Economic pleasant surprises are in the past, as is the buildup of the balance sheet. The future is deleveraging.
Alarm bells are ringing. No one cares. By now, everyone knows stock only go up.
For those in tune with other ideas, Financial Times writer Stephen King suggests the Global Economy is Due for a Downswing.
Jim Bianco at Bianco Research comments on synchronized growth in his report Concerted Economic Growth is in Jeopardy of Ending.
Summary
Less than 50% of the world’s economies are now producing economic data surprises. Realized economic data following suit in the months to come would remove the tailwind of ‘concerted economic growth’ for risk assets and central banks. Emerging markets may be first on the list to experience higher volatility.
Comment
We have all been discussing ‘concerted global economic growth’ since early 2017 as a tailwind to risk assets and central bank policies. The chart below shows the percentage of the world’s economies producing economic data surprises (orange line) and above-average data changes (blue line) since 2004.
Over 90% of economies were indeed posting realized data changes at above-average growth rates in mid-2017. However, reported data has slowed its ascent over the past month led by the Eurozone and Canada. The percentage of economies with upside surprises has fallen to 44%, which has been a leading indicator for actual data changes like payrolls, industrial production, and durable goods orders. Above-average data changes have also rolled over to 67%. A break below 50% would mean ‘concerted economic growth’ should no longer be proclaimed.
Economic Misses
The next chart offers the median returns by major asset classes after the percentage of economies growing above-average falls below 60%. The impact is not immediate, but higher volatility and drawdowns do ensue over the following months.
We expect U.S. Treasuries will slow their climb in this event, helping promote more steady, positive returns by the likes of municipal bonds. Emerging markets, U.S. high yield, and the S&P 500 are not necessarily expected to tumble, but higher volatility will remain the theme.
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Optimistic View
Compared to me, John Hussman, GMO, and a handful of others, Bianco presents an optimistic view. Then again, I am not watching the next 3-4 months. I am concerned about the next seven years.
What most caught my eye is Bianco's view on the MSCI World Index and US treasuries.
Typically, rot starts at the periphery, the spreads to the core. Anyone remember subprime? Eventually, it all became subprime.
It's going to happen again.
Arithmetic of Risk
Stocks are tremendously overvalued. In Sucker Traps and the Arithmetic of Risk I noted that some expect equities to decline as much as 67% from here.
I think we are somewhere in the box as shown.
Unlike Bianco, I won't put a timeframe on much of anything. But note his big winner: 10-year US treasuries.
This is at a time when most of the rest of the world is screaming inflation.
My view is that Inflation is in the Rear-View Mirror.
Debt-deflation is on the way and gold will be the beneficiary. If you disagree, please read the above article before moaning.
My definition of inflation may not be the same as yours. Mine is based on real-world economics, and we are in for a world of hurt.