Economic data this year has mostly surprised to the upside. However, recently, things have started to disappoint. For instance, Citigroup’s basket of economic indicators has fallen to its lowest level since the Financial Crisis. Even the Atlanta Fed is bearish, recently forecasting GDP at 1.6%. Bond King Jeffrey Gundlach agrees, saying he believes the odds of a recession in the next 24 months are “very high”. He believes the chances of a recession within 12 months are 50-50.
FINSUM: We think Citi’s indicator is definitely overstating the situation. However, there are legitimate concerns about the economy, especially if you start to consider the possible implications of a trade war.
A lot of investors are worried that the turmoil in Turkey could spark a global financial crisis. In particular, Turkey’s weak position could spread to European banks, letting the situation balloon from there. However, the reality is that such fears are overblown, according to a credit analyst. Europe’s banks are actually in a strong position and can absorb losses from Turkey, so there does not seem to be any contagion to spread. Turkey’s problems are largely self-inflicted and unique as well, so it is hard to see all EMs succumbing to the panic.
FINSUM: From an American investor’s standpoint, the Turkey situation should not be very concerning as it does not seem to have much direct relationship to the US economy or markets. Hence our shares rising while Europe’s are falling.
Investors may be watching the markets anxiously, and with good reason. Turkey is in the middle of a full blown financial crisis, and the threat of it leaking into western markets via European banks seems tangible. Emerging market stocks are down 18% from their peak in January and there is pressure on other EMs like South Africa, China, Russia, and India. However, the worries over a full-scale emerging markets meltdown seem overdone, especially considering the economies of EMs are actually quite strong and healthy at the moment, which should keep things from falling into dire straits.
FINSUM: EMs currently have good currency reserves and many are running budget surpluses, so they are not entering this period of turmoil in weak shape.
There has been a lot of speculation lately about the extent to which the current growing trade war may affect the economy and markets. Some expect a benign effect on both. Well, Bloomberg has run a piece arguing that the trade war may lead to a Chinese debt crisis, which could in turn lead to a global financial crisis. The impact of the tariffs on the Chinese economy could be serious. China is already seeing a very high level of defaults, and with the extra burden of tariffs coupled with a weaker Yuan, it could create credit chaos for Beijing. Bloomberg put it this way, saying “That the massive burden of debt will drag the economy into recession is as obvious as the empty towers that rise on every landscape … But on any metric, the amount of new lending each year grows faster than the economy, and the interest newly owed exceeds the incremental rise in GDP. In other words, the whole economy is a Ponzi scheme”.
FINSUM: It is hard to imagine a more forceful comment than that last one from Bloomberg. We don’t know if we would go so far, but given how indebted the Chinese economy is, and their reliance on exports, tariffs could spark a meltdown that then spreads overseas.
Three of the foremost experts on Financial Crises—proven by their experience in 2008—have just weighed in on the threat of another Crisis. Ben Bernanke, Tim Geithner, and Hank Paulson have just commented in a joint press conference that while the US financial system has better barriers in place to prevent a crisis, its tool kit should one come is considerably weaker than in 2009. The main weaknesses cited were the massive increase in debt the government has experienced since the Crisis, giving it less room to bail out the market; and secondly, the deep political divisions which could more easily block any bipartisan action that may be necessary to save the financial system. Geithner summed it up this way, saying “Better defenses, weaker arsenal”.
FINSUM: This is some very good insight from the most experienced Crisis fighters out there. All their points sound quite reasonable to us.