Author Bio

The world’s major stock price averages have registered robust double-digit gains, since early-summer, to within touching distance of multi-year highs, a somewhat puzzling development given that virtually all of the most recent data confirms that global economic growth has slowed to the most sluggish pace since the ‘Great Recession’ came to an end three years ago.

A troubling slowdown in economic activity is detectable almost everywhere, with stagnation or outright contraction evident across much of the developed world, while several emerging market economies have struck a nasty speed-bump.  The deterioration in the global economic outlook is beyond dispute, and reflected in rising unemployment, falling investment rates, as well as the volume of world trade, which has slowed to a standstill.

Hope continues to trump reason however, as investors continue to demonstrate blind faith in policymakers’ ability to deliver stimulus measures that will lift the global economy from its current soft patch.  It is staggering to observe that many seasoned market players persist with such a belief, given that all the evidence suggests that the various growth models responsible for the robust expansion in economic activity, in the years that preceded the global financial crisis, are now exhausted.

The debt-driven model that underpinned economic growth throughout most of the Western world, for at least the past two decades, is undoubtedly beyond rescue at this juncture.  The rate of increase in non-financial private sector debt outpaced GDP growth by more than three percentage points a year on average through the 1990s, and the gap widened to almost six percentage points a year in the early years of the new millennium, which inevitably pushed debt ratios to dangerous levels.

The unsustainable private sector borrowing spree duly came to an end once the ‘Great Recession’ struck in 2008, and the resulting plunge in economic activity required fiscal and monetary stimulus on an unprecedented scale to prevent a worldwide depression.  The unthinkable did not happen of course, but policymakers’ efforts to promote a self-sustaining economic expansion have been less than impressive.

The U.S. economy for example, is experiencing the weakest recovery in post-war history, with annualized economic growth, quarter-on-quarter, averaging little more than two per cent since the downturn ended, or less than half the pace recorded over a comparable time period, following the previous ten recessions.  Additionally, although real output has reached new highs, not one of the four indicators that the National Bureau of Economic Research employs to date business cycles, has exceeded their pre-recession peaks.

Meanwhile, European economic performance has been even less inspiring, with activity failing to recover its pre-recession peak in both the euro-zone and the U.K., such that GDP-per-capita is still roughly two per cent below its 2007 level in the former, and six per cent below in the latter.  Further, the post-recession experience in both economic regions trails the Japanese record following the deflation of its twin property and stock market bubbles more than two decades ago.

Three years have passed since the advanced economies of the Western world reached their nadir, and economic growth continues to disappoint, while aggregate debt ratios remain close to record levels, as the deleveraging of private sector balance sheets has been offset by the deterioration in public finances.  Further, persistently elevated unemployment rates, alongside relatively subdued investment in the productive capital stock, threatens to lower potential growth rates that are already pressured by an unfavorable demographic picture.

The debt-driven model apparent in most of the developed world is bankrupt, but troubling, the growth models applied in emerging market economies can no longer be relied upon to drive the global economy forward.  This is true not only in India, where persistently large fiscal deficits, a deteriorating external position, and stubbornly high inflation have undermined the sub-continent’s status as emerging-market darling, but also in China, where an unprecedented investment boom has limited the central government’s scope to offset the sharp slowdown in economic growth via a fiscal stimulus package centered on infrastructure spending.

The Middle Kingdom’s economy is already in desperate need of rebalancing towards household consumption, which at less than 35 per cent of GDP is well below that of countries at a similar level of in income.  Additional infrastructure spending at this juncture may well ease cyclical pressures, but would undoubtedly result in greater economic turbulence later.

China’s policy response to the global financial crisis precipitated a nine percentage point increase in the investment share of GDP to close to 50 per cent between 2007 and 2011.  However, the investment boom has been accompanied by an increase in the incremental capital/output ratio – the quantity of new capital required to generate an additional unit of growth – to levels comparable to its East Asian neighbors just before crisis struck in 1997.

Further, central government and corporate debt ratios are not far removed from Japanese levels just before its economic miracle came to an end in 1989.  Rebalancing, and not fiscal stimulus, is what the Chinese economy requires, and simple arithmetic suggests that this is not possible without a significant drop in the economy’s long-term growth rate.

Investors continue to push stock prices higher on hopes that stimulus measures will return the world economy to a more familiar growth trajectory.  Cyclical solutions cannot solve structural problems however, and it is troubling to note that there are no growth engines available to push the world economy forward.

www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

It’s been almost four years since the global financial crisis reached its climax, and the world economy is still unable to reach escape velocity without ongoing life support from central banks and governments.  The perennial optimists remain unmoved by the unimpressive economic expansion, and continue to believe that reflation efforts will ultimately prove successful, and that growth will return to its historical trajectory in the not-too-distant future.

However, the level of long-term interest rates offered on government bonds across a number of markets including Canada, Germany, Japan, the Netherlands, the U.K. and the U.S., is at odds with this view.  Indeed, sub-two per cent yields in many of the world’s leading economies are simply not consistent with robust future growth.

The economic data reported during the current upturn to date confirms that something is fundamentally different about this cycle.  The U.S. economy for example, is currently experiencing the weakest recovery on record with growth running at less than half the pace that is typical for this stage in the cycle.  Meanwhile, the euro-zone’s economic performance since the ‘great recession’ struck is even less inspiring, and trails the Japanese experience following the deflation of its twin property and stock market bubbles more than two decades ago.

The hard evidence would appear to suggest that the deleveraging of balance sheets to correct for the excessive build-up of debt throughout the developed world, and across all sectors of the economy, in the years leading up to the financial crisis, will exert a heavy toll on growth for years to come.

The extent of the debt accumulation over a period spanning three decades is simply staggering.  The level of non-financial sector debt relative to GDP in the developed world increased from 170 per cent in 1980 to almost 310 per cent by 2010, well above the thresholds that have been shown empirically to retard growth.  In other words, the rate of debt increase outpaced economic growth by more than four percentage points a year on average for three decades.

The late American economist, Herbert Stein famously wrote in “What I Think: Essays on Economics, Politics & Life” that “If something cannot go on forever, it will stop.”  The unsustainable private sector borrowing spree duly came to an end with the arrival of the ‘great recession’ in 2008, but the upward trend in outstanding debt continued, as declining tax revenues and automatic stabilisers increased the pressure on government finances.

The bottom line is that deleveraging has barely begun, with combined public and private sector debt relative to GDP across the developed world still close to an all-time high.  It is important to recognise that never before in modern history has so many of the world’s leading economies been saddled with so much debt.

Indeed, an analysis of the U.S. experience post-1945 reveals that total non-financial sector debt rarely strayed far above 150 per cent of GDP until the 1980s.  Simply put, the negative growth impulse arising from balance sheet rightsizing in one sector of the economy was traditionally offset by an increasing debt-to-GDP ratio in another sector.

Academic research by Stephen Cecchetti and others at the Bank for International Settlements reveals that debt begins to hurt growth when it reaches 85 per cent of GDP for the public sector, 90 per cent of GDP for the non-financial corporate sector, and 85 per cent of GDP for the household sector.

In aggregate, each of these levels has been surpassed across the industrialised world or an area that accounts for two-thirds of global economic output.  In other words, there is simply no balance sheet slack available to counteract the effect of deleveraging, and as a result, growing out of the problem does not appear to be a feasible option.

Several commentators argue that the debt will ultimately be inflated away.  However, as repeated rounds of quantitative easing in the U.S. demonstrate, inflation is not that easy to generate in the presence of persistent economic slack, and when the credit channel of monetary transmission is impaired.  Further, high inflation rates relative to the emerging world could potentially harm the labour market, as production shifts overseas to exploit lower costs.

The developed world is drowning in debt, and near-zero interest rates and unconventional monetary policies have failed to ignite an economic recovery that is sufficiently robust to allow for a fall in aggregate debt levels to more sustainable levels.  Lacklustre economic growth should be expected for several years to come.  Welcome to the ‘new normal.’

www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

Have you been paying attention to the changing dynamics in the markets of late?

We’re no longer in a world where the dollar moves in the opposite direction from stocks on a consistent basis – the risk-on/risk-off pattern. Of late, in fact, stocks and the buck have moved in the same direction, as we can see in the chart below (USD Index in green, S&P 500 in black). For the last few weeks that direction has been higher.

As we can see from the weekly chart below, things have been pretty muddled all year long. The stock/dollar correlation (based on a 20-period calculation) has been a bit positive since December, though only slightly so. Basically, the two markets have been mainly uncorrelated, taking us back to a time when the financial markets mainly traded on their own factors.

Ahhhh…the gold old days. :-)

Right now the thing that has the two markets moving in unison is something that was actually part of the story even back during the financial crisis. The US markets are benefiting from the view that the US is well into recovery mode while the Europeans (the USD Index being heavily weighted in those currencies) still have a lot of stuff to work through to get themselves on track.

Now, the European problem has been in place for a while now, which is why if we look at the relative performance of the S&P 500 and the German DAX index below we can see that while US stocks have pushed above last year’s highs, German one still have a ways to go.

What’s changed of late where the dollar is concerned is the view on what the Fed will be doing – or more correctly, what it won’t be doing. The better US data has lessened the need for Bernanke & Co. to further loosen monetary policy by piling on new quantitative easing (QE) at some point, and statements out of the central bank have indicated that these figures aren’t being viewed as some kind of anomaly, but rather as part of a developing pattern. This reduces even further the odds of QE3, and as the chances of the Fed pumping more dollars into the system decline, the dollar is at least less pressured, if not outright supported from buying by those who expected QE3, especially in the face of the ECB dumping close to a trillion euros into the system via the LTROs.

So we’ve got improving economic data helping stocks and also helping reduce the chances of Fed action which would be negative for the dollar. That’s what’s causing the two markets to move in tandem of late. Just keep in mind, however, that the dollar tends not to do great when (all things being equal) when the US economy is very strong because of our increasing demand for imports. We’re not exactly in strong economy mode yet, but it’s something that will become a factor as things improve.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

The world’s financial markets have entered the New Year just as they left the last – weighed down by myriad negative influences that threaten to send asset prices into a tailspin.  Reasons to be bearish are not hard to find, yet the bulls remain undeterred and continue to argue, albeit unconvincingly, that risk assets will deliver healthy returns in 2012.

The list of potential catastrophes or ‘black swan’ events is unusually high and urges caution.  First, the seemingly never-ending crisis in the euro-zone refuses to ease and could well gather in intensity – if not come to a head – in the near future, as a deepening recession is set to test the capital markets’ ability to absorb the large, scheduled supply of new debt issues from the monetary union’s shaky sovereigns.

It is already quite clear that the euro-zone’s monetary union is not viable in its current form and, further market stress would almost certainly increase fears of an eventual euro break-up – a potentially devastating event – with a concomitant rise in the return premium required on all risk assets.

Second, China’s stellar growth rates are now an historical artefact and, the demise of the Middle Kingdom’s notorious property bubble, in concert with the damaging side-effects of ill-advised credit creation – not to mention the downward pressure on the export sector reflecting the euro-zone’s economic malaise – could well provoke a hard landing.  The potential adverse impact on worldwide economic activity should not be under-estimated given the large share of global growth captured by the Chinese in recent years.

Last but not least, tension in the Persian Gulf continues to mount, as Iran flexes its naval muscles in the Strait of Hormuz, the world’s most important oil transit chokepoint with flows through the strait amounting to more than one-third of all seaborne traded oil.  The Iranian actions have been taken in response to tougher trade sanctions imposed by the West, who have grown increasingly concerned over the Islamic Republic’s nuclear enrichment programme.

The stand-off looks set to continue given the strong rhetoric on both sides and, could well result in an unwelcome incident that precipitates a surge in oil prices and plunges the global economy into recession.

Indeed, Intrade, the world’s largest prediction market, has seen the odds of an overt air strike by the US and/or Israel against Iran before the end of the year, rise to more than one-in-four in recent weeks.  The probability of a strike can hardly be viewed as trivial at this juncture and, and the potential for a ‘black swan’ event originating in the Persian Gulf is a very real possibility.

The bulls dismiss the worst outcomes in all of the above as hyperbole and, believe that disaster will be averted in each case simply because policymakers cannot – and therefore, will not – allow the worst to happen given the economic carnage that would result.  Recent history however, suggests that confidence in officialdom’s ability to deliver favourable outcomes is misplaced.

One need look back no further than three to four years to observe how American policymakers failed to prevent a supposedly containable problem in an inconsequential segment of the said country’s residential mortgage market from morphing into a full-blown global financial crisis.

More recently, Europe’s leadership did not demonstrate any greater wherewithal to insulate the euro-zone’s core from the difficulties that beset the periphery.  As for the foreign policy arena, America’s historical record suggests the less said the better.

Given historical fact, it is clear that the potential worst-case scenarios cannot and should not be excluded from the decision-making process.  Unfortunately, advocates of high allocations to risk assets do not concur and, are quite obviously, gambling on the most probable rather than probability-weighted expected outcomes.

The year ahead could well prove kind to the employers of such faulty decision-making but, should that prove to be the case, the favourable outcome should be considered a function of good luck rather than a solid investment process.

The bulls will undoubtedly counter that valuations are already cheap and, have thus discounted most of the potential bad news.  However, the measures of value employed are clearly flawed given that reliable valuation indicators such as the cyclically-adjusted price/earnings ratio or Tobin’s Q, which have historically demonstrated a statistically meaningful ability to predict future returns, suggest that most of the world’s major stock markets are far from cheap.

The investment world’s perennial bulls continue to expect risk assets to generate solid returns in the year ahead and, appear oblivious to the vast array of potential negative scenarios that threatens to undermine their asset allocations.  As Warren Buffett once quipped, “Forecasts tell you little about the future but a lot about the forecaster.”

The astute investor will know to emphasise a disciplined investment process over the most probable outcomes.  Indeed, the sub-standard investment performance delivered by many investment professionals over the past ten years or more confirms that good luck cannot outdo sound decision-making indefinitely.

Previously posted on www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

Far too many investors continue to stubbornly cling to the belief that the recent economic slowdown is simply a typical mid-cycle pause and, that a self-sustaining expansion is set to take-off any day now.  The view is naïve and fails to recognise that the financial crisis marked a once-in-a-generation breakdown in the prevailing economic model.  It is time to get used to the reality that the age of financialisation is at an end.

In this regard, it is important to take a step back in time to appreciate the dynamics that characterised the development of the American economy from the early-1980s to the present day.

An important shift in power from labor to capital began more than three decades ago, as growing frustration with the stagflation of the 1970s, precipitated a welcome sea change in economic ideology.

The resulting transformation from ‘big’ to ‘small’ government undermined union power and contributed to increased labor market flexibility, while greater shareholder activism led to a renewed focus on value creation and returns on equity.  The process gathered pace through the 1990s and into the new millennium, as the twin forces of rapid technological change and globalization, via increased trade flows and greater capital market integration, sparked a further reduction in labor’s bargaining power.

The shift in power to the owners of capital triggered a structural upturn in corporate profitability, as the labor share of output accounted for by employees’ compensa­tion, dropped by roughly five percentage points from its 1947/82 average to less than 61 per cent by the middle of the first decade of the new millennium.

The owners of debt and equity securities benefitted handsomely, as high returns on capital contributed to significant price appreciation, while interest income alongside dividend payments and share repurchases, provided an important boost to income.  Indeed, the share of total income captured by the top five per cent of the income distribution jumped from 22 per cent in 1983 to 34 per cent in 2007.

The large increase in income inequality however, brought with it greater financial fragility, as the typical American household had no option but to borrow in order to keep pace with rising living standards, as measured by real GDP per capita.

To appreciate this development, it is important to recognise that while productivity is the primary determinant of a nation’s standard of living, real hourly compensation measures workers’ purchasing power.  In this regard, the diminished power of labor meant that increases in real hourly compensation failed to keep pace with accelerating productivity growth over the past three decades and, the compensation-productivity gap became ever more pronounced as the period unfolded.

The increase in workers’ purchasing power lagged productivity growth at a rate of less than one-quarter of a percentage point per annum from 1947 to 1979 but, the gap began to widen as the power shift gathered momentum.  Growth in real hourly compensation trailed improving productivity by three-quarters of a percentage point per annum through the 1980s and 1990s and, the annualised gap widened to almost one-and-half percentage points during the economic expansion that peaked at the end of 2007.

The shortfall in employee compensation relative to national output could have led to oversupply and a fall in corporate profitability but, the savings of high-income earners alongside foreign capital was channelled to households via the financial sector to fill the shortfall in effective demand.

The result of this financialisation process however, was a surge in household indebtedness.  As the share of total income captured by high-earning households jumped by twelve percentage points between 1983 and 2007 to the highest level since 1928, household debt-to-GDP increased from less than 50 per cent to near 100 per cent.

A tipping point was bound to be reached sooner or later and, that moment duly arrived as the subprime segment of the residential mortgage market began to unravel.  The result was the deepest economic downturn since the 1930s, from which the economy has yet to recover.  Indeed, the damage unleashed upon the employment market has seen the labor share of output fall to a new low of less than 58 per cent, which means that the all-too necessary deleveraging of household balance sheets will be difficult to accomplish, while a self-sustaining recovery is likely to remain elusive.

The diehard bulls on Wall Street applaud the recent surge in corporate profitability since the recession’s end but, fail to recognise that this development has served only to exaggerate further, the move away from labor towards capital.  Indeed, workers’ purchasing power has lagged productivity gains at such an extraordinary rate during the recovery so far, such that the aggregate compensation share of the increase in national income amounts to just one per cent versus an almost one-third share at a similar point during the previous four economic recoveries.  Meanwhile, the corporate profits share has jumped from less than 30 per cent to almost 90 per cent.

The bottom line is that corporate profits are improving at the expense of effective consumer demand, which is inevitably self-defeating.  It is instructive to note that the increase in total private wages in real terms over the ten years to the end of 2010 has fallen well short of any ten-year period since the Second World War and, has even failed to match the disappointing increase from 1929 to 1939.  For now, consumer demand is being buoyed by government transfer payments rather than incremental borrowing but, it’s plain to see that current trends are not sustainable.

Investors should dismiss commentary that views the current recovery through the narrow prism of previous post-war cycles.  There is nothing typical about the current economic climate.  Overleveraged household balance sheets combined with stagnant compensation virtually assures subdued growth for years.

Previously posted on www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

This week looked absolutely miserable outside Currensee World HQ in Boston. And depending on which piece of news or commentary we were reading that day, the economic climate wasn’t looking much better. It seemed like every article I read heeded a warning about the doomed Euro or a tanking USD. As much as I like to dwell in my own self-loathing over my downright pathetic Forex account, sometimes enough is enough. Which made me realize, as traders (and people in general), when we’re in a particular mood or funk we seek news and information that mirrors our tone – happy or crabby.

So here’s a roundup of links that caters to every mood swing that went on this week.

If you’re in a doom and gloom mood, we’ll let you sulk for a little longer:

• The ultimate Forex-”diss”: you’re trading system is just fine – you’re the problem. Wicked burn.
• Remember 2008? (As if you could forget.) Let’s relive that moment, and what progress has been made since.

If you want to think happy thoughts, here’s some feel-good bits:

• Apparently, there’s an anatomy to a bullish market. Here’s what to do and how to capitalize on each part of it.
• Here’s an interesting take on the relationship between the USD and the US national debt. (Hint: debt-dollar link may not be what you think.)

And if you don’t know what you’re thinking:

• Durable goods are selling, new homes aren’t, and the USD is lost in the shuffle.
• The consensus seems to be that there’s a “new normal” economy. Don’t take our word for it – you can read about it everywhere, in the good ol’ Journal and in commentary from Currensee members.

We’re big fans of off-kilter Forex news and trivia around here, and get the hunch that some of our members may share our off sense of humor. We recently came across an article about having super-tricked-out work (or trade) station and how it helps or hinders productivity. Now, we know Currensee members are serious about Forex – why else would you trade together? So we want to see your trade station – where the magic happens, where you are last pip standing, where 95% cry themselves to sleep every night. Post photos of your Forex Fortress to our Facebook wall. We can’t wait to see them!

Have a piece of news or blog you want to share, or write one of your very own? Share it! We’re all about collaboration – it’s kind of our thing – and sharing the Forex good vibes. So drop us a line – you know where to find us.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.