The Trump Trade War Recession?

By John Mauldin, May 31, 2019

Hoover, Smoot & Hawley
Multiplayer Game Theory
Trade Sandpile
Victim List
Lopsided Polls
The Seven-Body Problem

Publisher’s Note: John Mauldin is recovering from a minor illness. He’ll be back next week. Meanwhile, with trade disputes still roiling markets, below is a still-timely letter he wrote last year. You should definitely read it again. —Ed D’Agostino

“A conservative is someone who stands athwart history, yelling stop, at a time when no one is inclined to do so, or to have much patience with those who so urge it.”
—William F. Buckley, Jr., 1955

I will never compare myself to Bill Buckley, as a writer or anything else. He was one-of-a-kind and a personal hero who I am disappointed to say I never met but who I read a lot. The response to my recent tariff comments gives me a small hint of how it must have felt to “stand athwart history” and launch the modern conservative movement.

Many of you support the tariffs. And I understand your reasons. I really do.

How central banks should prepare for the next recession

Date: 30-05-2019
Source: The Economist

They must change their targets and find new tools—while avoiding a populist takeover

It has been a decade since America’s latest recession, and it has taken that long for the Federal Reserve to ask itself whether it is ready for the next one. On June 4th officials and scholars will gather in Chicago to debate how monetary policy should work in a world of low interest rates. The benchmark rate is 2.25-2.5%, which gives the Fed little room to cut before hitting zero—and less than half as much as it has needed in past downturns. As if to remind policymakers that rock-bottom rates are here to stay, the ten-year Treasury yield fell below 2.3% this week. Other central banks, many of which preside over still lower rates and weaker economies, are looking to the Fed for inspiration.

The joys and pains of investing in a mature business cycle

Date: 23-05-2019
Source: The Economist

Investors fear that a recession cannot be far off

In 14th-century Germany a heretical cult grew up around the figure of Frederick II, a dead emperor. Its adherents believed that the apocalypse was close at hand. “In all countries a hard time sets in,” is how a prophecy from the period begins. “Rapine and arson go hand in hand,” it continues. “Everyone is at everyone else’s throat. Everyone harms everyone else in his person and his belongings. There is nobody but has cause to lament.”

This is not the sort of language used in investment-bank research notes and hedge-fund letters, or by pundits on cnbc and Bloomberg News, however troubled the outlook might seem for financial markets. Yet there is a parallel between today’s market chatter and the prophecies of medieval cults. The millenarians believed they were living in the end times or “last days”; and so, in a way, do today’s investors. Much of the talk is of “late-cycle” market conditions—the kind that prevail after a long expansion, when economic slack is largely used up and assets are richly priced.

The Rules Will Change but That’s (Probably) OK

By John Mauldin

April 19, 2019

Fiscal Insanity

Avoiding the Windshield
The Cost of High Debt
New Rules, or Moving the Goalpost

“But the emperor has nothing at all on!” said a little child.

“Listen to the voice of innocence!” exclaimed his father; and what the child had said was whispered from one to another.

“But he has nothing at all on!” at last cried out all the people. The emperor was suddenly embarrassed, for he knew that the people were right; but he thought the procession must go on now! And the lords of the bedchamber took greater pains than ever, to appear holding up the robes although, in reality, there were no robes at all.

—“The Emperor’s New Clothes” by Hans Christian Andersen

When you write about controversial topics for hundreds of thousands of readers for 20 years, you develop a thick skin. Virtually anything I say will upset someone.

So, when people say something like, “John Mauldin wakes up sucking lemons and then moves onto something sour,” as happened after last week’s letter, it doesn’t bother me. (It actually made me smile.) I write what I believe is correct. Those opinions change over time as I get new information.

I’m not the only one who changes. Laws and policies that may seem etched in stone are often more flexible than generally thought. In last week’s Japanification letter, I described how no one anticipated the various extreme measures taken in the last crisis, from TARP to QE to NIRP. Yet once those ideas were in play, they happened quickly.

I think the next crisis will bring similarly radical, sudden changes. We will think the unthinkable because we will see no other choices. That means the range of possible scenarios may be wider than you think.

Karas warnt vor italienischen Budgetplänen

21. April 2019, 13:56 derstandard.at

„Italienische Freunde der FPÖ spielen mit der Stabilität des Euro“

Brüssel – „Italiens neue Budgetpläne sind brandgefährlich. Italien droht immer mehr, in die Abwärtsspirale hineinzugeraten“, warnte der ÖVP-Europaabgeordnete Othmar Karas am Sonntag in einer Aussendung. Italien sei mit einem Schuldenberg von mehr als 2,3 Billionen Euro das am höchsten verschuldete Land der Eurozone und gleichzeitig als eines der größten EU-Länder wichtig für die Stabilität.

Die Europäische Kommission müsse dafür sorgen, dass Italien sich an die gemeinsamen Spielregeln halte, so Karas. Wenn die FPÖ sich in Europa mit der Partei von Italiens Innenminister und Lega-Chef Matteo Salvini verbünde, „heißt sie die Schuldenpolitik gut“. Die italienischen Freunde der FPÖ spielten mit der Stabilität des Euro.

Japanified World Ahead

By John Mauldin

April 12, 2019

Losing Decades
Too Much, Too Fast
A $10 Trillion Federal Reserve Balance Sheet
Mastering Private Markets

Regular readers may have noticed me slowly losing confidence in the economy. Your impression is correct and there’s a good reason for it, as I will explain today. The facts have changed so my conclusions are changing, too.

I still think the economy is okay for now. I still see recession odds rising considerably in 2020. Maybe it will get pushed back another year or two, but at some point this growth phase will end, either in recession or an extended flat period (even flatter than the last decade, which says a lot). And I still think we are headed toward a global credit crisis I’ve dubbed The Great Reset.

What’s evolved is my judgment on the coming slowdown’s severity and duration. I think the rest of the world will enter a period something like Japan endured following 1990, and is still grappling with today. It won’t be the end of the world; Japan is still there, but the little growth it’s had was due mainly to exports. That won’t work when every major economy is in the same position.

Describing this decline as “Japanification” may be unfair to Japan but it’s the best paradigm we have. The good news is it will spread slowly. The bad news is it will end slowly, too.

Capitalism Gone Wild

By John Mauldin

April 5, 2019

Unwise Investment
Zombie Companies
Gummed-Up Economy
Uncreative Destruction
The Drive for Scale
Helicopter Governments

Recession is coming. We can debate the timing, but the economy will turn decisively downward at some point. My own analysis, looking at the data available on April 4, says recession isn’t likely this year but unfortunately looks very probable in 2020.

In addition to when it will happen, there’s also the question of how deep the next recession will be. A shallow downturn wouldn’t be fun, but compared to the last one might feel relatively refreshing.

Alas, I don’t think we will be that lucky. I think the opposite: The next recession will be deeper, longer and far more painful to many more people than your average recession, and could persist as long as the last one. That is because the next recession in all likelihood will be truly global. If you sailed through 2007–2009 without your lifestyle changing, I wouldn’t assume it will happen that way again.

Ironically, but not surprisingly, it will be the response to the last recession that makes the next one so much worse. Part of the reason is that investors once again “learned” that if you simply stay the course, the market will get you back to where you were and more. The massive move into low-fee index investing instead of active management will make the next recession more painful.

Manufacturing blame

Date: 04-04-2019
Source: The Economist

The gloom hanging over the world economy is confined to manufacturing
Service industries have defied the sinking mood

Pessimism about the world economy has grown throughout 2019. Disappointing data, tumbling bond yields, the trade war between China and America and political crisis in Britain have all played a part. The only bright spot has been mostly buoyant stockmarkets. On April 9th the imf will probably report a downgrade to its forecast for global growth this year, which in January stood at 3.5%. But there has so far been only a deceleration, not a downturn, because economic weakness has been contained mostly to manufacturing, rather than afflicting the service sector (see chart). And a manufacturing rebound might soon lift the global mood.

Manufacturing’s woes can be blamed primarily on falling global trade growth. That is down partly to the trade war, and partly to Chinese policymakers’ attempts to reduce leverage, which slowed domestic growth late last year, curtailing demand for imports. The pain has been felt most in Europe, which is more exposed than America to emerging markets. It has been particularly acute in Germany. On April 1st a survey of German manufacturers, a preview of which buffeted bond markets in March, turned out even worse than expected. Industrial production has slowed even more sharply in Germany than in Italy, which is in recession, note economists at Goldman Sachs, a bank. Yet Germany’s service sector appears to be growing strongly, as does that of the euro zone as a whole.

Bei der Prognose von Rezessionen sind Ökonomen schlecht

Wir nicht! (hfk)

Studien. Der Aktienmarkt deutet eine Rezession zuverlässiger an, als Ökonomen das tun. Dass Profis so danebenliegen, hat interessante Gründe.

02.04.2019 um 18:15

London/Wien. Im Jahr 1966, vier Jahre, bevor er den Nobelpreis für Ökonomie erhielt, scherzte Paul Samuelson, dass Rückgänge der US-Aktienkurse sogar neun Rezessionen im Land richtig vorhergesagt hätten – obwohl letztlich nur fünf eingetreten sind. Investoren würden eben zur Panik neigen.

Die Vertreter seines Berufsstandes würden dennoch alles für eine solche Treffsicherheit geben. In Wirklichkeit nämlich haben diejenigen, die dafür bezahlt werden, Wendepunkte im Konjunkturzyklus auszurufen, eine traurige Erfolgsbilanz. Dies zeigt eine Untersuchung just zum jetzigen Zeitpunkt, da das Rezessionsgespenst wieder umhergeht: Im Gegensatz zum Aktienmarkt ist bei den professionellen Auguren die Wahrscheinlichkeit größer, dass sie Rezessionen verpassen, als welche zu prognostizieren, die nie eintreten. Der Tiefpunkt war natürlich das allgemeine Versagen, die große Rezession Amerikas zu prognostizieren, die im Dezember 2007 begann – neun Monate vor der Insolvenz von Lehman Brothers.

Schwache Bilanz des IWF

Global Growth Faces Fresh Threat as Industrial Downturn Spreads

Date: 01-04-2019
Source: The Wall Street Journal

Downturn has gripped factories in the eurozone as well as major Asian exporters such as Japan and South Korea

Factory activity in much of the world shrank last month, stirring fears that a rebound in manufacturing in China won’t be enough to stave off a sharp slowdown in global economic growth this year.

Fresh figures Monday showed that an industrial downturn has gripped factories in the eurozone’s biggest countries, including Germany, the region’s economic powerhouse, as well as major Asian exporters such as Japan and South Korea. The new data added to expectations that central banks will continue to loosen monetary policy to combat the slowdown.

March surveys of purchasing managers at factories around the world showed a pickup in activity in China and other regional economies with which it has close links, including Indonesia, the Philippines and Thailand.