A Global Recession Is More Likely Than Anyone Realizes

A recession is defined as two consecutive quarters of negative economic growth.

In the real world, nation-states that experience negative growth over longer periods, interrupted by occasional paltry-positive readings of GDP are, for all intents and purposes, in a recession.

Countries now in recession include Greece, Belgium, Italy, Portugal, Netherlands, Czech Republic, Venezuela, Brazil, Russia, Taiwan, and, as of Feb. 1, Ireland.

And the United States is closer than anyone realizes to joining them.

The U.S. saw a mere 0.7 percent annualized GDP growth rate in the fourth quarter of 2015.

On the other hand, for all of 2015, the country turned in an estimated 2.4 percent growth rate, so it doesn’t appear close to falling into recession.

 

 

But those figures are deceiving, and a whole host of recession barometers are dialing higher and higher.

Industrial production in the United States showed negative readings in 10 of the last 12 months. It’s down 3 percent in the last six months alone.

What’s more, the Institute for Supply Management Purchasing Managers’ Index came in at 48.2 for January.

That’s four months in a row the index has been below 50 – and a reading below 50 points to contraction in U.S. manufacturing.

The American Consumer Won’t Ride to the Rescue

Don’t expect consumption to spur growth, either. U.S. consumers, responsible for around three-quarters of GDP growth, aren’t stepping up.

According to the U.S. Commerce Department, personal spending in December was flat from a month earlier. Spending on durable goods fell 0.9 percent in December. And spending on nondurable goods also fell 0.9 percent.

Those numbers mean the end retailers’ most important quarter – and a true picture of consumers’ propensity for spending – has been a disaster.

It’s not hard to see why… Those consumers’ wages have only increased 2.2 percent in the past five years.

It gets worse…

For all of 2015, retail sales – including autos – were the worst since 2008-2009.

When you consider that anemic wage growth, rising healthcare costs courtesy of Obamacare, and an uptick in the savings rate to 5.5 percent, it’s highly unlikely that consumers will prove positive for GDP growth in 2016.

And then there’s the stock market.

Low, Zero, and Negative Interest Rate Policies Helped Bring Us Here

Now, it’s important to note that not all steep market sell-offs signal a recession ahead. But this time around, frighteningly, that’s exactly what they’re doing…

The January 2016 sell-off in U.S. stocks followed global equity markets getting hit last summer through year-end 2015. Now we’re all headed lower.

Selling isn’t the result of a valuation correction. What’s happening is investors are selling over fears of falling earnings – or an outright collapse.

 (AP Photo/Richard Drew)
(AP Photo/Richard Drew)

The root cause of global market volatility, and why the equity markets’ selling off portends a coming global recession, is all about currencies.

The currency market is the largest market in the world. Trillions of dollars of currencies trade every single day, dwarfing the volume of all the world’s equity markets combined.

That’s because currencies are used to buy goods and services the world over, and as global trade has grown, more and more trading is necessary to make payments in different currencies.

Currencies don’t just move up and down based on short-term buying and selling based on daily trade transactions. They mostly move up and down relative to each other based on interest rate differentials between countries.

And interest rate differentials are now the “last stand” for central bankers whose low-interest, zero-interest, and negative-interest rate policies have done nothing to keep staggering economies from slip-sliding back towards recession.

Raging Currency Wars Will Make Things Worse

By managing their currencies down, exporters cheapen the cost of the goods and services they sell globally.

With the sole exception of the United States, which has the largest domestic consumer economy in the world and is still an export juggernaut, almost every country in the world relies on exports to propel growth.

But when lowered interest rates, which cheapen a country’s currency relative to its trading partners, are met with counter-party interest rate cuts, trading partners and exporting competitors have nowhere to go – and nothing to do but to try and keep lowering interest rates.

When countries compete to lower rates to spur exports, they’re said to be in a “race to the bottom” (who can lower their currency further and faster) strategy to maintain export revenue.

Not only has that been happening, but it will get a lot worse as exports everywhere are falling.

The International Monetary Fund recently noted that the 2015 year-over-year change in global exports was the second lowest it’s seen since 1958.

The smallest change was in 2008-2009.

As “currency wars” heat up in Asia, South America, and elsewhere, the U.S. dollar remains strong, and on a relative currency basis, it is getting more expensive.

That means the Chinese, emerging markets, and other global debtors – all of them exporters, who grew their economies and export businesses by funding growth with trillions in dollar-denominated loans – will see the cost of their debt skyrocket.

The only way they can pay it off is to export more to generate revenue.

That “negative feedback loop” will cause major devaluations in currencies, debt defaults, and bankruptcies worldwide. At the same time, U.S. multinationals who get increasingly larger revenue streams from overseas will see that revenue decimated when they have to translate earnings in foreign currencies back into U.S. dollars.

Stock markets see this. Earnings will get hit, and for some companies, they’ll collapse.

Between faltering industrial production in the United States and across the globe, retrenching consumers here and elsewhere when layoffs will be announced in the first quarter and all year, and investors selling on account of rapidly diminishing earnings in the face of escalating currency wars, the warning lights couldn’t be any brighter.

I’m not the only one who sees the U.S. facing a recession. But I am the only voice predicting a serious and lengthy global recession will push the United States into that black hole with almost everyone else.

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