The doomsday conversation
Economic Armageddon is at our doorstep. The pressing question is no longer ‘if’, but ‘when’
The writer is a postdoctoral researcher in the UK, working on cybersecurity, next-generation voting systems and virtual currencies
In October last year, I collected a few statistics in an adhoc analysis in the article “Dude, where’s my recovery?”, suggesting that a global economic collapse may be on the cards soon. At the time this kind of thinking was on the fringes, an opinion that few in the mainstream media actually took seriously. Six months later however, the tables have turned in a big way. The conversation in informed circles at this point is nothing short of apocalyptic.
A bit of background: in 2015, we saw global growth slowing down amid a stream of constantly downward-revised forecasts. Big economies like Canada, Japan, Russia, and Brazil have plunged headlong into recession. Others like the US and the EU countries are struggling just to keep afloat. Inequality and unemployment are soaring. China is in the eye of the storm: record expansion over the last decade has nurtured large bubbles in multiple sectors, black holes which now threaten to consume the Chinese economy from within.
If the trends were grim last year, 2016 is looking like the ultimate rollercoaster ride into economic disaster. It is barely March and it is already obvious that huge tectonic shifts are happening. These are truly historic times.
Consider international stock markets, which have been in violent disarray since January, caught up in what CNN terms a “global market freakout.” In the US, stock markets registered some of their worst opening losses in recorded history. The S&P 500 has performed worse on only one occasion before — in 2009. The Dow Jones industrial average has never had a worse 12-day start to the year since the index was launched in 1896.
European markets were also the scene of mayhem, what Goldman Sachs estimates is the “worst start to a year since at least the 1970s”. Canadian stocks registered nine days of continuous slump, the longest such streak since 2002. China witnessed the worst carnage: in Shanghai, stocks fell so fast that they triggered emergency circuit breakers twice in one week, suspending trading. In one case, the breaker kicked in 15 minutes after markets opened — making it one of the shortest trading days in history.
As per one estimate, in just the first three weeks of January, some 4.6 trillion dollars in market cap have simply evaporated into thin air. And things are expected to get much worse. Certain big banks are advising clients that stock markets may have become a death trap (and are using very colourful language to do so). For instance, Royal Bank of Scotland recently warned of a “cataclysmic year” ahead: “China has set off a major correction and it is going to snowball… Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”
Unfortunately, bonds themselves are in very bad shape. As per the traditional mechanism, governments issue bonds when they want to raise money. Investors buy these bonds, receive periodic interest payments, and when the bonds mature, they receive the face value of the bonds. And since governments are generally more reliable than companies, bonds have generally been considered a sensible investment, safe from the vicissitudes of the stock market. But now about one quarter of the index for government bonds actually have negative yields, i.e., they operate at a loss.
This segment is valued at about 5.5 trillion dollars, a stunning amount. To quote the Financial Times (FT): “a new record has been set in the freakish world of negative yields.” And these bonds don’t belong to forsaken Third World countries, but some of the world’s leading economies, including Germany, Finland, Switzerland and Japan.
Why is this happening? As per FT: “Fears for economic deterioration and increasingly abnormal policies adopted by global central banks to ward off the threat of deflation have resulted in a bizarre scenario in which investors pay governments to hold their money.” Again, the colourful language speaks volumes.
And investors aren’t stupid. Imagine paying $100 for a bond and getting $99 back in ten years — who in their right mind would buy such bonds? And this is why Japan’s Ministry of Finance announced a few weeks ago — for the first time ever — that they have to cancel upcoming auctions of 10-year Japanese government bonds. This is again a historic moment.
This upheaval in international markets is mirrored by a seething turmoil in the economy itself. Shipping is a perfect example. Demand for manufactured goods (and consequently the raw materials used to make them) is plunging, and consequently, the shipping industry is undergoing its worst crisis in living memory. In January, the Baltic Dry Index (BDI) plummeted to a record low of 369 (from over 1,200 last August).
The BDI is a key economic indicator (used to track shipping rates and costs of transporting raw materials), which functions as a weather vane of sorts for the global economy and this is its lowest level since recordkeeping began in 1985. Thanks to cratering demand, shipping rates have now fallen so low that one can actually rent an 1,100-foot merchant vessel (at $1,563 a day) for less than a third the price of renting a Ferrari F40 ($5597 a day).
We’re seeing all sorts of desperate economic madness now. A whole new terminology is entering the lexicon, strange animals such as “negative interest rates”, “helicopter money”, “cashless society” and so on, which have mostly been highly controversial theoretical concepts up till now. And there is this distinctly growing impression that behind the scenes, the economists, bankers, and politicians are out of ideas — like Indiana Jones, they’re just making it all up as they go along.
We are living in historic times, but unfortunately — due in large part to our ‘economics-challenged’ mainstream media — we barely even realise it. But from the economist’s vantage point, it’s sort of like having front row seats to watching the Titanic crash and sink in slow motion. Unfortunately though, these seats we have are on the Titanic. Economic Armageddon is at our doorstep. The pressing question is no longer ‘if’, but ‘when’. What will be the triggers? How vulnerable are we in the developing countries? Do we have any coping strategies? What sort of collapse can we expect this time around? How bad can things truly get? Are we talking ‘recession’ — or ‘depression’?
Published in The Express Tribune, March 5th, 2016.
A bit of background: in 2015, we saw global growth slowing down amid a stream of constantly downward-revised forecasts. Big economies like Canada, Japan, Russia, and Brazil have plunged headlong into recession. Others like the US and the EU countries are struggling just to keep afloat. Inequality and unemployment are soaring. China is in the eye of the storm: record expansion over the last decade has nurtured large bubbles in multiple sectors, black holes which now threaten to consume the Chinese economy from within.
If the trends were grim last year, 2016 is looking like the ultimate rollercoaster ride into economic disaster. It is barely March and it is already obvious that huge tectonic shifts are happening. These are truly historic times.
Consider international stock markets, which have been in violent disarray since January, caught up in what CNN terms a “global market freakout.” In the US, stock markets registered some of their worst opening losses in recorded history. The S&P 500 has performed worse on only one occasion before — in 2009. The Dow Jones industrial average has never had a worse 12-day start to the year since the index was launched in 1896.
European markets were also the scene of mayhem, what Goldman Sachs estimates is the “worst start to a year since at least the 1970s”. Canadian stocks registered nine days of continuous slump, the longest such streak since 2002. China witnessed the worst carnage: in Shanghai, stocks fell so fast that they triggered emergency circuit breakers twice in one week, suspending trading. In one case, the breaker kicked in 15 minutes after markets opened — making it one of the shortest trading days in history.
As per one estimate, in just the first three weeks of January, some 4.6 trillion dollars in market cap have simply evaporated into thin air. And things are expected to get much worse. Certain big banks are advising clients that stock markets may have become a death trap (and are using very colourful language to do so). For instance, Royal Bank of Scotland recently warned of a “cataclysmic year” ahead: “China has set off a major correction and it is going to snowball… Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”
Unfortunately, bonds themselves are in very bad shape. As per the traditional mechanism, governments issue bonds when they want to raise money. Investors buy these bonds, receive periodic interest payments, and when the bonds mature, they receive the face value of the bonds. And since governments are generally more reliable than companies, bonds have generally been considered a sensible investment, safe from the vicissitudes of the stock market. But now about one quarter of the index for government bonds actually have negative yields, i.e., they operate at a loss.
This segment is valued at about 5.5 trillion dollars, a stunning amount. To quote the Financial Times (FT): “a new record has been set in the freakish world of negative yields.” And these bonds don’t belong to forsaken Third World countries, but some of the world’s leading economies, including Germany, Finland, Switzerland and Japan.
Why is this happening? As per FT: “Fears for economic deterioration and increasingly abnormal policies adopted by global central banks to ward off the threat of deflation have resulted in a bizarre scenario in which investors pay governments to hold their money.” Again, the colourful language speaks volumes.
And investors aren’t stupid. Imagine paying $100 for a bond and getting $99 back in ten years — who in their right mind would buy such bonds? And this is why Japan’s Ministry of Finance announced a few weeks ago — for the first time ever — that they have to cancel upcoming auctions of 10-year Japanese government bonds. This is again a historic moment.
This upheaval in international markets is mirrored by a seething turmoil in the economy itself. Shipping is a perfect example. Demand for manufactured goods (and consequently the raw materials used to make them) is plunging, and consequently, the shipping industry is undergoing its worst crisis in living memory. In January, the Baltic Dry Index (BDI) plummeted to a record low of 369 (from over 1,200 last August).
The BDI is a key economic indicator (used to track shipping rates and costs of transporting raw materials), which functions as a weather vane of sorts for the global economy and this is its lowest level since recordkeeping began in 1985. Thanks to cratering demand, shipping rates have now fallen so low that one can actually rent an 1,100-foot merchant vessel (at $1,563 a day) for less than a third the price of renting a Ferrari F40 ($5597 a day).
We’re seeing all sorts of desperate economic madness now. A whole new terminology is entering the lexicon, strange animals such as “negative interest rates”, “helicopter money”, “cashless society” and so on, which have mostly been highly controversial theoretical concepts up till now. And there is this distinctly growing impression that behind the scenes, the economists, bankers, and politicians are out of ideas — like Indiana Jones, they’re just making it all up as they go along.
We are living in historic times, but unfortunately — due in large part to our ‘economics-challenged’ mainstream media — we barely even realise it. But from the economist’s vantage point, it’s sort of like having front row seats to watching the Titanic crash and sink in slow motion. Unfortunately though, these seats we have are on the Titanic. Economic Armageddon is at our doorstep. The pressing question is no longer ‘if’, but ‘when’. What will be the triggers? How vulnerable are we in the developing countries? Do we have any coping strategies? What sort of collapse can we expect this time around? How bad can things truly get? Are we talking ‘recession’ — or ‘depression’?
Published in The Express Tribune, March 5th, 2016.