A Global Recession? It's All Over But The Crying

Regular readers of DOTE know I am not given to hyperbole and eschatological predictions. I don't go off half-cocked like so many modern Chicken Littles do. I'm not selling Doom & Gloom. I'm not selling anything. Credibility is important to me. So when I say that it looks like a severe global recession is coming by the 4th quarter of this year, or by the middle of next year, I hope you won't chalk it up to just another Doomer predicting the End of the World.

Desperation is in the air. Consider The World Looks For Reassurance That The Fed Will Take Steps from Reuters.

With the global economy sputtering and financial markets on the rocks, the world is looking for reassurance that the United States central bank stands ready to save the day.

Much attention will focus on a speech on Friday by Ben S. Bernanke, the Federal Reserve chairman, in Jackson Hole, Wyo., where policy makers and academics are meeting as part of an annual symposium.

Last year, Mr. Bernanke used the forum to suggest that the Fed could help growth by buying long-term bonds, a prelude to a program that did just that.

However, no grand new plan is expected this year, in part because the Fed already pledged this month to keep interest rates near zero into 2013.

“Markets are increasingly hoping there will be some signs that the Fed will come running to the rescue,” said Paul Dales, an economist at Capital Economics in Toronto. Many economists said they expected Mr. Bernanke to explain what was in his policy toolbox while promising to use those tools if necessary.

One danger looming over the world economy, which could compel Mr. Bernanke to act, is the prospect that the European sovereign debt crisis could worsen.

Investors are becoming more nervous daily that a new recession threatens.

Economists see rising risks that growth could evaporate in the United States, while Europe languishes in a debt crisis. Even strong performers like the economies of China and Brazil show signs of slowing.

Moreover, stocks have plunged, further threatening the economy because consumers could pull back if they sense their retirement savings are dwindling.

Investors have rushed into United States Treasuries as a haven, and the yield on the 10-year note last week fell below 2 percent for the first time since at least the early 1960s.

Already, worries over European debts are rattling the markets, leading investors to demand that some European governments pay higher interest rates to borrow.

It's pathetic, this hope that The Bernanke will rescue the global economy. When you've reached Pathos, begging Bernanke to tell a good story investors can identify with—take pity on us, Ben!—it's all over but the crying as Hank Williams Junior used to say.

This Reuters report demonstrates that the idea that we are on the cusp of global recession is not controversial, so I haven't really gone out on much a limb in predicting one. However, it was the prognostications of veteran China-watcher Michael Pettis which really cemented the deal for me. Mike Shedlock published them yesterday. Among them we find—

1. BRICs [Brazil, Russia, India, China] and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.
2. Over the next two years Chinese household consumption will continue declining as a share of GDP.
3. Chinese debt levels will continue to rise quickly over the rest of this year and next.
4. Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.
5. Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.
6. If the PBoC [People's Bank of China] resists interest rate cuts as inflation declines, China may even begin slowing in 2012.
7. Much slower growth in China will not lead to social unrest if China meaningfully rebalances.
8. Within three years Beijing will be seriously examining large-scale privatization as part of its adjustment policy.

I've repeatedly stated my belief that China's growth is mostly Smoke & Mirrors, and I trust Pettis' judgement. The only uncertainty here appears to be the timing. If the BRICS have not meaningfully decoupled (#1) from the troubled OECD economies, we might expect the swan dive in the U.S. and Europe to affect them within a year. If an OECD recession (in Japan, Europe, the U.S.) becomes apparent by the 4th quarter, we can expect the BRICS to feel the effects by the end of 2012.

If China's growth slows sharply by 2013-14 (#4), or before that (#6), the world economy is doomed, as are non-food commodity prices. But what about oil? I called for another large spike in oil prices in 2012 in Brace Yourselves For Next Oil Price Shock. Taking Pettis' views into account, there are exactly two scenarios—the next price shock will either happen in 2012 or it won't

Again, it is a matter of timing. If growth in the BRIC economies doesn't slow in the first half of 2012, and non-OECD oil demand thus continues its phenomenal year-over-year growth for that long, then I'm sticking with my prediction. Assuming that OECD demand doesn't fall off a cliff, I expect to see oil prices somewhere around $150/barrel by early next summer. This would lead to a massive slowdown of the world economy in a reprise of 2008.

In the second case, growth in the BRICs slows dramatically in the next six months, or OECD demand falls precipitously. Either event will prevent an oil price shock in 2012. I should add that a resumption of Libyan oil production sometime in the next six months will considerably reduce the chances of another price shock.

High oil prices sparked by the troubles in North Africa and Fed money printing have already had a deleterious affect on "consumer" spending in the United States. Growth in the first half of 2011 was almost non-existent. We can expect more of the same. Prices have come down since then, but the damage has already been done.

Mark Twain said history doesn't repeat itself, but it does rhyme. Looking at our prospects later this year and next, does history repeat? Or does it rhyme? There's no way to know the answer, but whatever we're in store for, it won't be pretty.

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Comments

[JC]

Dave - it looks like a downturn for multiple reasons is inevitable. I continue to believe that we will never "experience" another downturn however because war is still an option. The PTB will not let a failing economy occur without capitalizing on it. I predict war with Iran, dragging the world into war, this fall - however I'm just a blog reader so what do I know.