Rising U.S. interest rates, higher oil prices, lower earnings and geo-political unrest are merging to form an economic tsunami.
When the Dow dropped 830 points on 10 October, and fell 1,300 points for the week, $1.7 trillion was wiped off the S&P 500 and nearly $3 trillion off global stocks. Since that turning point moment worldwide equities have been sinking deeper into bear and/or correction territory.
After several months of the mainstream business media, central bankers, high powered financiers, and establishment politicians warning the world that tariffs and trade wars would bring down equity markets, they suddenly changed their tune. A collective bell rang across the financial world and in unison they began attributing much of the declines to the fear of rising interest rates.
They finally acknowledged what we have long forecast. One of our Top Trends for 2018, “Market Shock,” which we sent to Trends Journal subscribers last December, clearly identified the risk:
“As U.S. interest rates rise and the dollar strengthens, the cost burden to Emerging Markets, whose debt, much of it dollar based, has soared, will be difficult to service.”
With some $250 trillion in global debt, much of it dollar based, nations whose economies, markets and currencies are declining, cannot bear the debt burden of progressively rising U.S. interest rates.
Spiking rates, which have increased three times this year, with one more expected and three or more in 2019, signal the end of the cheap money, negative/zero/low interest rate policies by world banks that have artificially propped up markets worldwide.
We concluded in December 2017, that “…global economies, particularly in China, India, Europe and EMs will shift significantly downward to bear territory and some will sink into recession.”
That’s precisely what happened. The stunning and sustained collapse of many equity markets in countries worldwide, especially China’s, which is deep into bear territory, are among several signs lighting up and flashing “Economic 9/11.”
China’s Shanghai Index is down over 30 percent this year, while its Gross Domestic Product growth is at its weakest point since 2009. And China, the world’s second largest economy, is drowning in debt. In fact, S&P Global Ratings reports that borrowing by the country’s local governments is likely as high as 40 trillion yuan ($7.95 trillion).
IT’S INTEREST RATES, STUPID
While the mainstream business media have falsely attributed economic and market slowdowns, particularly in China, to trade wars, it had been and remains rising U.S. interest rates alongside mounting historic debt that will sink markets.
In fact, despite President Trump’s $200 billion in tariffs imposed on China, America’s trade deficit with China reached $34 billion in September, a 13 percent increase over last year and a new record.
While Asian markets have been hardest hit with losses – the Shanghai and Taiwan indexes have experienced single-day, double digit percent declines – the MSCI Emerging Market stock index has now tumbled 26 percent from its January peak.
The pan-European Stoxx 600 sunk to its lowest close of the year, and nations across the globe were sinking deeper into bear market territory: Turkey, South Africa, Brazil, Venezuela, India, Hong Kong, Australia, Argentina, Italy, Indonesia, Singapore among others are in bear territory.
BUBBLE, BUBBLE, OIL AND TROUBLE
Beyond the interest rate factor, rising oil prices are putting more downward pressure on already deeply indebted, overleveraged economies.
Escalating geo-political tensions and economic warfare in the Middle-East, especially as the U.S. imposes its crippling oil embargo on Iran that will take effect on 5 November, have pushed oil prices up steadily.
While Brent Crude has fallen some $10 from its $85-per-barrel recent high, should the cost of oil continue to climb higher as many developed and Emerging Market currencies and economies are falling lower, a perfect storm is forming. The higher oil prices rise, which are dollar based, and the lower their currencies fall, the cost burden adds more downward pressure to their economies.
And since the last five market crashes were preceded by sharply rising oil prices, we forecast a global market meltdown should oil prices spike above $100 a barrel and interest rates continue to rise. TJ
While Federal Reserve Chair Jerome Powell has said he’s undeterred by the president’s remarks, it is certainly possible the Fed could be pressured by President Trump or other factors to delay interest rate hikes, but all that will do is delay the inevitable. Already, even modest increases have deepened downward pressures on real estate markets in many nations and economies worldwide and showing the early signs of affecting consumers in the U.S.