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Yet, while the Fed and others proclaim the economy’s health, signs of stress abound. China’s Shanghai Composite is back to 2006 levels. Japan’s Government Pension Investment Fund, the world’s largest public pension fund, reported a loss of $135 billion for the December quarter. Europe’s economy offers little to cheer.
In the U.S., corporate profit growth is decelerating, and stock buybacks, once a major source of stock-market support, appear to be diminishing as funding becomes more expensive, or disappears. Repatriation of corporate cash due to changes in tax law helped fund buybacks in 2018; it doesn’t exist to the same degree this year. Buybacks also were funded by low-cost debt, some $3 trillion of which was issued in the past five years and now sits on companies’ balance sheets. A recession would substantially reduce companies’ willingness to authorize additional aggressive buyback schemes. At the same time, the Fed has been shrinking its balance sheet by $50 billion a month, which has drained liquidity from the financial system.
There seems little doubt that the world economy is sliding into a recession—or, minus unprecedented action by the authorities, a crisis that could be much worse, led by China, Europe, emerging markets, and other troubled economies. Individual-country data suggest as much, as does the decline in global trading and exports as evidenced by the Baltic Dry Index, a measure of global dry bulk shipping costs that has plummeted since the middle of 2008. The U.S. trade battle with China only compounds the problem.
Keep an eye on falling banks shares, too. Those in Europe, Japan, and China are sending clear signals of trouble, and U.S. bank stocks can’t be far behind. A blow to the global real estate market, coupled with a severe recession, conceivably could cause irreparable damage to the global banking system.
In the U.S., corporate profit growth is decelerating, and stock buybacks, once a major source of stock-market support, appear to be diminishing as funding becomes more expensive, or disappears. Repatriation of corporate cash due to changes in tax law helped fund buybacks in 2018; it doesn’t exist to the same degree this year. Buybacks also were funded by low-cost debt, some $3 trillion of which was issued in the past five years and now sits on companies’ balance sheets. A recession would substantially reduce companies’ willingness to authorize additional aggressive buyback schemes. At the same time, the Fed has been shrinking its balance sheet by $50 billion a month, which has drained liquidity from the financial system.
There seems little doubt that the world economy is sliding into a recession—or, minus unprecedented action by the authorities, a crisis that could be much worse, led by China, Europe, emerging markets, and other troubled economies. Individual-country data suggest as much, as does the decline in global trading and exports as evidenced by the Baltic Dry Index, a measure of global dry bulk shipping costs that has plummeted since the middle of 2008. The U.S. trade battle with China only compounds the problem.
Keep an eye on falling banks shares, too. Those in Europe, Japan, and China are sending clear signals of trouble, and U.S. bank stocks can’t be far behind. A blow to the global real estate market, coupled with a severe recession, conceivably could cause irreparable damage to the global banking system.
https://www.barrons.com/articles/the-federal-reserve-seems-oblivious-to-a-coming-economic-crisis-51550268059