Categories: world

The state economy 17: Are we heading for a global recession?

(Source: imgflip) Please note that due to read requests, I have decided to break up my weekly portlet updates in three parts: comment, financial update, watchlists / best stock to buy now. This is to avoid too long articles and maximize the tool for my readers. This week's comment explains why you should ignore stock prices and focus on three more important things instead. Introduction Please note that I offer these weekly financial updates only because I believe investors should always take a holistic view of the "big image view" of the world. This means that you are familiar with the economy and what the short-term and medium-term recession is likely to be. However, as I will explain later in this article (the recession rate section), macroeconomic analysis has historically proved to be a terrible tool for the stock market (SPY) (QIA). Therefore, I only offer these analyzes so that readers are likely to see a recession that lasts about a year or so. It will hopefully give you time to prepare yourself emotionally and economically for the decline. It will also hopefully allow you to adjust your portfolio's capital allocation to a more defensive approach, for example with defensive sectors or potentially larger allocation to bonds (for lower risk tolerant investors). Growing global economic downturn … [19659008] On Friday, the market was once shocked by slower global growth, this time from China. It shipped shares down to a new correction low, 11.3% from its September 20 record high. [Source:…

(Source: imgflip)

Please note that due to read requests, I have decided to break up my weekly portlet updates in three parts: comment, financial update, watchlists / best stock to buy now. This is to avoid too long articles and maximize the tool for my readers.

This week’s comment explains why you should ignore stock prices and focus on three more important things instead.

Introduction

Please note that I offer these weekly financial updates only because I believe investors should always take a holistic view of the “big image view” of the world. This means that you are familiar with the economy and what the short-term and medium-term recession is likely to be. However, as I will explain later in this article (the recession rate section), macroeconomic analysis has historically proved to be a terrible tool for the stock market (SPY) (QIA). Therefore, I only offer these analyzes so that readers are likely to see a recession that lasts about a year or so.

It will hopefully give you time to prepare yourself emotionally and economically for the decline. It will also hopefully allow you to adjust your portfolio’s capital allocation to a more defensive approach, for example with defensive sectors or potentially larger allocation to bonds (for lower risk tolerant investors).

Growing global economic downturn … [19659008] On Friday, the market was once shocked by slower global growth, this time from China. It shipped shares down to a new correction low, 11.3% from its September 20 record high.

[Source: Advisor Perspective]

According to recent economic data, retail sales rose in November at the weakest rate since 2003. Worse than, industrial output rose with the slowest level of almost three years, indicating that trade war with the United States really starts to bite. In fact, China’s manufacturing sector is now on the verge of contract and its weakest since June 2016.

(Source: Bloomberg) – Over 50 Indicates Growth

At the same time, news from Europe is also bad. According to Reuters, “the EU is expanding at the shortest pace of over four years as new order growth, all but dried, damaged by trade tensions and violent protests in France.”

And in Germany, Europe’s economic growth engine, GDP growth in Q3 has fallen by 0.2% QoQ, but was still up 1.1% YoY. This is the first negative QoQ quarter since 2015.

“The weak decline in GDP compared with the previous quarter was mainly due to developments in foreign trade: preliminary estimates show that there was less exports but more imports in the third quarter than in the second quarter. “- Destati’s office

At the same time, Brexit continues to be a hot mess, with the British contest to arrive at any kind of trade department before it officially leaves the EU on March 29.

Japan is also continuing to struggle to curb a recession. After QoQ GDP decreased during the first quarter, the country reached -1.2% QoQ growth in Q3. It was below already bearish expectations of -1.0% growth.

And with US economic growth forecasts that are now falling steadily and the IMF is lowering its forecast for global growth next year, many investors are worried that a global trade war can tip the world into a recession. But the good news is that while global growth is actually slowing down, the fear of a global recession is largely overblown.

… is very overblown

Firstly, it should be noted that the very risks we are concerned about, primarily the slowdown of the trade war, are likely to risk self-limiting. For example, thanks to China’s economic growth rate already falling due to the government’s attempt to refrain from excessive dependency on debt and a labor force that has fallen since 2014 (because of the single child policy that is now turned off but too late to help) China makes strong takeovers in trade negotiations, including announcing plans to

  • postpone higher $ 126 billion taxes in US imports that will come into force on January 1, 19659020, purchase as much as 3 million tons of US corn so early as in January
  • Reduction of US car taxes from 40% to 15% (a refund charge was introduced in July)

Now it is important to realize that due to the complexity of these negotiations, which imply many important trading policies which needs to be addressed (like Chinese IP theft) it is unlikely that we will not get a trade agreement by 1 March (the current deadline ). Rather, economists expect steady progress will only lead to the US and China expanding its “truce” on new tariffs.

Current fees will remain in place (unless the US returns to withdraw any of its established fees) and an actual final trade agreement is likely to take six to twelve months. The United States / Canada / Mexico The NAFTA negotiations took 15 months to complete and there was much less animosity between America and these trading partners.

(Source: CNBC)

The good news is that President Trump now listens to nothing but his intestine on trade policy. While short-term stock prices are actually a terrible economic indicator, the fear of the market, which has dropped into the second year’s correction, is also likely to remain at Trump at the negotiating table. It is especially true now that progress is progressing, and he feels increasing pressure from what he cares about other than his intestinal instinct.

What about the second weak global economic growth? Japan’s economic weakness is also not as bad as it seems. According to Takashi Miwa, an analyst analyst at Nomura:

“A breakdown by demand category shows 0.1% qq decreases for real consumption expenditure and 1.8% for real exports, with factors that work to lower overall real GDP We believe that this turn to negative GDP growth is a temporary decline caused by natural disasters. In fact, monthly indicators released since October indicate a recovery in real exports and real consumption spending, which had also decreased qq in July- September. “

At the same time, the growth of global manufacturing, and indeed, decreases from the end of 2017 high, seems to be bottoming at a level that makes a global recession unlikely.

(Source: Bloomberg) – Over 50 Indicates Positive Growth

How about lowering global growth forecasts? Well, slower growth is not the same as negative growth. The IMF estimates that the world economy will grow 3.7% next year, down from 3.9% this year.

(Source: Forexlive) – November Calculation

The OECD also expects slower but solid growth in the future, including in all major economies.

The point is that when you see scary headlines in the financial media, realize that these serve two main purposes. They are intended to explain short-term market volatility (basically a guess of why stocks fall on a certain day). But more importantly, they are designed to maximize page views and ad revenue. They are not generated with your best interest in mind. All investment decisions must be made on a long-term basis, taking into account your personal risks, long-term plans and the breakdown that is best for your financial goals.

Current economic growth

  • Q3: 3.5% (second estimate)
  • Q4: Approx 2.4% to 2.5%
  • Full year 2018: 2.9% to 3.1% [19659020] 2019: 2.4% to 2.7%

(Source: Atlanta Federal Reserve)

Each major GDP model uses some different combinations and emphasis on leading indicators to estimate the current growth in the economy. Thus, the actual week’s figures are significantly less important than the calculation trend.

Atlanta Fed’s model is the most volatile I’m tracking and is once more much bullish (3% growth) than the overall economic consensus 2.5%).

[Source: New York Federal Reserve]

New York Fed’s BNP model, which tends to float on the conservative side, is sidelined with the consensus estimate with a growth forecast of 2.4%. It is not only for the fourth quarter but also for the first quarter.

(Source: now-casting.com)

Nucasting is still the most bullish forecast, with 3.5% growth for this quarter, but it is under previous estimates as high as 3.9%. Personally, I tend to page with New York Bold on this and estimate that we are currently growing 2.4% to 2.5%.

That would mean 2018 GDP Growth of:

  • Q1: 2.2%
  • Q2: 4.2%
  • Q3: 3.5%
  • Q4: 2.4% to 2, 5%
  • Whole Years: 2.9% to 3.1%

Although it’s a disappointment that US growth slows down to 2019, I have to remind you that this was completely expected.

(Source: Federal Reserve)

2.4% to 2.5% is in the low part of what Fed expects next year and by 2020 and by 2021 growth is expected to slow even more. But slower growth does not make a recession.

Recession Risk: Very Low

  • The likelihood that we are in a recession at the moment: 0.58%
  • The probability of a recession beginning in the next three months: 1.63%
  • The likelihood of a recession begins in the next nine months: 22%

I use eight key meta-analyzes to track the health of the economy. This includes those who have historically proven to be good predictors for recessions:

  • The 10-year yield curve;
  • Exchange curve 10y-3m (most accurate)
  • Baseline and change rate or BaR economy graph;
  • Jeff Miller Meta Analysis of Leading Economic Indicators;
  • St. Louis Fed equalized recession risk indicator; and
  • New York, Atlanta Fed’s and now-casting.com’s real-time GDP growth trackers.

(Source: Business Insider )

The yield curve has shown that the most precise predictor of recessions in the past 80 years. When the curve inverts or falls below 0 (because short-term interest rates rise above long-term prices), a recession will be particularly likely. It usually begins within 12-18 months.

Exchange Curve Inversion Date

Recession Start Date

Months To Recession Once Turner Turner

August 1978

January 1980

17

September 1980

July 1981

10

] December 1988

July 1990

19

February 2000

March 2001

13

December 2005

December 2007

24

Average

16.6

(Source: St Louis Federal Reserve, Ben Carlson)

According to a report from San Francisco Fed in March 2018, an inverted rate of return has “correctly signaled all nine recessions since 1955 and had only a false positive in mid 1960 century when an inversion was followed by an economic slowdown but not an official recession. “

In other words, if the return curve goes negative, there is probably a 90% chance of a recession that begins within the next 17 months or so.

Unfortunately, investors are investing in using the yield curve to time-bar stops is an accident. While a replacement curve version is very accurate in predicting long-term recessions, its record of predicting bear markets is much less impressive.

10y-2y Yield Curve Inversion Vs. Bear Market Beginning

(Source: Common Common Sense)

The delay time between market peaks and yield curves is across the map, from just 2 months 2000 to almost 2 years in 2005.

And if we go back to 1956 (using the 10y-1y return curve), we can also see that the return curves are reversed to a large extent useless for the times to start the market. In fact, in three cases, the forward-looking market has actually peaked before the curve was inverted. This means that the yield curve should not be used as a market mechanism but rather as a good indicator of recession.

Current 10y-2y Yield curve: 0.16% (down from 0.24% two weeks ago)

On 3rd December 3rd warning curve (its inversion has derived the 10-2th inversion with few months for 40 years) inverted but on December 14 it was unchanged (currently 0.01%). This shows why it is important not to panic about a warning curve inversion because the yield curves can go upside down.

But more important than the 10y-2y curve is the 10y-3m curve.

[194590101] (Source: San Francisco Federal Reserve)

According to a study by San Fran Fed in August 2018, “The best summary measure is the spread between ten years and three-month interest rates.”

10y-3m yield curve: 0.47%

According to a Dallas Fed bank survey, banks closely look at the 10y-3m curve and plan to withdraw lending (and thus cause the recession the fears) when this curve inverts. Fortunately, the curve, the most accurate recession forecast for all, has been plotted with a high predictable rate. If that trend continues, it will take 14.5 months for the 10y-3m curve to turn. [19659106] At what time, we are probably about one year from the recession. This means that my best estimate of the next recession’s start date is 23.5 to 30.5 months (December 2020 to July 2021).

But it’s important to keep in mind that you should not fear a flat yield curve as a sign of bad short to medium term 19659107]

During the strongest bond market in US history (tech boom), the yield curve was so low or even lower than it is now. Of course, it was also an epic bubble, but the point is that a flat but positive return curve is not a sign of poor return in the future.

Average monthly stock returns with 10-2 year return curve since 1976)

(Source: Bloomberg)

The fact is that in the last 42 years the monthly return on equity was highest and volatility was at its lowest when the yield curve was flat but positive. This means that we are likely to be in that sweet spot right now, and investors should avoid using the fear of return curve as a reason for market time.

This is because even after an inversion, the stocks tend to continue to rise for a long time and tend to generate strong returns before the next bear market begins.

In principle, the yield curve is an entirely binary indicator.

  • positive = very low business cycle (continue with long-term investment plans)
  • negative = 90% chance of recession coming within 6 to 24 months (probably 18 months) – consider becoming more defensive

The second economic indicator I’m looking at is David Rices (aka Economic PI) baseline and change rate, or BaR’s economic analysis network. This is another meta-analysis that contains 19 leading indicators that trace all aspects of the US economy. It includes the yield curve, but another version of it. I think it is the best overall indicator of basic economic health (because it is so granular).

]

(Source: Economic PI )

The BaR network has proved to be a reliable indicator predicting 1980, 1990, 2001 and 2007 recessions.

(Source: David Rice)

Currently, 11 out of 19 economic indicators indicate positive economic growth with eight indicating negative growth. That number of negative indicators rises three weeks ago.

(Source: David Rice)

Note that the number of leading indicators in the decline quadrant over the past 35 weeks has varied from three to 10. There is a lot of volatility between the number of indicators that show deceleration or accelerating growth. This is just statistical noise, and only long-term trends should be used as warning signs for recession.

(Source: David Rice)

Both trends and twelve months trends are still very positive and are currently moving in the right direction (continued growth). Most importantly, the average of coordinates or MOCs remains high, but it is now down from 35.3% three weeks ago. The mean of the leading indicators is now below MoC, but indicates that growth is likely to have peaked and the trend will be lower (confirming what other models are waiting and forecasts).

(Source: David Rice)

According to Mr. Rice, the rise of MoC usually occurs about two years from the beginning of a recession, which backs up what the yield curve (and other models) says.

Next, it’s Jeff Mill’s excellent economic indicator snapshot, a rich source of many useful market / economic data. It also provides an actual percentage probability estimate of how likely a recession will start in the next few months.

(Source: Jeff Miller )

What I’m looking at here is the quantitative estimates of short-term recession trends. In this case, the risk of a four-month recession is about 1.63%, while the probability of a recession beginning within nine months is lower from 24% to 22%. The short-term recession rate is very volatile, ranging from 0.24% to 3.32% since I began to track the economy over the past eight months. The most important thing to focus on is thus not the absolute figure without trends in both the short and medium term with the recession.

Both have shown low risks, with a 9-month recession rate as high stability at 24% year-round, and now fall to 22%. The falling inflation expectations are due to lower inflation expectations. The high risk capital (return on earnings minus 10-year returns) is good news. This indicates that stocks are now attractively priced, and we are probably close to the bottom right now.

For a definitive look at the recession risk, I like to use St Louis’s equalized recession indicator. This looks at the risk that a recession will start during the current month (it is actually delayed two months). It uses a four-month running average of leading economic indicators.



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