Retail sales within the Euro Area for October have produced a slew of negative numbers. On several occasions this year multiple nations have simultaneously contracted, but so far 15 out of the bloc’s 28 countries were in the red (the Euro Area itself reported a -1.1% fall in sales). Germany, France, Belgium, Spain, Portugal and Ireland were among those affected. Figures for November and December will provide clearer insight into whether the scale of this downturn develops into a trend.
This past Sunday the Bank for International Settlements (BIS) released their final quarterly review for 2017. Of particular note is a section called, ‘A Paradoxical Tightening‘, where the bank openly raise the prospect of the next economic crisis manifesting sooner than people realise.
After giving an overview of how central banks have been tightening monetary policy over the past year, they comment on how investors ‘essentially shrugged off these moves‘ and continued with apace to buy into the stock market and keep the post Trump victory bull run going (as of writing, the Dow Jones is on over 24,000 points). They then move on to talk about how the actions of central banks have followed the model of ‘gradualism‘:
Gradualism and predictability have characterised the current tightening cycle, with respect to both the policy rate and balance sheet adjustment. Gradualism also defined the programme announced in June for the balance sheet run-off. In addition to being perceived as gradual, policy decisions in the current cycle were well anticipated. The balance sheet policy was also carefully and extensively communicated.
Gradualism is a leading component of globalist doctrine. There is evidence of this throughout history – from the creation of the Federal Reserve in 1913 to the birth of the BIS in 1930 and the International Monetary Fund in 1944. In seeking to achieve a greater level of centralisation, globalists prefer to take their time.
I would contend that the Fed’s actions have been delivered with an orchestrated clarity and utmost attention to detail, in order to keep the majority invested in the markets until the time comes when the bank’s programme of raising rates and trimming their balance sheet begins to impact on equity prices. When a downturn occurs, events that coincide on a geopolitical level will most likely serve as an adequate distraction from their behaviour.
Where the review gets particularly interesting is when the bank discusses how ‘gradualism and predictability may have contributed to the easing of financial conditions’. Beneath the sub-heading, ‘High Valuations: market complacency?’, they write:
- Tentative moves towards monetary policy normalisation have revived long-standing concerns about asset valuations.
- At the root of these uncertainties are questions about how the compression of term premia in core sovereign bond markets may affect other asset valuations. There is also significant uncertainty about the levels those yields will reach once monetary policies are normalised in the core jurisdictions.
In more simplistic terms, what the bank are citing here is the danger of rising inflation in bond yields amidst the central bank policy of ‘normalisation‘.
The BIS then share concerns about the dividends per share of U.S. equities, and how since the ‘Great Financial Crisis‘ they have been growing exponentially. This has given rise to ‘questions about long-term sustainability‘ and how ‘the upward potential for dividend growth may be limited.’
The reason for why this might originate rests with this passage:
High dividends per share were also supported by stock repurchases. Except for a short interlude in 2008-09, share repurchases have been very large since the early 2000s (bottom left-hand panel). When and if interest rates begin to rise, corporates may have the incentive to tilt their capital structure back to equity, or at least to reduce stock repurchases, which could raise further questions about stock market valuations.
Stock buybacks have been the major cause for the elevated equity prices that we see today. Companies buying up their own stock with borrowed money when rates were practically at 0% was seen as a win-win situation. Now that rates are consistently on the rise, that practice will no longer be as prevalent. The fact that the BIS have been so open about this, and have used the probable deterioration of buybacks to question current market valuations suggests a downturn could be imminent.
The BIS’s conclusion is that bond investors ‘remain sanguine‘, a fact that ‘may leave investors ill-positioned to face unexpected increases in bond yields‘. They are not the only ones. Global media outlets continue to push the narrative of an economic rebound since 2008 (rising growth, shrinking unemployment etc). Apparently, this is the bull run without end. First it was a race to Dow 20,000. Now it’s to Dow 30,000. Deeper inquisition into why equity prices are so high in the first place has not been forthcoming. This will ultimately be to the detriment of not just investors, but people who are already finding life hard enough to afford. And that’s before they even factor in the emergence of a new economic decline.
It is difficult to gauge and understand geopolitical and economic events without first comprehending the fact that much of what happens in the world is engineered to happen and with a specific encompassing goal in mind…
- Richard Sharp, a member of the BoE’s Financial Policy Committee, said it was important to recognise that Britain’s debt levels of nearly 90 percent of gross domestic product might prove stretched if future shocks occur.
- “To my mind, low market interest rates and a persistent excess of global liquidity could be creating an illusion of readily available spare national debt capacity,” Sharp said, in comments prepared for a speech to University College London.
- “The global financial crisis taught us that fragilities can be more real than apparent and that global spillovers mean that broadly shared systemic fragilities can lead to disastrous contagion and amplification,” he said.
- UK sales of new cars fell for an eighth consecutive month in November as economic uncertainty and a sharp fall in demand for diesel cars weighed on demand.
- Sales slumped by 11.2% last month to 163,541 vehicles, putting the industry on course for the first drop in annual sales since 2011. New car sales in the first 11 months of 2017 were down by 5% at 2.39m.
- Struggling US retailer Toys R Us has confirmed plans to close to a third of its permanent UK stores but says all the branches will remain open through Christmas and the new year.
- Up to 800 jobs are threatened by the potential closure of at least 26 of Toys R Us’s 84 permanent UK stores from spring next year. It is seeking to reduce the size of a further 26 stores along with rent reductions on those and 12 more stores.
CNBC: Fed rate hike is expected next week and three more increases are expected in 2018: Reuters poll
- The results, from a survey taken just before the U.S. Senate voted to pass tax cuts that are expected to add about $1.4 trillion to the national debt over the next decade, show economists were already becoming more convinced that rates will need to go even higher.
- While about 80 percent of economists surveyed in October said such tax cuts were not necessary, the passage of the bill, President Donald Trump’s first major legislative success, means the forecast risks have shifted toward higher rates, and faster.
- Americans overall bought and leased new vehicles at an annual pace of 17.4 million, according to General Motors, slightly below the 18.1 million and 18.6 million pace of October and September sales, respectively.
- Fiat Chrysler Automobiles’ sales fell 4% in November; General Motors’ slid 2.9%, and Ford’s sales rose 6.7%, as dealers tried to clear 2017 models from their lots and consumers continued shifting to trucks, crossovers and SUVs.
- The Moscow stock exchange will soon issue nearly $1 billion-worth of yuan-denominated bonds. It could become the start of a new financial system not based on the US dollar, analysts say.
- Russia will issue the 6 billion yuan (about $900 million) bonds with a five-year maturity in December or January. The Central Bank says it is testing the water for future investments.
- More than eight years since the birth of bitcoin, central banks around the world are increasingly recognizing the potential upsides and downsides of digital currencies.
- The guardians of the global economy have two sets of issues to address. First is what to do, if anything, about the emergence and growth of the private cryptocurrencies that are grabbing more and more attention — with bitcoin climbing above $10,000. The second question is whether to issue official versions…
**Attribution for home page image: Wladyslaw Sojka [FAL, GFDL (http://www.gnu.org/copyleft/fdl.html)**