We all know that the global economy is stinking. Europe’s economy is a swampy deflationary mess. Japan’s looks a little better, but it questionable whether any of the growth is real, or if it is all just nominal price increases from its aggressive currency stealth devaluation. China is growing, but not nearly as fast as the world economy is accustomed. But into this global slowdown, the one standout has been the US economy. For the past little while, the US has seemed to be able to continue chugging along without being hampered by the weak global economy. But how long can that last? Is the US economy really as strong as traders believe? Should we really not worry about it? Are we sure it is good?
There is a big part of me that says don’t over think it. Economies tend to continue along in one direction far longer than a hyper active trader like myself imagines. An economy that is getting stronger usually continues to get stronger until the Central Bank chokes off growth by raising rates. That process can sometimes takes years, and second guessing when the strengthening momentum is going to peter out is a difficult endeavour.
But there is another part of me that contends we are not in a normal economic environment. I know that every cycle is unique, and everyone loves to come up with reasons why this time is different, but it rarely (never) is. Yet, they can be no denying that the massive Central Bank balance sheet expansion over the past half dozen years is unprecedented. Maybe things really are different this time.
I am unsure if the US economy is going to falter to the pressure of the global economic slowdown, but I am on the lookout for clues. Yesterday there were a slew of economic reports that suggested that the slowdown might be spilling over into the US.
First off, the initial claims rose by an unexpected 22k. Economists were expecting 288k claims. They came in at 313k. The disturbing aspect of the claims data is that it seems to be trending higher. It is a noisy series, but it isn’t headed the right way.
And just in case you don’t think that initial claims matter, have a look at the chart of the S&P 500 versus the inverted claims number.
It wasn’t just claims that disappointed. Have a look at the screen shot of the economic releases versus expectations.
There can be no denying that these releases were below forecast. Personal income, below forecast. Most of the goods data – disappointing. Chicago and University of Michigan sentiment numbers , below consensus. And finally the pending home sales topped off the weak numbers with another miss.
Is the global economic weakness spreading to the US? I am not sure, but this was the first real good clue that the Americans might not be quite as immune as previously hoped.
And what really scares me is that global bond markets are all hitting new lows in terms of yields. The bond market is generally much better at forecasting the economy than stocks, so the recent dramatic decline in yields really freaks me out.
German 10 year yields are basically at an all time low of 73.5 basis points. Japanese 10 years yields have pushed back down to their all time low level of 43.7 basis points. The US 10 year is yielding a whopping 2.23 basis points, but it has been falling as well.
I have been writing about how the world financial system is much more unstable than most pundits realize. Although I think these bond yields are ridiculous, I am nervous that they could get even stupid-er. If the US economy rolls over, then there is going to be a fixed income chase that could surprise many. I read recently that most pension and other retirement account managers are underweight their benchmark duration. These managers are all counting on the US economy to continue to surprise to the upside and for the Fed to raise rates. Although that could happen, given the system’s instability, I am worried about any crowded trade.
I am covering my JGB short as well. Even though I hate myself for buying a bond that is yielding negative 2% real rates, I am too scared to hang on for now. I have a worry that things are going to become really unglued.
I believe that a massive bear bond market is going to be the catalyst that eventually derails this financial asset bull market. But that doesn’t look like it is in the cards for today. So I am going to make sure I am on the sidelines for the potential fireworks if the US economy also rolls over.
This is not a prediction, I don’t know if the US economy is going to be able to battle through this global economic slowdown without rolling over or not. They might be able to, then again, they might not. I just know that at the margin the poor economic data keeps piling up against the US, while at the same time the global economy refuses to bounce in any meaningful manner. Every day the odds of the global economic slowdown dragging the US downward increase. I am nervous about something big breaking, and the market’s belief that the US is immune to the global economic slowdown scares me.
To all my American friends, I wish them a Happy Thanksgiving.