‘I can feel it coming in the air tonight, oh Lord.’
Can you feel it?
After years of carrying us through an expansion, the global economy is beginning to huff and puff.
Some of us remember the last time this happened…and it’s causing our stomachs to lurch uncomfortably. But the signs are there…
Business leaders are cancelling their tea times…and heading into their war rooms.
Central bankers are emerging from their cloisters to assure the masses that all’s well.
Politicians are dusting off their smoke-machines and mirror collections…getting ready to persuade their constituents that this is temporary…at least until election season is past.
It’s all hands-on-deck.
Because we’ve been happily click-clacking our way up the rollercoaster for over 10 years…and now we’re cresting the pinnacle…knuckles white as we clench for what’s to come.
And now we’re peeking over the summit…
‘A recession is coming. I don’t know when, and what specifically will trigger it. But that is not the point. Business and economics, like so much of life itself, is cyclical. And particularly this time around, after so many years of central banks suppressing the “bad stuff” from happening naturally, in order to keep the economic party going, there will be some unique issues for investors to deal with.’
‘…the long expansion in the economy, housing and stock markets, combined with continued low interest rates, could mean the U.S. is due for a recession.’
—Nobel Prize-winning economist, Robert Shiller
‘I give a business downturn starting this year a two-thirds probability.’
‘Alarm bells ring for the Goldilocks world economy’
The consensus is shifting.
If you’re a long-time reader, you’ll know that I’ve been clanging the recession-warning bell for many months now.
‘Watch Out: Today’s Financial House of Cards Is Getting Shaky’
—Money Morning NZ, 23 Nov 2018
‘Our Green Light Economy Is Turning Red’
—Money Morning NZ, 28 Nov 2018
‘Gasping for Breath — Why an Economic Knockout is Coming’
—Money Morning NZ, 6 Dec 2018
And over the next few days, I’ll be publishing a very special three-part series, where I’ll delve deep into the economic shifts happening here in New Zealand and around the world.
I’d like to provide you with an update on where we currently stand (and where we’re going) based on several global indicators that have recently signalled a coming crunch.
You need to watch out for these signs. Like canaries in a coalmine, they could foretell something serious about to happen…
SIGN #1: The turning tide in housing
Kiwis know, better than most, what a housing bubble looks like.
They just don’t know what it’s like to see it pop.
We might not have to wait too long to see that lesson taught, however. Because New Zealand’s bubble buddies — Australia, Canada, Great Britain, and Hong Kong — are starting to see their home values sliced and diced.
If history’s any indicator, NZ will feel the shockwave 12–18 months after our kangaroo-riding neighbours.
‘“Let the bloodbath begin”: House prices in Sydney and Melbourne “could halve” in worst crash since 1890s. House prices could fall by more than 40 per cent in the “worst crash since the 1890s depression”, a new report warns. We’re now in stage two of the “bloodbath”.’
‘Nearly half of new apartments in Sydney and Melbourne are now valued less than what the buyer paid off-the-plan. Despite approvals for new projects falling sharply, CoreLogic data says Australia’s two major property markets will have an oversupply in the next two years which will further weigh on the falling property market.’
—New Zealand Herald
SIGN #2: The end of the easy-money era
During the Great Financial Crisis of 2007–2008, central banks around the world fired off what can only be described as emergency measures. They drove interest rates into the dirt, effectively ‘loosening’ credit conditions…and allowing borrowers to get money more cheaply.
It worked here better than other places.
But it’s important to understand that this weapon — easy money — is there for emergencies only. Central bankers ought to reel it back in once the weather clears.
As we know, that hasn’t happened…with most developed economies still riding on the basement-bottom interest rates that were initially deployed in 2008. New Zealand is no exception, with the Official Cash Rate (OCR) at 1.75%…the lowest it’s ever been.
It means that central banks won’t have that tool in their toolbelt when the next recession hits. From an economic perspective, that’s terrifying.
‘At 9%, or 5%, and certainly at 22% as back in the 1980’s, the [US central bank] has plenty of room to lower rates. But at 2.4% or anywhere near that level, they don’t have much room above zero. THAT is one of the biggest threats to investors next time we do have a recession.’
SIGN #3: The death of the FANGs
Market darlings — Facebook, Amazon, Netflix, and Google — were at the helm of the current bull market…pulling the market up with their passive-investment-fuelled astronomical valuations.
These companies, called the FANGs, represented the four horses driving the tech revolution’s chariot.
And today, they’re deep in a mire. Facebook and Amazon are at least 20% off their all-time highs. Netflix and Alphabet (Google) are in correction territory at 10% off.
While the FANG stocks are not dead yet, they don’t seem to have the lifting power they once wielded. Instead, they could pull the market downwards if funds start exiting their positions.
‘[Trader Matt Maley] foresees gains for FANG but says the high-flying days of yore may be gone for good. S&P Global’s Erin Gibbs…believes the “decline in a lot of these stocks is people just adjusting to the fact that they’re no longer such high flyers.”’
‘Investing in FANG stocks is no longer the brilliant move it used to be.’
The tip of the iceberg
The three signs that I’ve explored may just be the prelude to a seismic shift that’s beginning to rattle the economy, both here in New Zealand and around the world. The problems are obvious…if you know where to look.
But I’ve barely scratched the surface of these issues. Disturbingly enough, there’s more. Much more.
In Part Two of this series tomorrow, I’ll give you an in-depth analysis of four more signs that you need to watch out for.
Editor, Money Morning New Zealand