HEADING TOWARDS THE MEGASTORM

HEADING TOWARDS THE MEGA STORM

The recent plunge in stock prices and the slowdown in global growth are taking place at the same time that investor confidence in central banks is waning. Underlying some of the turbulence of the past few months was a growing perception in financial markets that central banks might be running out of effective policy options. The global central banks have already used their most powerful weapons and are currently trying to put forward the untested, experimental policies like negative rates that cut bank profitability while having little impact on lending. But the sluggish performance of the global economy, the massive debt overhang, and the erratic behaviour of the stock market are all directly attributable to the cheap money policies coordinated and implemented by central banks following the Great Recession in 2008. While it's true that China is facing slower growth, oil prices are plunging, emerging markets have been battered by capital flight, and yields on junk bonds are relentlessly rising, it’s also true that central bank policy is not primarily designed to address these problems, but to ensure the continued profitability of its main constituents,  the big banks and mega-corporations. Keep in mind, the global economy has been sputtering for the last 6 years, but major financial institutions have only expressed alarm just recently.  Why? What’s changed? 

What’s changed is profits are down, and when profits are down,  Wall Street and its corporate allies lean on the central banks to work the levers to improve conditions. 

"There’s a big difference between companies’ advertised performance in 2015 and how they actually did. How big? S&P earnings per share fell by 12.7%, according to S&P Dow Jones Indices. That is the sharpest decline since the financial crisis year of 2008. Plus, the reported earnings were 25% lower than the pro forma figures—the widest difference since 2008 when companies took a record amount of charges. The implication: Even after a brutal start to 2016, stocks may still be more expensive than they seem. Even worse, investors may be paying for earnings and growth that aren't anywhere near what they think. The result could be that share prices have even further to fall before they entice true value investors." (Wall Street Journal)

Profits are down and stocks are in trouble. Also, corporate earnings have dropped for two straight quarters which is a sign that the economy is headed for a slump. 

“Recessions have followed consecutive quarters of earnings declines 81 percent of the time, according to an analysis from JP Morgan Chase strategists, who said they combed through 115 years of records for their findings.”(CNBC)

“The increasing desperation of corporate CEOs is clear, as accounting gimmicks and attempts to manipulate earnings in 2015 has resulted in the 2nd largest discrepancy between reported results and GAAP results in history, only surpassed in 2008…..Based on fake reported earnings per share, the profits of the S&P 500 mega-corporations were essentially flat between 2014 and 2015…..earnings per share plunged by 12.7%, the largest decline since the memorable year of 2008….With approximately $270 billion of “one time” add-backs to income used to deceive the public, the true valuation of the median S&P 500 stock is now the highest in history – higher than 1929, 2000, and 2007. Wall Street’s latest con game, with the active participation of corporate CEO co-conspirators, is a last ditch effort to fend off the inevitable stock market crash….All economic indicators are flashing red for recession. Stocks are poised for a 40% decline faster than you can say Wall Street criminal banks." (Jim Quinn at Burning Platform) 

When the profitability of the world’s biggest corporations are at stake, the central banks will move heaven and earth to lend a hand. This was the basic subtext of the discussions at the recent G-20 summit in Shanghai, China. The finance ministers and central bankers wrecked their brains for two days to see if they could settle on new strategies for boosting earnings. In fact, the austerity-minded IMF even called on the G-20 to support a coordinated plan for fiscal stimulus to  boost activity and decrease the risks to the equities markets. Unfortunately, finance ministers balked because fiscal stimulus puts upward pressure on wages and shifts more wealth to working classes. That’s why the idea was shelved, because the oligarchs can’t stand the idea that workers are getting a leg-up. What they want is a workforce that scrapes by on minimum wage and lives in constant fear of losing their job.  

The “failed” G-20 summit was clearly a turning point for the markets. Now that the central banks are out of ammunition, the only hope to keep stock prices artificially high rested on Keynesian fiscal stimulus injected directly into the real economy. That hope was extinguished at the meetings. The prospect that equities can continue to climb higher in the face of shrinking profits, tighter credit, slower growth and bigger corporate debtloads is unrealistic to say the least. 

“Companies still have a little time left before they must pay down the bulk of $9.5 trillion of debt maturing in the next five years….But it’s not getting any easier for these corporations to borrow, at least not in the U.S. In fact, many of these obligations are becoming harder and more expensive to repay at a time when companies face a historic pile of bonds and loans coming due. It’s not terribly surprising that companies have a bigger debt load to pay down. They borrowed trillions of dollars on the heels of unprecedented stimulus efforts started by the Federal Reserve at the end of 2008 during the worst financial crisis since the Depression. They kept piling on the leverage as central banks around the world doubled down on low-rate policies and kept purchasing assets to encourage investors to buy riskier securities..." (Bloomberg)

The central bank policy seduced corporations into borrowing tons of money that they frittered-away on stock buybacks and dividends, neither of which create the revenue streams necessary to repay their debts. So rather than build their companies for the future, (Business investment is at record lows) corporations have been behaving the same way the Wall Street banks acted before the Crash of ’08. They've been borrowing trillions from the average investors via the bond market, rising their share prices through stock buybacks, increasing executive compensation, and dumping the money in offshore accounts. Now the bill is coming due, and they don’t have the money to repay the debt or the earnings-potential to avoid default. Something’s gotta give.

Like the gigantic asset-price bubble in stocks, it’s a sign that the economy and the markets are headed for a long and painful period of adjustment...

FED laid down on the table the interest rate hike route…

FED laid down on the table the interest rate hike route…

US Federal Reserve has finally raised the interest rate to 0.50 by increasing them by 25 basis point, the first time since 2006. FED has cited the following reasons for the rate hike: a notable improvement in the labor market and an assuring view regarding the reaching of the 2 percent in the rise of the inflation. In the statement issued after the meeting, in fact a road map for the interest rate hikes has been put forward. It has been emphasized that the FED’s stance would be consistent with the economy’s pattern and will be based again on data and this continuation of the interest rate hike will be progressive.

The 10 out of 17 members of the FED’s Open Market Committee’s decision making body see the interest rates as 1.40 at the end of 2016. If we consider this emphasis on the gradual increase and that the FED will meet 8 times in 2016, it means that it will bring the interest rates to 1.50 percent by the end of the year through 25 basis points increases.

Judging by the forecasts, within this outlook, the interest rates will also continue to increase in 2017 too and will reach 2.75 percent at the end of the year with an additional 1.25 increase. But an acceleration in the inflation may cause further increases while a deterioration in the employment may cause a suspension in the increase of the interest rate.

By pointing out the improvement in the labor market, the FED stated that the decline in oil process was effective to have the inflation rate staying below 2 percent and after the passing of these impacts, it is estimated that the inflation will be close to 2 percent at the end of 2016.

The FED is raising the interest rate gradually in order to avoid having to make a sudden high increase in the future and if necessary to be able to lower it again. Yellen says “the interest rate increase should be seen as a sign of confidence”.

The FED drew his sword and laid down its route on the table. On this route, it will slow down or accelerate in case of a different situation that may arise in this route. Without any changes in the current state, the FED will not stop in its interest rate increases.

As of today, the questions such as “will it raise the interest rate?”, “when will it raise?” are replaced by the question “will the Fed’s interest rate increase’s dose change?”. And this will be scrutinized deeply by the high yield bond market and the emerging countries. Because the extreme section of the capital markets which took advantage of the FED’s interest rate cut and its monetary expansion performed in three phases were these high yield bonds and bonds of emerging countries. Now that the FED is exiting this policy, the first effects will be seen in these markets.

In this view, the emerging countries will be forced to raise their interest rates in order to protect the interest rate difference in terms of dollars as well as to keep the value of the domestic currency. The most unprepared and which follows a loose monetary policy will be the one which will be affected the most. The fingers point out the fragile quintet. And the formula is quite simple: whoever stalls in the interest rate will see its national currency lose substantial value.

USA is entering in to the troubled waters.

Will the the Fed begin or postpone the implementation in 2015 of its plan of interest rate increase as the first step of the monetary tightening? Financial markets complains of mixed signals from the Fed. Even if the slowdown of the Chinese economy is seen as responsible for the late activity in the international stock markets, the main problem is stated to be the US economy. Is there any doubt behind the conflicting messages from the Fed?Is it concerned about the overheating of the economy?

If so, their worries cannot be considered as unfounded. After all, the US undertook in the last 40 years, four times the monetary tightening, and all of them ended in a crisis. Each time employment and production collapsed beyond the Fed's forecasts. The biggest disaster was brought by the fourth tightening implemented between 2004-2007. Now USA is entering into the troubled waters again.

Between the years 1979-1982, Federal Reserve Chairman Paul Volcker, had convinced the political authority. He was hoping to take greater steps in combating  unemployment and idle capacity by controlling the money in circulation instead of the Keynesian policies which had been applied for a long time. But the cost was great. Citi and other financial institutions were difficultly saved from bankruptcy. In those years, Latin American countries that were under the direct influence of the United States were plunged into a crisis for five years.

It applied in another monetary tightening program had been applied during the 1988-1990 period. Federal Reserve Chairman Alan Greenspan dragged into debt the money and credit institutions who were already struggling to survive. In order to avoid recession and save the bankrupting companies, the federal authorities made great efforts. At that time, it is said that the state of Texas had consumed all of quarterly government revenue.

Alan Greenspan, undertook another monetary tightening in 1993-1994. He hoped to obtain significant results upon the long term assets and borrowing costs through small-scale tightening. Fortunately, upon the opposition of major members of the Federal Open Market Committee, Greenspan gave up shortly the application. The US economy was saved from entering into a new recession.

The last one (2004-2007), was the most devastating. After the implementation, neither Greenspan nor his successor Bernanke understood how the financial system and the housing sector had become fragile. The world economy is still not able to get rid of the effects of the 2008 crisis started in the US. In the US, the policies, deregulations and tightenings upon which everybody is clinging to, continue but until when?

THE GREAT CRISIS OF THE CAPITALISM

THE GREAT CRISIS OF THE CAPITALISM

The beginning of the affecting of the world economy by the neoliberalism coincides with the end of the '40s. Its main tools have been the World Bank and the IMF. It showed itself in the political arena and came to power through Thatcher (1979) and Reagan (1981). In fact, by making their first appearance in the Third World countries before the developed countries, neoliberalism manifested itself in Chile with the Pinochet's coup.

The disabling of the applications such as welfare state which belonged to the "Golden Age" of the capitalism, enabled the strengthening and spreading of neoliberal policies. The surrender of the Social Democrats to the neoliberalism permitted the change of policy of the SPD, headed by Schröder, thus took effect in Europe in the same line. In fact, a return had started in another guise to the wild capitalism that the Marxists had meticulously analysed.  The circle was being closed by the neoliberals.

The neoliberal do not comprehend that the neoliberal policies cannot be sustained without pressure or tyranny, nor do they understand the causal relation between neoliberal politics and the civil or military coups. They are opposed to the coup d'etat but they don't want to abandon the neoliberalism. Now, once again the circle is closing; capitalism is in the grip of a crisis on a world scale. The resort is also likely to call on bullying.

The crisis is crushing upon the all the countries with a great noise; the ones who will bare the most pain will be the employees and the people who were pushed to the bottom rows of the income distribution during the neoliberal era. The imperialists who have began to take measures on a global scale in order to extend the life of the bankrupt policies,  are putting up a bullying on an international scale.

Trans-Pacific Partnership TPP, foresees an almost unlimited freedom through large and versatile arrangements in favour of the international capital in many areas. One does not know whether this agreement which plans to cover the northern half of the sphere will be a remedy the crisis of the capitalism. But there is one thing we are sure of: unless the persons who will put their hand in a revolutionary way upon the system, the imperialists will always be successful in overthrowing the burden of the capitalist crisis on the developing countries.

THE TAIL OF THE DRAGON: THE NIGHTMARE RISING IN THE EAST

THE TAIL OF THE DRAGON: THE NIGHTMARE RISING IN THE EAST

Being the world's second-largest economy, China's slowing growth is steadily becoming a problem in the country, there are increasing concerns over the spread like a virus that affect the global economy. While the devaluation and the successive weak economic data of the said country are scaring the investors, the causes and the results of the more visible depression nightmare are given below.

The current phase is the third phase of the global economic crisis of 2008. After the bankruptcy of Lehman Brothers in 2008, the first phase of the crisis began. In this process, the United States has intervened rapidly to the crisis and through support packages, she has first recovered, then socialized the debt of the financial sector. However, because of the integrated nature of the global financial system, the crisis was not limited to the United States. The second stage of the crisis was experienced by the spread to Europe. The bankruptcy stage passed from the companies to the states. While Europe still did not emerge from the crisis, we have passed to the third stage: the deepening of the crisis. And this third stage was completed by the spreading across the world. In the production bases such as China, slowdown has become more pronounced.

In the coming period, the US Federal Reserve (Fed) and other major central banks may deepen the crisis they had postponed further with the expansion of credit, imposed since 2008. Grounding of the global economy, which had been kept afloat by credit expansion, may arise. Particularly the Fed, the major central banks do not have the primary weapon they can use this time to avoid the incoming wave. Productive investment will be destroyed. This recession could mean further spreading. The process will not be limited to one region, like the 1994 Asian crisis. Asian markets after the 1994 crisis were included in the global financial architecture. Therefore, a problem arising in one part of the system can quickly spread to the other parts.

Fear of a global slowdown triggered by China, which already causes a drop in commodity prices, has pulled the world financial markets to the bottom. From Asia to Europe, from the US to the emerging countries, the stock markets across the world witnessed record losses. Oil prices fell more than 4 percent.

While the stock market in China has recorded a loss close to 9 percent, it was the sharpest decline since the financial crisis in 2007.The indexes that were positive by 50 percent in June compared to the beginning of the year, have retreated to the Christmas time levels.

Asian stock markets, on the concern of the ongoing decline of China's stock market in three months is going to be out of control, went down to the bottom of last three years. Losses in the European stock markets exceeded 6 percent during the day, thus experiencing the most drastic decline since the most severe period of the global financial crisis of October 2008.

The problems in China are not only limited to the stock market; the country has accumulated a lot of serious problems. Previous growth rates in China could not be sustained. With the devaluation and the gradual deterioration of the data, the market began to see it clearly. Even if the Bank of China takes the necessary steps, it will not change this fact. China will replace the preceding 10 years of growth model. While replacing it, she will decrease her economic growth rate to 3 or 4 per cent. A choice can be made between a sudden decline and a decline spread over time but she does not have an alternative as to not decline. But if they lose the control of Yuan's adjustment, it will be a very dangerous phenomenon for the world: China will begin exporting deflation. The producer inflation rate is already very negative since 42-44 months. This could bring a harder wave of deflation. The Fed will increase interest rates in September. America will enter a crisis without increasing interest rates.  There is already now a crisis in emerging markets. Global trade is expected to have the lowest growth of the last 10 years. There is an economic crisis coming from emerging markets. US can protect herself for a year or a year and a half but not more...

CAN CHINA LEAD THE WORLD INTO A NEW ECONOMIC CRISIS?

The Chinese slowdown could plunge the world into a new crisis, many economists believe. Is China so bad, and does she have such a power of influence?

When China will fall asleep ... the world will tremble. The Chinese recession, if confirmed, will drag that of Brazil, which will cause the same for the US and Europe. The expected Chinese slowdown will have colossal consequences, since China makes up a third of global growth since the beginning of the century. China is seriously ill, and the global contagion is inevitable.

China's growth is slowing. Even if it falls to 6% or 5% this year, one can not speak of recession. This is a relatively difficult transition between two growth schemes. Since 2011, China is trying to be less dependent on exports and develop its domestic market. Domestic demand remains weak, however.
This slowdown questioned China's ability to switch to an endogenous growth. The economy has excessive debt, speculative bubbles have multiplied. China has failed to initiate something virtuous on the domestic front. Meanwhile, the rise in wages that made its exports less competitive, forces it to devalue its currency to boost its foreign trade. China is in midstream, not knowing in which direction to turn.

Perhaps it is only a crisis of growth. But why China would lead the world into turmoil, starting with Brazil? Brazil is already in recession because of China. The growth was led between 2005 and 2012 by massive raw material exports to China. The decline in Chinese imports has been fatal. In return, Brazil imported Chinese products, contributing to the dynamics of world trade.

This dependency of China is evident in the case of Brazil, but it is the case in all countries. China accounts for 11% of imports in world trade. When it slows purchases, all exporters receive a kickback. This is the case of Germany, particularly exposed, where industrial productivity has been falling since 2011 and Europe is indeed threatened: one can not say that emerging countries need to support Europe's growth by purchasing their products. China's closure feeds a judgement of globalization.

China's influence on emerging markets is considerable, and the global economy is not going very well. Europe is a big stone. A new crisis is not impossible, but a return to recession could come from many poles. The eyes of the world have turned to the United States, where growth occurred for the last six years. Or to India, cited as a possible relay of China.

If China's failure does not necessarily plunge the world into recession, it seems to question the model of growth driven by trade flows. There will be more growth in the manner of the past. Anyway, the world has achieved the environmental limits; the Tianjin explosions just remind it.

THE WORLD ECONOMY: DEPRESSION OR RECOVERY?

THE WORLD ECONOMY: DEPRESSION OR RECOVERY?

In the financial circles, a story is being told regarding the world economy emerging from the long recession it had entered after the financial crisis. But what is happening in China's economy with the last week's unexpected devaluation and the state of the labour market in the OECD countries refute this story.

Until last week, the Chinese currency Yuan was considered to be overvalued by 15 percent against the dollar. When this level of the Yuan was coupled with the economic growth, it served as a control valve of the deflationary pressure (lack of demand) in the world economy. The devaluation of the Yuan by more than 3 percent last week shows that this valve has been broken and the Bank of China is warning that there could be a continuation of strong fluctuations regarding the value of the Yuan. 

Despite that the Chinese officials try to show that the devaluation is "a reform to facilitate the functioning of the market economy", one can  easily reach a different conclusion. First, the devaluation is not suitable for the Chinese government' project of redesigning the economy towards the domestic consumption, other than encouraging exports. On the other hand,   in today's world economic environment, one cannot expect to have the devaluation to make a significant contribution to China's exports nor to the growth based on investment. 

Second, this devaluation  is an expression of the crisis of capitalism in China. July data show that the growth rates of industrial production, exports, fixed capital investments and retail sales are falling. In short, while the economic growth is going towards below the projected 7 percent, the deflationary pressure and excess capacity problem is getting more pronounced.

Because the Chinese government has chosen the devaluation as a solution and as a tool to encourage exports, one thinks that she has chosen to "export" the deflation at the same time. This devaluation will not only have adverse effect upon the export capacities and growth of the countries in the region, it will also have a negative impact upon Europe's and United States' economies as well as upon the financial stability. The probability that United States' economic growth falls below 2 percent will delay Fed's decision to raise the interest rates and will strengthen the instabilities in the financial markets. In short, the economic recovery story is far from being true.

The story of "recovering from the recession" is also supported by certain declines in the unemployment rates. In reality, not only the unemployment rate is still far below the pre-crisis levels, but also the "recovery" burden of this story, which has a dark side, is imputed upon the workers, especially upon the young people of 15-24 age group. 

Within the newly created jobs, the temporary jobs, which are not standard, while representing 33.4 percent across the OECD, Italy, Greece and Spain have figures that go beyond 40 percent. This ratio is 38 percent in Germany, the strongest economy of Europe. The share of temporary jobs in the total new employment in the 15-24 age group, can reach 69 percent in Spain and 53 percent in Germany. And the chance of the persons who enter into the temporary job market to jump to a permanent job is less than 50 percent. Finally, the average income of workers in temporary jobs is lower than the employees of the permanent jobs. Across the OECD, 22 per cent of family workers in temporary jobs live below the poverty line. 

In summary, OECD is dominated by low growth, high and fragile unemployment, impoverishment and deflation... This situation is not called "recovery" but depression.