
have reached an impasse. If there is no progress in the coming weeks,
the Trump administration is expected to introduce another $200bn worth
of tariffs — perhaps sanctioning all Chinese imports.
And investors remain on edge about the impact of rising interest
rates on both fixed-income and equity markets. The Federal Reserve is
expected to lift rates for a fourth time this year in December, and is
slowly but surely shrinking its balance sheet, which has been stuffed
with bonds acquired when combating the financial crisis. Former Fed
chair Janet Yellen sounded a warning that the planned hikes could cause a
new financial bust as many companies have taken out what are called
‘leveraged loans’ which are subject to sharp changes in interest rates.
Yellen commented that “If we have a downturn in the economy, there
are a lot of firms that will go bankrupt, I think because of this debt.
That would probably worsen a downturn.” Indeed, it is estimated
that nearly 20% of US firms are already finding the cost of servicing
their debt greater than the earnings to cover it.
Yellen also pointed out what current Fed Chair Powell has observed,
that it was not clear what the appropriate Fed policy interest rate
should be to ensure full employment and moderate inflation; there was “genuine uncertainty”. In other words, the Fed has no idea what it was doing in raising interest rates.
Other central banks are also trying to ‘normalise’ monetary policy
and turn off the money flow. The European Central Bank plans to end its
own bond-buying by the end of the year, and even the Bank of Japan is
easing back on its monetary pedal. The net effect of this is what
investors have dubbed “quantitative tightening”, a sea change in the global monetary environment since the financial crisis that bodes ill for markets in 2019.
Back at the beginning of October I wrote
that if the Fed is wrong and the productive sectors of the US economy
do not resume ‘normal growth’ (the average real GDP growth rate since
1945 has been 3.3% – so growth is not back there yet), the rising costs
of servicing corporate and consumer debt could lead to a new
downturn. The first estimates of real GDP growth figures for the US in
the third quarter to September are out tomorrow.
Most important, corporate profits, after a stellar two quarters are
beginning to fall back. If you strip out financial sector profits, then
corporate profits are still below levels of 2014, even after Trump’s
tax boost. And in the productive sectors of the economy, like
manufacturing, they are falling quite sharply – as measured per
employee.
The stock market is not always a harbinger of what happens in the ‘real’ economy, but it may be this time.
If you have opinions about the subject matter of posts on this blog please share them. Do you have a story about how the system affects you at work school or home, or just in general? This is a place to share it.
4 comments:
just thought i'd tell you guys your website is being "throttled" by google
i used to type in "weknowwhatsup" and it would come right up. Now not at all
so i had to remember the actual blog name and i did so i typed in "factsforworkingpeople" and the search was, not sure the right term, but it wouldn't complete until fully typed and then it showed up.
just fyi
Thanks for the info. I type in weknowwhatsup and it comes right up but is that because I am one of the owners? What can we do about it anyway?
Anonymous thank you for this information. If we can tie down what exactly they are doing we could launch a campaign on the Internet to expose them and perhaps make them back off. Your experience could explain why there has been somewhat of a reduction of views on the Blog in the last couple of weeks. Thank you for the help and hopefully you and others reading this and whom are more tech savvy can come up with suggestions and raise the issue and try and get google to back off what it is that is happening. Sean O'Torain.
Yes we've had a significant drop in readership or numbers anyway by over 50% the last couple of weeks. This would be connected to what you say I suppose. I wonder how hard it is to move a blog to wordpress. It's pointless contacting Google.
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