WILL THE SHIFT IN GLOBAL CENTRAL BANK DIRECTION DELAY THE RECESSION TO 2022?



A PUBLIC SOURCED ARTICLE FOR MATASII (SUBSCRIBERS-RESEARCH & PUBLIC ACCESS ) READERS  REFERENCE

MACRO:  MACRO MONETARY POLICY

EXTRACTED FROM:  02-02-19 - Seeking Alpha - "As The Global Economy Slows, The Grab For Yield Will Accelerate"



MATASII SYNTHESIS:

I found a recent Seeking Alpha article by  promoting his High Dividend Opportunities subscription service to be closely inline with much of what we have recently been concluding at MATASII. Our conclusion is based on what we have witnessed as a clear change in narrative from the global central banks since the "Mnuchin Massacre" on Christmas Eve. Here is his summary:

As per our analysis over the past several months that the global economy in 2019 will slow down, we are now starting to see clear signs of deceleration at a rate faster than expected. Alarming data recently caught the eye of investors and was reinforced by poor data releases from China, Japan and the Eurozone:

  1. China's growth rate is at its lowest rate since the year 1990, now only at 6.4%.
  2. The Eurozone economy began 2019 with activity growing to its lowest pace in more than five years, and expected to grow at a rate of 1.8% year-on-year, following a decline in Q3 and Q4 2018
  3. The IMF cut its estimate for global growth this year to 3.5%, from 3.7%, due to heightened trade tensions and rising interest rates.

It's irrefutable that global growth is in a synchronized slowdown with inflationary pressures continuing to be almost non existent in most of all major economies.

The only major economy that's still growing at a healthy pace is the United States, but no economy is an island by itself.

The global economy has peaked in the first quarter of 2018, but the US economy got an extra boost in 2018 from the tax reforms which has delayed signs of slowing down until this year. The US economy, according to the Federal Reserve, will only grow by 2.3% compared to 3% in 2018. Projections point to an even slower growth in 2020 which is likely to be growth below 2% based on our own analysis.

Despite a weaker economic outlook, there's some good news. Almost all the major central bankers are acknowledging the fact that the risks to the global economy are increasing, and are talking about a continuation or a restart of quantitative easing. It seems that the latest market correction (or mini bear market) that we saw in late 2018 was a wake-up call. While "bear markets" are usually the result of an economic recession, market crashes can increase recession risks as asset prices melt down. This also can drag the global economy into a recession.

So what we are seeing now - contrary to what we were seeing in 2018 - are more dovish central bankers.

Let us look at some details:

1- The United States: After the U.S. Federal Reserve embarked on its plans to normalize interest rates by hiking them several times during the past two years, the Fed is now showing willingness to listen to investors' worries about a flattened yield curve and weakening business and consumer sentiment. The Fed finally woke up and introduced the word “patient” into the statement and removed all references to rate increases. So the door is open for zero rate increases in 2019. Powell’s statement:  In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."

More importantly, it now appears that the Fed will consider ending its bond portfolio runoff earlier than previously announced which also is a sign that the Fed does not want to derail the economy.

2- Europe and Japan: We also heard last week from two major global central banks - for both Japan and the Eurozone - that quantitative easing needs to continue because of a poor inflation outlook. There's no need or willingness to hike interest rates. The Eurozone continues to delay its plans to hike rates, and most likely this will continue for several years in my opinion.

3- China: As for the Bank of China, they are using every tool available to them in term of quantitative easing to stimulate their faltering economy.

This is ironic to see that the central bankers of these major economies were so upbeat about global growth last year, and being completely wrong.

There is now the realistic possibility of delaying the coming global recession from 2020 to 2022

This kind of synchronized recognition of risks by Central Banks, and coordinated efforts to stabilize the global economy, can have some wonderful results if the decisions are taken at the right time, meaning not being too late. Today is not too late, and in my opinion the deteriorating situation that would cause a global recession can be delayed several years.

In fact, if executed properly, these international bankers have a good chance of shifting the economy back to growth next yearand thus pushing any recession risks until 2022 at least.

There remains one big hurdle to be overcome which is a trade deal between the United States and China. The recent trade war had a big negative impact on the global economy, and once this issue is resolved, then we can be more confident that recession risks will dissipate. I would like to reiterate my views on this point that both the U.S. and China presidents are aware that they have no choice but to resolve the situation, and so I believe we are likely to see a deal sooner rather than later.

The bottom line is that with all central bankers on board to rekindle growth, I'm even more confident today that we will not see a global recession before the year 2022.

We  have posted a significant number of demographic studies at MATASII that illustrate that in fact a decline of working age populations and an increase in retired age citizens will result in slowing economic activity. This is a central reason why price inflation has been so moderate.

Inflation in the United States has remained stubbornly low despite stellar economic growth last year. In fact, inflation has been consistently lower than the Fed target rate, even in 2018.

We have touched on this subject before - the reason behind such low inflation can be attributed largely to both an aging population and lower population growth rate. Economic growth comes mostly due to population growth as more and more people enter the workforce, start generating and spending money. For example, the Baby Boom generation contributed to a growing population with increased spending and consumption needs.

In today's aging global population and decreasing birth rates - in the US and more notably in other major economies - we do not have this luxury anymore. This means that the U.S. and other developed economies are more fragile today because demographics just do not support them. Economic growth and a minimum level of inflation are healthy, but as population growth declines, it has been very difficult to achieve any meaningful inflation.

We should keep in mind that slowing population growth in Europe and Japan has resulted in an inflation rate that's non-existent and even deflationary. Countries like Germany and Japan recently resorted to negative interest rates to boost their respective economies. One day in the future, the United States may have to do the same by going into negative interest rates too in order to support its economy.

Listen to what the Bond Markets are Saying

The bond markets are rarely wrong, especially the long-term ones, and they all indicate that the lack of inflation - and continued deflation for some economies - will persist. Let us look at the long-term chart trend.

Below is the 10-year US Treasury Bond Yield Since 1962

We can notice that we have been so far in a 29-year period of interest rate declines, and this trend is not changing.

Even worse for the 10-year German bond yields

The 10-year yields of the German bonds have been in straight declines since the 2007-2008 financial crisis, and the yields dipped below zero in 2018 following the Brexit scare.

Here is 's predictions for 2019 which are intented to promote his service but have solid merit if you ignore the Tsunami of De-Dollarization presently occurring:

Our Views and Predictions for 2019

  • With central bankers across major economies putting their weight to rekindle economic growth, recession risks will be reduced and pushed back till the year 2022 or later.
  • This also will support equity prices, and I believe that the S&P 500 index (while it remains technically challenged) should reach well above the 3000 level in 2019. The year 2019 should be a good year for equities.
  • Growth stocks will recover some of their recent losses and should see renewed interest. However lower economic growth and low inflation means that the hunt for yield will continue.
  • High-dividend stocks and sectors which have had a stellar performance so far in 2019 will continue to outperform.
  • The best strategy for income investors is to remain well-diversified into the high-yield stocks and sectors while increasing allocation to preferred stocks and bond-like stocks.

WE STRONGLY RECOMMEND YOU NOW OVERLAY ON THE ABOVE ANALYSIS WHAT HAPPENS TO TOTAL RETURNS IF THE DOLLAR BEGINS A PROCESS OF DEVALUATION OF 25-40% AGAINST IMPORT CURRENCY PAIRS OVER THE NEXT 5 YEARS?