There’s no sugar-coating it. The showman who plays real President on TV and in real life, and his cabal of facilitators, are leading the global economy off the cliff. We can quibble about timing and extent, even who to blame, but certain truths are self-evident – ego-driven volatile leadership is least equipped to deal with it. “Lacking any apparent strategy for achieving its goals, it instead is engaged in a campaign of petty vandalism that has unsettled both American businesses and foreign allies.” – opined The New York Times. I could not agree more.
If you have been living under the rock for the last thirty-one odd months, here’s what you have missed. We are living in a topsy-turvy world where old alliances are under attack by the very participants and players who benefit from it the most. Here scientific facts are deemed as alternatives on a menu, treaties are suddenly reneged on with impunity, where long-standing legitimate grievances are excuses for thuggish shootouts off-the-hip, and, real consequences are easily ignored as “fake news”. Flagrant violations in thought and speech, and at times in action, of the Founding Principles, were glossed over routinely. Large parts of the population were crooned to silence for a rendezvous with a juiced-up bed-warmer under the sheets, the Economy.
Now that you are waking up from stupor, let’s talk about the road ahead.
No matter how crooked the road ahead is, it goes through R World. And yes, I mean Recession. I do not take the R word lightly as consequences are dire for risk-takers like me; memories of 2008 and 2001 are too raw. But I will lend my voice to the pluralistic view of economists polled in NABE Survey that came out last week. U.S. Economy and the global economy is on track to enter a recession by the end of 2021.
Biggest market signal is yield curve inversion. Every single postwar recession was preceded by yield curve inversion. Conversely, brief inversion in 1998 was not followed by a recession. Overwhelmingly supporting the theses, inversion is not the only one predicting it.
Strong consumer spending, the biggest component of the U.S. economy, held so far, but optimism is on a precipice – an early indicator. Early tax cut boost lost potency – Home Depot, JC Penney and Kohl’s are headline drivers who publicly warned of difficult times. Government spending is at a high level, but that is coming at a cost. Over last 50 years, the deficit as % of GDP was about 2.9%, CBO recently projected it to go to 4.7% over the next decade, upping their estimate from 4.3% as recently as in May. CBO projects USD 12.2 Trillion additional government debt over the next decade, on top of USD 22 Trillion already, an unprecedented growth. Private non-residential investment growth – essential hardware for economic growth – boosted to 8% immediately after-tax package, now halved back to 4%, jobs in goods production is at an anemic 1%, ISM Purchasing Managers’ Index at 51.7% is just above recessionary level, core capital goods orders flatlined already. In short, the corporate sector is not holding an olive branch. Seven deadly sins of a trade war are in no way correcting themselves to help us in net exports.
All in, 85%+ economists polled by NABE predict a global economic slowdown in 2019, 74% predict a U.S. recession by end of 2021, even if a quarter of them consider current Fed monetary policies as too accommodating. Still, Atlanta Fed Realtime forecast for Q3’2019 U.S. GDP is 2.2%, higher than Q2’19 real data of 2.1%. Is there a silver lining somewhere? None as I see, and there are reasons.
First, the tax package was ill-conceived. Corporations can and do use tax bounty on capacity build-up, but only if they see a period of economic growth that will pay off such investment. Well-designed corporate tax break needed to be paired with initiatives to boost demand, at home and abroad – that was not to be. Individual tax relief was targeted top-heavy, resulting in asset price bubbles, as was the case till recently. Any case, benefits of tax relief have turned over on both fronts.
I am on record supporting tough stance on China. That said, implementation could not be farther from perfect. Systematic humiliation of international bodies left the U.S. to deal with China by itself, arguably preferred U.S. policy these days. China is no pushover, and America First policy – U.S. demand to China included a shopping list for items to buy from the U.S. exclusively, angering others – means China ramped up its trade relationships elsewhere. As The Wall Street Journal commented, the U.S. already lost trade war.
Fed is caught in a bind. By almost all traditional metrics guiding Fed policies, rates are nowhere near requiring intervention. Constant harangue from above creates an expectation in the market, failure to meet it has its consequences. On the flip side, a give-in by Fed is a sure-fire way to spook the markets. For years markets have been goosed up by a near submissive posture by the Fed, and now it has lost control, target rate nudge above 2% leaves not many places to go down.
The biggest threat to prosperity is an administration that is loath to admit defeat and make amends, even if volatility in all manners define it. We have gotten used to a style that escalates till other side folds – and we have been brainwashed to call it a success. International diplomacy and global economics are a different beast altogether. Memories linger and butterfly effect amplifies each misfortune. Sustained positioning on moral high grounds of freedom, reasonably free markets and democracy need be complemented by vigorous lower-level exchanges till a shared ground emerges – bullying your position on hapless supplicants can only backfire over time. If your emissaries can not speak for you before being contradicted, who would trust a negotiator? If your own stance changes mid-sentence, who would blame a capable foe from exploiting that in a tête-à-tête? Who will blame China if their leadership, with no half-life, chooses to outlive you, knowing fully well your own people are getting tired of your idiocies? Gathering uncertainties and discontent – Brexit, Hong Kong, Iran – can each glowing ambers each waiting for a match to start a wildfire. We have a leader who will call it a queen’s necklace when ridges around our enclave catch fire.
Normalizing irresponsible behavior has its consequences, and this time we will have snatched recession from the jaws of the longest-running post-war recovery. Something tells me this will not be the last time.
[Partha Chakraborty, Ph.D., CFA is an entrepreneur in Blockchain and Wealth Management. All opinions are of the author alone and do not necessarily represent that of any organization he may be part of. The author alone is responsible for any error or omission.]