The market seems to be very sluggish in picking up on the implications of
My conclusion is this:
This will have huge implications outside of
World growth will come down from its recent 3.7 percent to less than 3 percent;
The recovery projections will once again be postponed and the out-of-synch monetary policies of the major central banks will be questioned, leading to all-time new lows in interest rates;
Deflation will take hold in
Equity markets need to be sold off. This comes after commodities sold off after the US banking and housing crisis, followed by fixed income during the late stage European debt crisis. Now I see a 30 percent correction in the second half of 2014 after a high is registered between current levels of 1,850 and 1,890 in the S&P 500.
I have already spent some effort explaining why
With the present tensions between
It's certainly not been a good month for monetary policy coordination or friendly summits. The growing potential for a political crisis comes ironically at a time when stock markets across the world are reaching 7-, 14- or even all-time highs, as was the recent case of the US S&P 500 Index.
My old economic theory: The Bermuda Triangle of Economics remains in place. We've still got slow growth, high unemployment and high stock market valuations — all driven by a policy that only benefits the 20 percent of the economy that comprises large, listed companies and banks, who get 95 percent of all credit and access to policy subsidies. Meanwhile, the 80 percent of the economy that is the SMEs, who historically create 100 percent of all jobs, get less than 5 percent of credit and less than 1 percent of the political capital.
Markets and monetary policy
It's the weather! The reason for the disappointing start to 2014 in the US is now all about the weather — well partly. I think most investors/pundits forget that the data for December and January was actually "born" three, six and nine months before due to impulses in interest rates and the overall cycle. As I have covered in the past, the slowdown in housing was "expected" in our models owing to the spike in mortgage rates between May and
Elsewhere, the US consumer must have known the weather would be bad as far back as last summer. US consumers remain two thirds of the economy, but they are still conservative: spending rose 2 percent in 2013 after 2.2 percent in 2012 and 3.4 percent in 2011. This is mainly due to low wage growth. Since 2010, the average after-tax income growth, adjusted for inflation, has only been +1.6 percent — to reach the magic 3 percent growth level, we will need wages to grow at least 3 percent on their own! This is not likely to happen in world of excess capacity, but nevertheless the pundits started the year with a 2.9 percent average expected growth for 2014. Now, one month into the year, the revisions are pouring in: the first quarter has already been reduced from 2.3 percent to 2 percent and the blockbuster Q4 growth of +3.2 percent is now expected to be revised lower to only +2.4 percent! Again, one has to laugh at how imprecise these measures are — we watch them, take decisions on them but ultimately their reliability is really only valid six months past the first announcement. Talk about looking in the rear-view mirror!
Fixed income: still see new low yields in 2014 — mainly in Q4 — and into Q1 2015. ETF flows into fixed income are at
Dividend yield is at 1.89 percent versus 2.72 percent and still attracts my money.
Equity: We have had a call for a peak in Q1 — admittedly I did not expect 1,850 to be broken, but my partner in Economo-physics still sees the chance of 1,870/90 before a top is in place. I submit our updated
My most recent update called for a correction higher of the equity market, which is now almost complete from tactical point of view:
FX: overall, the USD should soon find support. The best long-term gauge of the USD is world growth minus US growth. Why? Because the USD is the reserve currency and often the currency of choice in trade. When world growth is slowing (now …) then the US and the USD need to pull ahead to fill the gap. We need to monitor the US Dollar Index over the next week or two as it's sitting on a major trend support line
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