Oliver Hartwich on doom and gloom in the global economy and the Donald Trump effect

Today’s Top 10 is a guest post from Oliver Hartwich, the executive director of the New Zealand Initiative.

As always, we welcome your additions in the comment stream below or via email to david.chaston@interest.co.nz.

And if you’re interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1) Brazil’s recession

In case you have missed it, the world economy is in crisis mode. So welcome to Friday’s Top 10, The Doom and Gloom Edition. If you bear with me for the first nine stories of economic turmoil, I will reveal the real reason for our troubles at the very end.

To kick us off, let’s remember that the emerging markets’ crisis is more than just about China. Consider the case of Brazil, where crisis symptoms abound.

Brazil analysts forecast faster inflation and a deeper contraction next year, putting them at odds with the country’s top economic officials. Brazil’s inflation will accelerate 5.50 percent in 2016 compared to last week’s estimate of 5.44 percent, according to the Aug. 21 central bank survey of about 100 analysts. They also forecast the economy will shrink 0.24 percent in 2016, down from a 0.15 percent contraction last week. It was the third straight week economists increased their consumer price forecast and cut their GDP estimate for next year.

2) More gloom and doom (with no boom in sight)

The celebrated author of the Gloom, Doom, Boom Report, Marc Faber, does not give us much reason to be optimistic, either. 

We have a slowdown practically everywhere and if you take out the fudging of statistics, the economy for the median household everywhere in the world is not doing particularly well. If the global economy were doing so fantastically well, how would it be that commodities collapsed to the extent that they have declined? Or how would it be that the currencies of American markets and some of them have actually declined by more than 50 percent against the U.S. dollar in the last three years. How would this happen? So I do not believe that we have a healing of the global economy. On the contrary, I believe that the global economy is slowing down and that essentially equity markets are not particularly attractive. 

3) Satyajit Das and the illusion of liquidity

Star analyst Satyajit Das explains how regulations and central bank interventions after the Global Financial Crisis have distorted markets, thereby exacerbating the crisis. 

The problems of trading liquidity fundamentally highlight the distorting effects of intervention in market mechanisms. Official policies in the aftermath of the financial crisis have forced excessive risk-taking in search of returns to prevent erosion of the purchasing power of savings. At the same time, regulation changes have reduced trading liquidity. Over time, the process feeds on itself, with investors becoming increasingly exposed to ever more risky financial assets that will become illiquid in a crisis, thus triggering a major collapse in prices. The process is difficult to reverse. Withdrawal of liquidity would precipitate the problems. Yet, the more money central banks add to the markets and the longer they take to withdraw their support, the greater the distortion to normal market functioning and the larger the risk. 

4) Australia heading for recession?

News from across the ditch is getting gloomier as well, and even The Irish Times is reporting on Australia’s uncertain economic future. 

Dr Mark Melatos, senior lecturer at the University of Sydney’s school of economics, says China’s flagging economy is having major repercussions in Australia. “We’re just seeing the start of it. I’m pretty pessimistic. Australia hasn’t had a recession for 25 years and we can thank a lot of that to the commodities boom, which has basically been due to China. And now that’s falling apart, so I would imagine we will end up with a recession sometime in the next couple of years,” he told The Irish Times. 

5) Even Rupert Murdoch is worried

It’s not just that The Irish Times that is worried about Australia; it’s also Australia’s Rupert Murdoch who is worried about pretty much the whole developed world.

News Corp boss Rupert Murdoch has summed up just how precarious markets and the economy are at the moment in just two tweets on Friday. Murdoch warned it’s not just stock prices that are falling and suggested we might be on the edge of another global crisis. He also said that central banks would have precious little ammunition if the world heads into recession. 

6) Gold the new ‘safe haven’?

Writing in USA Today, market trend forecaster Gerald Celente explains why gold could be the safe haven in the current global economic turmoil. 

Conventional wizards now advise to take a deep breath, it’s merely a correction and there are buying opportunities. We disagree. Global central banks’ low interest rate policies and massive quantitative easing liquidity injections merely relieved symptoms of the Panic of ’08, but were not the cure. Therefore, in this environment of currency devaluations, failing economies and a series of other trend lines leading to increased global conflict and social unrest, we forecast gold will be highly valued as a safe haven commodity.  

7) When Greek economists get worried about China

If you thought Greece’s crisis was bad, you ain’t seen nothing yet. China is going to be 1,000 times worse, writes Forbes contributor Panos Mourdoukoutas.

Things are even worse in China when it comes to the potential of a systemic risk crisis. Government-owned banks lend money directly to government owned corporations, which usually function as welfare agencies; and to land developers, who are behind the country’s “investment” bubble, one of the engines of the Chinese economy. Now, think about the size of the Greek economy vis-à-vis the size of the Chinese economy. You can see why China’s financial crisis could be a Greek-style crisis on a grand scale, unsettling world financial markets, as the country’s regime will try to export that crisis through currency devaluations. Investors around the world just got a taste of what that means for currencies, commodities, and equities.

8) Eurozone still heading for collapse: Roubini 

Dr Doom, aka Nouriel Roubini, has made another pessimistic prediction. The eurozone will not last, the American economist just told a German audience.

 American economist Nouriel Roubini said on Wednesday that the Eurozone will break up unless the member states restore economic growth. The New York University professor was speaking at a conference organised by IG Metall, Germany’s biggest trade union, in Berlin. He said that the Eurozone was not paying enough attention to job creation and GDP growth, because it was too focused on austerity. “If I had to propose policies that change that historic road I would say we have to postpone the fiscal austerity in the periphery and do it more gradual, slower rather than faster. In countries like Germany where there is fiscal space instead of doing fiscal austerity now you have to postpone it and you have to do fiscal stimulus,” he said.

9) A global commodity crisis

It’s not just an ordinary stock market crash we are witnessing but a crisis of commodity prices across the board. Which makes you wonder whether gold really is a safe haven after all. 

If the Bloomberg index is any indication, the plunge between its 2011 high and now is worse than its fall during the Asian financial crisis in the late 1990s. The index has declined over 51% since its 2011 peak of 175.42, recording a greater fall than that of 42% between the high of May 1997 and the low of February 1999. However, the index suffered its worst decline during the global financial meltdown of 2008, losing 57% between its peak of 237.95 (July 2, 2008) before the crisis flared up with the collapse of Lehman Brothers and the low of 102 (March 2, 2009) after which the index started inching up gradually. 

10) It’s Trump’s crisis

Thank you for bearing with me through all of these doom and gloom stories. As your reward, let me reveal to you who is responsible for the global crisis: Donald Trump!

Investors and financial journalists scrambling to find an explanation for the recent plunge in global stock markets have plenty of suspects. Some look abroad for scapegoats: Greece or China. Others blame Janet Yellen: the Federal Reserve she chairs is at long last on the verge of raising interest rates, if only slightly. Personally, I blame the decline in share values on Donald Trump. Markets are finally taking note of the fact that the Republican presidential candidate atop the polls is someone who wants to restrict immigration, cut back on foreign trade, and raise marginal tax rates. In each case, Trump’s policies are the opposite of the pro-growth approach.