Both Economically and Politically
Stock markets are crashing around the world, as I write this. China is cited as the culprit — or at least the catalyst. Some $10 trillion has evaporated from the global stock market since a June peak. The DJIA, S&P 500 and Nasdaq indexes continue to drop, now moving beyond 10 percent from that peak, which puts them into correction territory (it takes a 20 percent drop to be defined as a bear market).
And a few minutes following the opening bell of the NYSE on 8/24/15, the Dow lost 1089 points, which has not experienced such a steep loss since October 2008. And it will be the first time in the history of the Dow that it will have dropped a total of 1500 points in three consecutive days.
Then, on the very next day, with the futures up over 200 points, some trader (most likely) flippantly labelled it “Turnaround Tuesday” following “Black Monday.” Well, the Dow did claw its way back some 400 points during the day, only to close down over 200 points. A turnaround? It’s more like traders working the day’s volatility to make a few quick bucks. The real story was that the market smells further instability as events unfold in the real global economy, with an eye on China. So, while you are reading this blog, the gamblers might be inflating the market again, but I’ll bet on yet another lower closing. So do not expect the bulls to come charging back again, to gin up the market. Any gains will be nothing more than “hail Mary passes.” This time is different. Read the following and deal with an unsettling economic reality.
China’s Largely Opaque and Schizoid Economy
China accounts for 15 percent of global output and close to half its growth, so when its economy starts looking like an unraveling yo-yo, it’s a real scary thing. When they sneeze, the world catches a cold. While China’s withering economy and its devaluation of the Yuan may have been the catalyst for the bears lumbering out around the world, these bears also know that China manipulates its economy which might very well be growing at only half the rate they claim. Their long term strategy to shift from a manufacturing- to a consumption-driven economy is just that, a long and complex reshaping of millions of moving parts, particularly tough in a culture that favors saving over spending. In the meantime, the global stock market’s retreat has been exacerbated by a measure of China’s manufacturing activity, which was reported it at its lowest level in six years.
The day following the crash, China did rush to lower interest rates and reduce the reserve requirements of its big state-owned banks. In turn, the theory is that the banks will loosen credit to juice consumption growth. One of the real risks is that the banks will seek low hanging and more profitable short-term fruit, which is the target of real estate or manufacturing investment opportunities, both of which are already in way over-capacity mode. This works against the government’s long-term goal of shifting to a consumption economy.
Elsewhere around the world, China’s emerging BRICS brethren (Brazil, Russia, India and South Africa) are also stuck in the mud. Europe is still just slogging along, and Japan slips in and out of deflation hell on a regular basis.
China Was Just the Catalyst
The Real USA Economy Is Ugly
During the historic bull market run of the past six years, anybody with a modicum of brainpower knew it was not an accurate gauge of the health of the real U.S. economy. It was simply the result of \”casino\” oriented traders betting with free money (ultimately insured by taxpayers), on expectations of infinite growth, which of course, is impossible and unsustainable. Accordingly, the gambling frenzy drove average price-to-earnings ratios to levels that distorted reality, awarding companies valuations based on hope for the future; a future that until now, has been viewed through rose-colored glasses.
So I would say over those years we overlooked assessing the health of the real economy based on the rise of the stock market. Not this time. This stock market correction, which could very well turn into a bear market, is not just an acknowledgement of real economic conditions around the globe. I believe it is actually the harbinger of things getting worse before they get better.
This time is different.
Economic growth is at its lowest point in three decades with wages rising at the slowest pace since the 1980s. This fact flies in the face of most economists’ observations that the bigger the recession, the bigger the comeback — the old V-shaped recovery theory, steep down and steep up. Yet this has been the weakest recovery since WWII, and has only benefitted the wealthiest 1 percent. And as many economists point out, if we follow the typical eight-year cycle of recessions, we are certainly not prepared for the next one — which looks like it could be now. After creating trillions of dollars of essentially free money, and maintaining a near zero interest rate following the recession, the Fed would appear to be weaponless if another crash ensues. Of course, the supposed silver bullet of shoveling free cash into the economy under the assumption it would be used to invest in growth has sure turned out to be an erroneous bet, hasn’t it? Our casino traders used it to double down on stocks, driving the market into the stratosphere for the last six years. No real economic growth has come from this folly.
The Fed follows the Phillips Curve theory, which claims that falling unemployment pushes up prices and wages, requiring tighter credit to keep inflation in check. Unemployment has fallen, prices and wages have not increased, but the stock market did. This time is different.
Through both Bernanke’s and now Yellen’s tenure, the Fed has been consistently wrong in its projections. That’s scary. So if the Fed raises the rate in September, once again reading the wrong tea leaves, it could tip us into a recession, or worse.
Hey, let’s not just blame the Fed and the traders for pumping air into a flat tire with no results. Our corporations are equally complicit in creating a false sense of growth, adding to the bubbles filled only with hope. Understanding that there is no real organic demand growth, cutting costs and discounting become weapons of necessity. And cost cutting is a partner to not investing in new production or services or adding to the workforce. And the cuts certainly don’t favor wage increases. Cost cutting also paves the way to acquiring growth, (M&A), but that doesn\’t necessarily add to overall economic growth. And oh yes, a correlate to this mess, productivity is way down. No money, no demand, no consumption, therefore no productivity.
At the end of the day (and I\’m getting blue in the face), add uncertainty and anxiety about a future when consumers have more than they need and are overwhelmed by even more of what they don\’t need. So what do you get? The answer is the opposite of inflation.
The Gas Price Bonus is an Empty Tank
Now at below $40 a barrel, and with the U.S. continuing to add to the oversupply, along with Iran soon to be rolling more barrels into the global market, experts predict the price could reach lower numbers. Economists claim that the savings for consumers at the gas pumps will become what they call a “gas bonus.” They will spend these savings in other areas of the economy, thus generating growth.
“The Robin Report” proved this correlation to be false … period. The quantitative analysis of this ratio can be reviewed in the article Memo from the Grinch: The Gas Price “Bonus” is an Empty Tank. Furthermore, in this period of high anxiety, gas savings will likely remain just that: savings.
Enter From Stage Right: Donald Trump
Enter From Stage Left: Bernie Sanders
Enter the politicians from stage right and left, literally. There should be no question as to why Trump continues to lead the Republican pack and why both he and Bernie Sanders draw thousands of just-plain-folks with their anger against the government (as well as Big Money) for allowing the economic lives of most of them to be horrible, and their fear of the future if we elect more of the same-old, same- old. This is the reactionary fuel that keeps on giving us Trump in the lead and may very well turn Bernie into a serious contender. They are so convincing to so many people as saviors. And while a humble Bernie Sanders represses such an opinion of himself, The Donald seems to believe that not only is he a savior, but a deserving “King,” capable of commanding the direction of our lives and our country. Now that is scary and dangerous.
We have all said it is impossible for either Bernie or Donald to be nominated. We are now saying, hey, not so sure, they may be contenders. This time is indeed, different.
What About Retailing?
Finally, in our own little world of retailing, is it surprising that the entire sector is barely surviving? My message, as it has been for years: bite the bullet, downsize (or right-size) into reality, and adjust to relative demand. Then you can hope to make a nice living. Tell Wall Street to take a hike on their demands for infinite growth. Nothing is forever.
Yes, this time is different. It really is.