2016 started off as one of the worst years on record for the stock market. As investors scrambled around dreading that the bull market might be over, the Federal Reserve and Central Banks from the around have continued to pacify fears that despite the jerky start, economic indicators were positive.
The Federal Reserve incessantly refers to the unemployment numbers, which fell to 4.9 percent (the lowest in a decade), as proof that the economy is continuing to strengthen. But how true are the soothing words of the Central Banks as compared to the economic data?
Gold the Indicator
In the ancient days, gold was considered the medium of exchange but in more recent times, especially since the elimination of the gold standard, the precious metal has been seen as a commodity. The prices of commodities fluctuate with the overall demand and supply of the global economy. As the global economy decelerates, commodities fall in price. As of 2016, almost all commodities have dropped in value and leading that dramatic decline is oil. Despite the precipitous drop in commodity prices, one commodity that has not depreciated but rather increased in value is gold. Unlike other commodities, gold can fluidly transition between being a commodity, medium of currency or hedge against financial uncertainty. In the current fickle financial environment, gold has reasserted itself as a form of insurance against the unstable fiat currencies.
Unlike other commodities, gold can be seen as a vote of confidence for Central Banks around the world including the Federal Reserve. Gold has been up about 14% against the Dollar but roaring against other currencies like the Ruble, Yen, etc. The rise in the price of gold indicates that investors are flocking to the precious metal as means of indemnification. Thus, all the assortments of financial tools that the Central Banks have employed such as quantitative easing, negative interest rates, etc. have failed with respect to propping up the economy. Despite all the “positive” indications by the Federal Reserve, the economic numbers from around the world are indicating the world is or will be in a global recession.
The US, the world’s largest economy, has not been performing as well as the administration and Federal Reserve has claimed. Despite the stock market breaking records in the last several years, the fundamentals did not support it rather the Federal Reserve’s intervention via quantitative easing and interest rate reductions have helped create the artificial bull market. The largest misleading indicator is the unemployment rate, which is claimed to be at 4.9% but, in reality, is much higher. Some estimates put the unemployment numbers closer to recession/depression levels. In addition, today more than half of Americans are on a form of government assistance. The following data indicates a worsening economic situation:
- Exports were in decline in a year over year basis by 7%
- Factory orders have dropped for 14 consecutive months
- The Restaurant Performance Index, a monthly composite index that tracks the health and outlook of the restaurant industry, has dropped to the lowest level since 2008
- The Baltic Dry Index, a measure of the price of moving major raw materials by sea, fell below 300 for the first time. This signals a dramatic drop in global demand for raw materials since the index is a direct measure of demand for shipping capacity
- Orders for the Class 8 trucks have been almost cut in half on a year to year basis, which indicates demand for supplies has largely declined within the US
- Despite approaches to reduce production of oil by global producers, the price of oil has more or less stayed below $30 USD per barrel. This indicates the global economy has slowed down
- A large number of those employed in the US since the Great Recession was due to the boom in the Oil and Gas (O&G) industry. It is now reported that 67 O&G companies are filing for bankruptcy in the US and that 35% of all O&G companies around the world are at risk of becoming insolvent. This is in addition to the tens of thousands that have been laid off since the decline in oil prices
- The number of job cuts skyrocketed by 220% in the month of January
- Retail stores are shutting down at a stunning pace across the country
While the US numbers are looking bleak at best, the global data is not any better:
- Chinese exports have fallen by more than 11% on a year over year basis
- Chinese imports are even worse in January on year over year basis indicating a decline of almost 20% –This dramatic decline is part of a larger trend of Chinese imports declining now for 15 months in a row
- Indian exports plunged by almost 14% on a year over year basis
- Japanese exports have declined by almost 10% on a year over year basis while their imports have declined by almost 20%
- For the sixth time in six years, Japanese GDP growth has treaded negative territory
- The overall global stock market currently exhibits a bear market with about 20% of all global stock wealth being wiped out in the last year alone
Unfortunately for global investors, the continued intervention by Central Banks around the world, in the hopes of propping up the languishing economies, has caused the global economy to only worsen. Since the 2008 crash, the interest rates have been slashed by the Central Banks almost 640 times and more than 12 trillion dollars’ worth of assets have been purchased by them to no avail. Despite attempting to resolve the financial crash of 2008, governments did not eliminate the root cause of the problem but rather applied a bandage solution, which only worsened over time. Now it is all beginning to slowly unravel. All that is needed is a Black Swan event to bring the Central Banks to use the “R-word ” in describing the global economy.