In my article of January 2018, I expressed my fears of impending recession and the likelihood of it happening. I am still of the opinion along with other economists that the downward shift in world economies has started and the financial sector is already gearing up for a significant economic tsunami.
I believe there are four reasons for a recession in the near future, probably starting in the latter part of 2019.
Global Debt Bomb
One of the major problems is the Global “Debt Bomb.” World debt over the past 15 years doubled to almost $150 trillion, bringing the figure recorded by the Institute of International Finance to an astonishing 247 trillion dollars. The value represents 318% of world GDP, which in the medium term is unsustainable.
In the USA, the country’s debt has grown so large that people cannot wrap their heads around the $21.29 trillion and if nothing else happens in the economy, the interest alone will be a staggering $310 billion per year.
The fact that China has been printing more money than America and their Yuan, backed by the US greenback is putting them well and truly into the financial bomb bubble, thus making their debt harder to repay when the Yuan weakens against the Dollar.
In their World Economic Outlook, the IMF (International Monetary Fund issued a stark warning to central banks cautioning the practice of printing money to bail out delinquent public debt to stimulate economies. The IMF stated that central banks have limited tools with which to correct and deal with any future crises.
The bond market is further adding fuel to the fire under this financial gas bubble. While the Fed tackles short –term interest rate dogma, the long-term interest rates, controlled in the main by the bond market, are struggling with the bearish strategies for over a year. The result is that interest rates are rising significantly on long corporate bonds, treasury notes, and mortgages.
For example, the benchmark ten year Treasury rate increased 50% from 2.06% in September 2017 to 3.06% 14 months later. This rise in interest rate means that in the same period the dollar value of bonds wiped out $1 trillion in investment value!
Lower World GDP
The two world superpowers, US and China, have both seen changes to their GDP.
It would be unrealistic to assume that the phenomenal growth that China experienced between 1990 and 1993 of 15.4%. Even the average and unprecedented, 9.55% between 1989 and 2018 is unsustainable. The real figures show that although the Chinese economy has healthy GDP, their dominance in the world trade markets is contracting and the GDP per quarter in 2018 shrunk to a final 6.4% for the last quarter of the year. One other disturbing factor in the Chinese financial dilemma is that government debt has risen to 47.6% of GDP and this is staggering given that between 1995 and 2017 government debt in China averaged 29.75%. This type of oversight is what is playing into economist’s prediction that China is on the verge of recession.
The US economy is not fairing any better, but government expenditure is not as rampant as China. The GDP showed 3.4% annual growth, which was just .1% below the forecast for 2018. During the period, exports and personal consumption expenditure were all lower than expected. The expectation that economic growth will slow even more to 2.4% during 2019 gives further causes for concern in financial circles.
The rest of the world, are showing extreme contracting of GDP and increased overspending by governments leading to national debts that probably will never be recovered. Although some of the third world debt has been growing over the past 40 years or so, other nascent economies are looking to the future shoring up their borrowings with investment in gold and oil. The fact that these economies do not really put a dent in the world debt fund means that when the recession does come, they may or may not even be affected unless they are waiting for financial bailouts by the two superpowers.
The increase in employment levels in the United States will press the salary levels higher adding to inflation, which further compounds an increase in interest rates.
Mark Carney, Bank of England Governor has been a proponent of keeping interest rates low as long as the unemployment levels remained high in the UK. As the British economy has been slowly pulling out of the bottom curve, employment has steadily grown and so comes the tightening in monetary policy. The interest rate rose to 0.75% which is the highest since 2009 and it brings with it a concern that consumer spending will drop causing a domino effect on everything from house prices to holidays. Therefore, the economic curve will begin downward – or so it is expected if history is repeated.
US-China Trade War
- Background: The United States is China’s largest export market. Even before the election in 2016, POTUS (Donald Trump) began, his vilification of Chinese trade practice with the US and this battle has been escalating over the past two years.
Last year Beijing retaliated to the US imposed billions of dollars of tariffs on Chinese goods. The hostilities broke in December, and both countries agreed to talk before further trade tariffs. The deadline is the beginning of March, after which the battle could begin again.
- Tariffs: The tariffs have affected around $250 billion in duties ranging from 10% to 25% covering a wide range of consumer goods from heavy machinery to fashion accessories. The threat of a further $267 billion, bringing all Chinese imports under tariff is just the tip of the iceberg for China. POTUS tariff policy now includes common charges worldwide on imports such as washing machines and steel affecting Chinese products yet again.
The Beijing government hit back and accused the United States of starting “the largest trade war in economic history” by imposing its own set of tariffs on US goods worth $110 bn. The biggest hits to the US economy have come from soybeans, coal, chemicals and medical equipment. Given that China can either manufacture these items, itself of purchase from other sources means that they have made contingency plans to come out of the battle unscathed.
The theory behind the tariffs is to create a “buy home products” consumerism principle for Americans.
- Impact: The early victims in the trade war, giving rise to the looming global crisis by the WTO, have been both international an American. The IMF has also expressed concern for a weakening global economy that has added to unease by investors and stock markets.
The Turnaround in 2019 -2020
I firmly believe that the real value of the companies in Stock Market are higher than they should be (some of them used the easy money to buy their own stocks) and the increase of the interest rates will likely spark the gas bubble. My view is that there will be a contracting of stock market prices of more than 50%.
There are crucial decisions to make to keep a robust financial portfolio going forward into the year. My opinion is to adjust investment in the following areas:
- 25%: Gold and other precious metals
Whether you buy physical gold and silver to keep in a safety deposit box or paper gold, this is a good investment as it converts quickly to fiat and gives cash to re-invest when there is an opportunity. This forms a short to medium term form of investment.
- 15 %: Real Estate
Buy a stake land and buildings for long-term investment and make sure they are in countries where real estate holds a high market value such as Singapore, Hong-Kong, and Melbourne (Australia).
- 20%: Investment Funds & Hedge Funds (Real Estate, Health, and Food Industries)
If you have the funds to invest in hedge funds, this is one sure way to make sure that your investment outlasts the downturns. What to look for in a high-quality fund: identify absolute values in investment returns that exceeded 20% per annum over five years.
- 15%: Bitcoin and Cryptocurrencies
2018 has been a bear market for Bitcoin, but my view is that it is likely to come out of this after perhaps a little more downward leverage in the market, which will make it an excellent hedge investment. Here you will have to keep an eye on the crypto trading market, get in when the price of BTC is on a downward spike. Once again, this will be the time to buy as a medium-term investment and, I believe that the coin will probably go up to double your investment within 12 months. If you do not have the funds to spend on BTC, buy cryptos that have a sound project and good backing during 2018. If they have been able to withstand the bear market, chances are they will be stable in the coming years.
Short trading on strong cryptocurrencies has the advantage of making money and there are some good options taken up with the right strategies in place to buy and sell efficiently, such as Automated Trade Bots, but that is a topic for another discussion.
- 25%: Fiat Currency – Cash is King!
I am recommending that investors get a large amount of cash on hand, whether in physical fiat or as cash in various, preferably offshore, banks. If bank rates go up in the United States and elsewhere, the need for liquidity is going to be crucial to keep financially viable for everyone.
The economic outlook for the year ahead
My view is that a burst bubble is not going to end the world, but getting in ahead of it to make sound investment choices is essential to stay ahead in short to mid-term.
As an economist, I have spent much time watching the market trends and what I see happening this year is a leveling out of interest rates by the Fed and, a downward trend on the stock market, probably towards the end of the year. The international trade wars will bring about an increase in the price of consumer goods and even food items. This means that having disposable income is going to be much harder for everyone.
I hope that I am wrong in my pessimism and that we never see another out of control spiral as we witnessed ten years ago, but the time is probably right for at the very least a big enough bang to cause stabilisation of world GDP and bring everyone to a more sustainable level of growth.
If someone sees fit to launch a nuclear missile in 2019, I will re-evaluate my own portfolio!