Will 2014 turn out to be a repeat of 2008 for the US economy?
6 years ago, after all, not a single mainstream forecaster – including the IMF and World Bank – was forecasting a recession. Even in September 2008, the consensus was still confident about the economic outlook. Yet the National Bureau for Economic Research later confirmed the official start of the recession as being December 2007.
Interestingly, a number of the same people who were wary of the outlook in 2008 are equally wary today. Thus Nobel Prize-winner Robert Shiller warned last week:
“I am definitely concerned. When was [the cyclically adjusted P/E ratio or CAPE] higher than it is now? I can tell you: 1929, 2000 and 2007. … We don’t know what it’s going to do. There could be a massive crash, like we saw in 2000 and 2007, the last two times it looked like this. But I don’t know. … One thing though, I don’t know how many people look at plots of the market. If you just look at a plot of one of the major averages in the U.S., you’ll see what look like three peaks – 2000, 2007 and now – it just looks to me like a peak. I’m not saying it is. I would think that there are people thinking that way – it’s gone way up since 2009. It’s likely to turn down again, just like it did the last two times.”
And, of course, there is the fact that Q1 GDP was a negative 2.9%. Of course, all the professional optimists immediately told us that this was just due to bad weather, and we would see an immediate and sustained recovery. They may turn out to be right, of course. But it seems many forecasts are now quietly being revised down..
The Bank for International Settlements (BIS, the central bankers’ bank) has also warned explicitly of the dangers for the global economy:
“Obviously, market participants are pricing in hardly any risks….Financial markets are euphoric, but progress in strengthening banks’ balance sheets has been uneven and private debt keeps growing. Macroeconomic policy has little room for manoeuvre to deal with any untoward surprises that might be sprung, including a normal recession.”
The BIS issued similar warnings in July 2007 and July 2008 which were, as now, mostly ignored.
The key issue is complacency. Markets believe that central banks would never again make the mistake of allowing a Lehman Brothers to go bankrupt. Therefore they believe that it is perfectly safe to chase stock prices higher and higher. As the above chart of the IeC Boom/Gloom Index shows:
- The US S&P 500 Index is making new highs month by month, despite bad news on the real economy (red line)
- The key is the liquidity programmes from the US, Europe and Japan, which provide free cash to investors
- But the Index itself seems likely to have peaked in March (blue column)
It is also not hard to identify a catalyst for a future panic as investors insist on continuing to wear their rose-tinted spectacles. They seem totally unaware of the massive potential downside that could be inflicted on an over-leveraged global economy by the unwinding now underway of China’s ‘collateral trade’.
The reason is they have completely failed to understand that China has abruptly changed economic course under its new leadership. President Xi and Premier Li know only too well that disaster could follow if they continue with the old policies of stimulus-led growth. Thus on a tour of central China last week, premier Li brushed aside concerns from senior province governors that:
“The aluminum, coal and steel sectors are still suffering heavy losses. … Lending rates, especially for smaller businesses, have grown by at least 20% on average,” and that “footwear and textile exporters are struggling with weak foreign demand”.
This is a major development in the world’s second largest economy. But nobody talks about it, or its possible consequences.
Maybe Shiller is wrong to be worried. Maybe the BIS is also wrong. But they were right before when everyone else was wrong. And if they are right again, then as the BIS has also warned, central banks now “have little room for manoeuvre to deal with any untoward surprise”.
WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
PTA China, flat 0%. “Buying interest for higher-priced cargoes were curbed by prevailing weak downstream demand”
US$: yen, down 3%
Brent crude oil, up 2%
Benzene, Europe, up 6%. “Several players in Europe are uncertain whether prices are sustainable at current levels”
Naphtha Europe, up 6%. “Europe is structurally long on naphtha and has to export to petrochemical markets in Asia and the gasoline sector in the US”
S&P 500 stock market index, up 8%
HDPE US export, up 7%. “International buyers are not interested in building inventory at high prices”