Pension pulse is global growth crumbling power in costa rica


It was just three months ago that stock-market investors were being swept up by a euphoria pinned to the idea of economic expansion taking hold harmoniously across the globe—a dynamic that hadn’t occurred since the 1980s, and one that was expected to extend into 2018.

However, less than midway through the year and some market participants are already spotting cracks in the notion of so-called synchronized global growth, with some fearing that a whiff of stagflation is starting to permeate. Stagflation is typically described as persistently high inflation and high unemployment, combined with weak economic demand.

Perhaps it is that worry of a slowdown that has so far overshadowed a run of solid results from some of the most highly valued and most influential U.S. corporations, including Inc. (AMZN) and Facebook Inc. (FB) said Alec Young, managing director of global markets research at FTSE Russell.

Indeed, about half the S&P 500 companies have reported first-quarter results during the busiest week of the season of quarterly results, with the earnings growth rate at 22.9%, compared with 18.3% at the end of last week and the 11.3% expected at the start of the quarter, according to FactSet data. Moreover, approximately 80% of those companies reporting results surpassed analysts’ earnings estimates, better than the 74% four-quarter average . And earnings outperformance was substantial, with companies surpassing average estimates by 9.4%, above the average of 5.1%.

That is the sort of performance that should have elicited cheers on Wall Street. Instead, the Dow Jones Industrial Average (DIA) put in a weekly decline of 0.6%, the Nasdaq Composite Index (QQQ) lost 0.4%, and the S&P 500 index (SPY) closed virtually unchanged for the five-session stretch.

Some of those macro forces include a deceleration in places like the U.K., where the economy grew at the slowest pace in more than five years in the first quarter of 2018, according to a report from the Office for National Statistics on Friday.

It may be that type of retreat that gave European Central Bank President Mario Draghi a degree of pause during his news conference on Thursday as he discussed the eurozone’s monetary-policy path and the timing of the phaseout of the ECB’s crisis-era €30 billion ($36.6 billion)-a-month bond-buying program.

Last year, the eurozone grew at the fastest pace in a about a decade, bolstered by expansion in France—a showing that outstripped that of the U.S. However, industrial output in February, fell by 1.6% in Germany, the eurozone’s largest economy. That slide came as overall business activity in Europe had begun to lag amid persistent concerns of the imposition of tariffs by President Trump’s administration on billions of goods to the U.S.

In Asia, Bank of Japan Gov. Haruhiko Kuroda said that the central bank was dropping its effort to predict when inflation would hit its 2% target, implying that the BOJ, is uneasy and believes that it still has work to do to normalize its easy-money policies.

Against that backdrop, inflation has been percolating, with commodities, particularly West Texas Intermediate crude-oil future gaining sharply in recent weeks. WTI, the U.S. oil benchmark, has risen 12.5% so far this year, with more than 5% of that advance coming in just the past 30 days.

“That said, recent data is more accurately characterized as a hint of stagflation rather than anything more acute and, therefore, it shouldn’t be a surprise that many of the economic metrics that have characterized periods of more pronounced stagflation historically, such as unemployment, still remain low,” he added.

Indeed, the unemployment rate for March, clung to a 17-year low of 4.1% and is expected to go even lower, according to economists. So, it may take a seismic downtrend in the state of the jobs market for the other criteria of stagflation to be met: high unemployment.

Economic growth in the U.S. has tapered a tad, with the first-quarter gross domestic product, the official scorecard for the economy, coming in at the slowest pace in a year owing to a big pullback in consumer spending. Still. the economy held up better than expected and the first reading tends to be seasonally weaker.

In fact, Torsten Sløk, Deutsche Bank’s chief international economist, told MarketWatch that the real threat to markets may be the economy overheating: “There are certainly upside risks to inflation, but I think it is too early to call for a slowdown in growth. The consensus expects solid growth for 2018 and 2019.”

Now, typically we only see the US dollar rally when US long bonds sell off (yields go higher) but I think we’re headed toward a global economic slowdown, coupled with fear in markets, which is bullish for both the US dollar and US long bonds.

And it’s not just global growth I’m worried about. Even in the US, there are serious doubts consumer spending will drive growth going forward. Also, if gas prices keep creeping up, they will negate the effects of Trump’s tax cuts which is why I don’t see oil prices rising further and staying at elevated levels. All this will do is reinforce deflationary headwinds down the road.

The problem? Global demand isn’t strong which is why the US dollar is rallying and there’s a limit to how much OPEC can cut output without shooting itself in the foot, especially if prices rise too fast, too high and create a global shock which is led by a deflationary bust.

When it comes to oil prices, I see a lot of people making big proclamations but very few are thinking things through. The same thing with US long bonds, very few market pundits recognized the backup in yields so far is all part of what I call the bond teddy bear market.

Can the yield on the 10-year US Treasury surpass 3% again and even hit 4%? It might pass 3% again but there’s no way it will see 4% now that global growth is crumbling. And if it does, back up the truck, leverage to the max, and buy US long bonds.

I doubt this is a sustained pickup in wages. More importantly, did anyone watch Good Morning America this morning? Gas prices are starting to bite consumers, and if they keep creeping up, they will negate Trump’s tax cuts for most Americans (the ultra rich don’t care).

Stay tuned but I’m pretty sure global growth is crumbling so stay US-centric, stay defensive in stocks and for Pete’s sake, hedge your downside risks in your portfolio by allocating to good old boring US long bonds. When the economic slowdown is in full throttle and these boom boom markets get clobbered, you won’t sustain massive losses.

Lastly, please remember to donate to this blog and help support my efforts in bringing you great insights on pensions and investments. You can donate or subscribe via PayPal on the top right-hand side, under my picture. I thank all of you who take the time to donate, it’s greatly appreciated.