The prospects of global recession heightened in the Dec-2015 quarter

The Dow Jones is coming under pressure at a time when market pundits are being told to expect a market recovery. What's new? There have been numerous opportunities for equity markets to go into a tailspin, but on each occasion asset prices (equities, property and bonds) have tended to rise. The elusive recovery to date could be attributed to:

• The strong equity markets
• The housing market recovery
• Low unemployment
• Low interest rates

The problem of course is that these indicators are not convincing for the following reasons. Basically there is little economic activity going on in Western economics, and that is even undermining growth in the emerging markets that rely on their exports to the West. 

Equity markets

The following chart shows that the Dow Jones is close to challenging its support levels. It has of course been sold off before, only to recover...So we might ask what is different this time?

Source: 4-Traders.com

The problem is apparent in the following chart. The market has had a huge 'unprecedented' rally in terms of its longevity. Even if you were positive about the outlook, you might question the sustainability of this rally, given the expectation of rising rates. Looking at the following chart it seems reasonable to expect a 'good retracement' to at least the 14,000pts level. The reason why we might not expect more than that is simply that, there is every reason to expect a recovery in the real economy because:

1. Interest rates remain very low - so there is scope for the market to accept some increase in rates
2. Higher rates would actually encourage more spending because the incentive to pay off one's liabilities will be lower. The problem is that the Fed would not raise rates if there was any prospect of sinking equity & property markets. 
3. There are no signs of inflation

Source: Google Finance

Based on the chart above, there is good reason to expect a 'sell-off' in Sept-2015 on the prospect of rising rates, but also for other reasons:

1. The 'dead-cat' bounce in China's equity markets, suggests a lack of confidence there
2. Ominous signs of political instability in the USA, with elections looming in 2016
3. The prospects of a currency war, that can only undermine confidence in political leaders. This is the surest sign of no demand. 

Housing market recovery

Judging by the following chart of new housing starts in the US, you could be forgiven for thinking the strong growth in construction is a 'good sign'. The reality is however is that:

• Current levels of housing construction only offset the 'pent-up demand' for new housing that arose after the global financial crisis. 
• There is no 'fundamentals' which would support the persistence of this trend, as I will show next.

Source: Federal Reserve

Looking at this chart and the absence of fundamentals to support it, it is easy to conclude that the USA is about to enter another recession, and that housing starts are destined to dip down soon. Might the Fed arrest this prospect with another QE program. The problem is the lack of jobs to justify it. You can put credit into the banking sector, but in the absence of 'real spending', it will just end up in already over-priced asset markets. If the Fed resorts to QE, it would probably also raise rates, and prompt more liquidity to enter the derivatives market 'short'. That would not help confidence in the real economy.

Low unemployment myth

The myth is being perpetuated that the unemployment rate is low, and that it has fallen over the last 7 years since the global financial crisis. In fact, we have simply seen a lot of Americans, as in other countries, live off their equity, and simply stop looking for work. I'm way ahead of these people because I left the workforce 15 years ago to simply live off investments. I was motivated by the decline in Western values; but others were mostly motivated by the decline in opportunities, i.e. retrenchments. The problem of course is that we have four types of people in the market place:

1. Families spending like there is no tomorrow because they have kids and little savings
2. Subsistence lifestylers living frugally - mostly these are skilled people leaving themselves flexible
3. Subsistence welfare recipients - mostly these are 'estranged' unskilled people, or skilled people in vocations that society does not value. Sometimes they are just people who don't readily integrate into society, i.e. libertarians, white supremacists, atheists, disabled or convicted felons for drug use. 
4. Skilled people who have seen a rapid rise in incomes - Even these people are not spending because they are rapidly paying off their homes

You can see from this 'anecdotal survey' of Americans that the only people spending are working families; whilst everyone else in 'economizing', whether because they are struggling, cautious or opportunistically paying down debt on their significant liabilities. This explains why spending is subdued, and why it will not increase until:

• There is a recovery in the 'real economy to justify a rise in interest rates by over 100bp beyond Sept-2015
• Quantitative easing in order to stimulate the US market

I am actually expecting the Fed to pursue both of these courses of action. So-called reference to a 'liquidity crunch' is nonsense. The reality is that there is a 'wage gap' between Western society and Emerging Markets. This will take time to resolve, however Western governments have done the exact opposite of what they need to have done in order to solve the problem. Far from increasing productivity, they have reduced it. Far from reducing waste; they have taken it to new levels with more intrusive 'distortionary' laws. This is why I support Donald Trump. He's not a political hack, he talks about reducing waste, and unlike Rand Paul, he resonates like a conservative, so he is plausibly electable.

It is therefore important to appreciate that 'low unemployment' is a 'dirty white lie' that is in fact a long term decline in the US workforce participation. You could argue that too many people have simply left the workforce, or 2-income families have become one, or full-time workers have become part-time, that more children are staying at home until their 50s, or more people are packing into ever-smaller apartments. Of course there are more Americans on welfare programs. But the greater reality is that they are simply living minimalist lives. This is actually one of the reasons why governments have shifted to taxing consumption, as well as expanding their powers to intrude into foreign bank accounts, as more people 'live abroad'.

Source: US Bureau of Labor Statistics

Why would this rate be falling if unemployment is falling. People have simply stopped looking for work. Not everyone of course. It is also fair to say that a lot of people are 'under-employed'.

Excess business inventories

There are however also other 'demand indicators' that are used to justify the premise that the US economy is recovering, such as new vehicle sales, which are at "record levels". There is other evidence however to suggest that not all is well in the US economy, namely:

• US inventory levels - see the ominous signs of recession below
• Vehicles in the US are a 'necessity' unlike Japan. The issue is not 'car ownership' but car cost. Moreover the credit terms for new cars have never been easier, and anyway delaying the purchase has a reason to jump into the market....they have been saving for 7 years.
• Judging by the statistics belong, vehicle sales are at 'break-neck' rates, so I'd expect a fall in coming months.

Source: Trading View & Federal Reserve; trend analysis by Andrew Sheldon

Source: US Bureau of Economic Analysis & Federal Reserve of St Louis

In conclusion, there are strong reasons to be cautious about the outlook for the next few years. There are also compelling reasons to appreciate that the current crop of conservative and democratic politicians have no intent to reform goverrnment. Only politicians like Rand Paul and Donald Trump are likely to make those tough decisions to cut costs, that will restore the US economy to health. Note the following:

• Stock and bond prices - the tendency for stock indices to fall every 7 years (2001, 2008 and now 2015??)
• Excess inventory levels - a precursor to recession
• Prospect of a modest interest rate increase - not so significant as only 25bp probable
• Election concerns diminishing confidence in the next year

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Rebuttal of Krugman's inflation critique

Paul Krugman is an annoying person. He is annoying because his entire modus operandi is attacking neo-conservative idiots on the right, whilst ignoring his own shortcomings. His short comings arise from his:
1. Gross ignorance about economics as a compartmentalised irrelevant economist
2. Engagement in straw arguments, or false dichotomies between left and right when the real game is the ascension of libertarianism.

Liberals love this game because it keeps them 'self-important'. The world will not miss Paul Krugman. He will fade into obscurity. But before he does, lest we be criticised for attacking the man without argument, let us focus on his arguments for asserting that there is no inflation, and that its not coming. Well, in truth, he is 'right'....yes 'right' in a sense, and wrong in a sense. There is bugger all 'cost-of-living' inflation. The problem with his arguments is:

1. Krugman does not understand inflation
Krugman thinks inflation is a 'cost-push' phenomenon caused by excess demand for goods and services. He thus celebrates the lack of demand for goods evident in the absence of evidence for inflation, measured empirically by CPI indices. The problem is that the 'goods and services' measured by the CPI are not exactly a useful basket, as some indices exclude the 'volatile' items in order to give a seasonal account. The greater issue however is the 'qualitative' adjustments governments make to inflation numbers, as they are not always comparing like items, i.e. A 286 computer in the 1980s bears no easy comparison to the modern computer. How do you account for the fact that you no longer need anti-virus software as an bundle of inflation costs. Finally, Krugman ignores the 'asset inflation' that exists in many countries. If these assets were to collapse, thanks to higher interest rates or correction to an impending asset bubble, then you would indeed expect inflation. The problem is 'not that the conservatives are wrong', but that their concerns are misplaced. i.e. Inflation is not in the short term from costs, but in unsustainable asset prices. The problem is that 'the problem' is concealed as a 'benefit' for some, because people in the cities like to see their property prices rise. Those buying late are happy as long as the correction in asset prices doesn't show. i.e. They are not concerned until there is a collapse, and even then they might not care if the collapse does not send them broke, precipitate the loss of their job, or their interest repayments does not exceed what they would otherwise have paid in rent.

2. Krugman cannot forecast inflation
Krugman is akin to the environmentalist who points at 'evidence' and decries how bad or wrong people are. He is a tragic soul who understands nothing. He has no credible analytical proscription for how the world works. This is why he cannot offer an explanation of the world; only criticism when others are wrong. He cannot tell us when inflation will appear; if it ever will, and he cannot offer an explanation of why. Firstly, we need to deal with what inflation is.

Inflation is a broad indicator of price movements relative to purchasing power; which is itself tied to the productive capacity of any economy and the supply and demand for money. 

The Austrian School is correct insofar as they regard there to be a relationship between the supply of money and the productive capacity of the economy. Their failure is to not convey an understanding of the dynamics that actually drive price movements. i.e. There is a tendency to speak 'broadly' (by definition) and not see the differentiated foundation for supply and demand in the economy. They fail to see that there are several pertinent factors, namely:
a. Wage restraint prompting an overweight investment in investments like productive property, productive capacity and securities that help finance that capacity, prompting an excess of savings over consumption, i.e. we see a deferment of spending. They fail to realise that this is caused by the autocrats of developing countries causing a pent up supply of labour, suddenly released in the 1980s. It will take us another 15-20 years to balance this global labour distortion, but the impact will be 'mass stimulus' to the global economy, the persistent of the 'super cycle', and low inflation. There will be no wages spiral, though we might expect some unionisation in Asia. There is however no culture of this, and Asia will need to compete with Africa, South Asia on labour costs.
b. Low interest rates prompting speculation in assets.

For these reasons, we can say that the global market place will be under low inflationary pressures for another 15-odd years. In that time, we can expect corresponding asset price bubbles. Its inflation, but not the type described by Krugman. He, like the Fed Reserve, like Alan Greenspan, are simply not looking at asset prices as a vulnerability. It is the prospect of asset price collapses that will demand further QE programs. These are forms of taxation rather that cost-of-living inflation. They are destined to recapitalise the value of money; but not cause the type of inflation spiral that is associated with cost-of-living inflation. In fact, the dearth of specialisation and economies of scale, along with productivity gains are destined to see costs under control. So that's the explanation and forecast.

3. Krugman offers no clarity over 'excess money'
Concerns about "excess money and a devalued dollar" is not a problem (as Krugman argues) because there is no such thing as excessive money. Even in the context of a 'balanced labour' market, the problem is not wage demands; the problem is that they able to be extorted from business by unionised labour. We are however under the illusion that unions are good, because they lead to better worker conditions. They don't. They take what business would have been forced to give (belatedly) or they extort that which business cannot afford to offer, so being forced to close business and go overseas, or go broke.
Krugman suggests that the USD is not weak, but in fact it is relative to hard currencies in Asia. He does not realise this because he selectively compares USD value with other major currencies, like the Yen and Euro, which are also weak, or those economies whose pricing is tied to the USD, whether its the managed 'mercantilist' currency regimes of Asia, or even the USD-denominated currencies of commodity producers like Australia, South Africa, Canada et al. It does not help that these countries borrow in USD. The implication is that all these currencies become immutably tied to the USD. The fact is that there is no country pursuing a 'productivity' based wealth strategy to prompt higher currencies. They are pursuing an 'economic stimulus' strategy, which attempts to create the illusion of wealth creation. Observe that households are working harder than ever, with two or more contributors to income, and they still struggle to live. Home prices are 10x average earnings in many cities. Unskilled labour is having a harder struggle still. This is the constituency that 'applaudes' Krugman's negativity, but he is unable to offer a solution. He can only knock down straw arguments.

It is true that many free marketers and conservatives have been expecting inflation. His argument is not entirely invalid; but this is not a man with much interest in truth; so much as disparaging counter-thesis to his own delusion.

In conclusion, we can expect more asset bubbles, with the prospect of more bail outs by government of banks or maybe creditors. We can expect no sign of inflation for more than a decade. We can expect those traditional indicators of inflation, the precious metals, like gold, silver, palladium and platinum to rise in price slowly, as they are among the cheapest assets. They will not however do as well as demand-based commodities in the short term, or as well as emerging market property. The reason being of course the low-yield on these asset classes. They will however be helped in time by the low yield on equities and property. This will take time to unfold. This is a super-cycle...so don't be tragic. Though it will be harsh times for unskilled workers in the West. They live in an over-priced, high cost markets, and without exployment opportunities in the third world, they are really between a rock and a hard place, with no preparedness to address their problem.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Fed decision - what does it mean?

The Fed has said that it will freeze interest rates for 2 years. Whilst this can be considered a measure to give the market confidence; the question has to be asked, is the measure reasonable, or just another scam to suck in long suffering taxpayers and investors. Consider that 3 Fed governors rejected the idea. Three does not make a majority; but it strikes me as ludicrous that these governors would commit to such an arbitrary policy. This is all 'illusionary'. It strikes me as a rather desperate measure to commit to something that one has no necessary intention to keep. i.e. Ben Bernacke is not Santa. He is allowed to keep his promises. More worrisome is the fact that its not clear to me that the majority of other Fed governors have committed to the freeze.

In any respect, they are bankers. I would sooner believe in Santa than the promises of a Fed chair? Will the market buy this? I doubt it. This is why the doubt remains in the market. The market might be volatile if the Fed does not step in and clarify. Ben - Stop playing silly buggers with my money. Oh, its ok, I'm holding gold!

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Andrew Sheldon www.sheldonthinks.com

The Fed to engage in monetary easying

Markets are expecting a correction. There is every reason to expect a correction, but by no means is the US, UK, EU or Japanese governments going to allow equity markets to collapse in any dire way. Of course we have come to expect monetary debasement....its what unaccountable governments do rather than increase tax. Why? Inflation is a far more cowardly tax, and politicians are cowards; well-matched with a psychologically repressed constituency which allows them to engage in all manner of 'economic persecution'.

Here is a good article on the problems confronting the USA. I will only add that I expect Japan and the EU to debase their currencies more. It will be a pooled effort by these governments, the USA and the UK. Because I think these other governments are going to do more debasing than the US, we can expect a 'relatively' strong USD, but of course it will be the commodity countries and emerging markets which will perform best. We might also expect the property markets in emerging Asian countries to do rather well. i.e. Thailand and the Philippines. The Philippines has the most liberal laws for foreign investment as well as most relaxed visa laws. You can stay 18 months without leaving the country on a tourist visa.

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Andrew Sheldon www.sheldonthinks.com