What isn’t clear?
5 February, 2016
The hard data regarding economic activity, especially in the ‘EM’ (emerging markets), but also in ‘DM’ (developed markets) make it quite clear that the world economy is in poor shape. Hard data does not have to mean GDP, which is increasingly regarded as unhelpful in measuring developments within a national economy, and certainly not the numerous surveys now conducted everywhere — although these latter, because they are frequent and timely, at least provide useful indications of the direction things are going.
Rather, hard data means things like final sales, orders of capital goods and, perhaps best of all, how much stuff was actually moved. Of course, it might be argued that the entire concept of “moving stuff” is becoming obsolete, as services become ever more dominant within economies, in terms of employment, sales, etc. However, it seems probable that the old stalwarts of manufacturing and transportation remain excellent indications of what is going on — not least because they are visible and measurable.
One oft-quoted measurement of this sort is the “Baltic Dry Index”, which essentially tracks the cost of shipping dry goods around the world. This index is volatile by nature, subject to severe seasonality and has other problematic characteristics. But when it goes down consistently over time — and certainly when it reaches record-low levels in a series reaching back through the 1980s, as it has in recent weeks — then it is definitely sending a message.
That message is amplified by trade data from important countries around the world, especially the Far East — not just, but certainly including, China — which have been signaling trouble for some time. These data have gotten significantly worse in recent months.
Trucks and tires
But it’s not just trade data, not just the Far East — and certainly not just the impact of the collapse in oil and other commodity prices. In the continental US, much of those kinds of stuff is transported by rail and the weakness reported by the major railroad companies is bad news in and of itself. But the main transportation tool for anything other than the bulk and heavy stuff is trucks. That being the case, the fact that orders for new trucks have collapsed during 2015 and are continuing to slump further this year, is telling us that something is very wrong.
Tracking new truck orders is a pretty wonkish thing to do, although it makes sense if you want to actually kick the tires of the economy instead of floating in macro-economic la-la land. But you don’t even need to do that. You can just follow the news regarding Walmart: how much or little its sales are growing, or shrinking, how many stores it is closing — yes, closing — and where, etc. You could even read Walmart’s quarterly reports, which are not written in Greek and do not involve consumer-level rocket science, as do Apple’s.
All this comes down to one thing: whether in the US, China and South Korea, or the oceans in between, the name of the game is deflation. Whether this is being caused by excess supply or deficient demand is of immense concern to economists, because it largely determines the policy response. The consensus has that deficient demand is the culprit and the attempted solution has been to seek to boost demand, basically by printing huge amounts of money and keeping interest rates very low.
From ZIRP to NIRP
Yet it is now clear to virtually everyone (except Paul Krugman and a few other die-hard Keynesians) that the effort to boost demand via ultra-cheap money has failed. Unfortunately, central bankers around the world are refusing to accept this verdict on their policies and are instead intensifying the scale of their monetary expansions, so that ZIRP (zero interest rate policy) is morphing to NIRP (negative etc.) in one country after another.
But this is a doomed effort, based on theories which markets and even mainstream analysts are no longer willing to believe in. The erosion of belief is manifesting itself in the manic volatility that has become the norm in markets over recent months — in total contrast to the extreme LACK of volatility that characterized markets until mid-2015. This increased volatility is likely to continue and further intensify for some time, with the sharp swings obscuring an overall downward trend which will prove resistant to the efforts of central banks and governments to stop it — as has already proven to be the case in China.
The media focus, as usual, is on the gyrations of the equity markets, but in fact these are merely playing catch-up to the sharp falls in price (and hence rises in yields) that have occurred in the high-yield (i.e. junk) bond market. The rot in bonds is spreading from junk to investment-grade bonds, while at the same time the prices of government bonds — at least of those governments still considered sound — are rising and their yields are collapsing into negative territory.
In other words, we are witnessing a process in which capital is fleeing from most markets, countries and asset classes to the perceived safety of those few markets and assets in which confidence remains stable. It looks and indeed is nasty, but it’s clear enough for anyone prepared to face the facts.