Beyond the hyped-up business media headlines on what drives markets and economies on any given day, when the noise clears, there are three trend indicators that are among the major determinants of economic performance: Interest rates, the U.S. dollar and oil.
Interest Rates. It was record low interest rates that juiced global equity markets since 2009, and it was aggressively rising rates that drove the markets into correction territory in February.
In our assessment, markets are overvalued and overleveraged, and stock buybacks, now estimated to hit over $1 trillion in 2018, is a major driver pushing equities higher.
As the stock buyback fever breaks, and should the U.S. Federal Reserve follow through on its stated plan to aggressively raise interest rates – two more times this year, three more next year – it will push U.S. equities into correction territory and the nation’s Gross Domestic Product back to the two percent or lower.
And, as interest rates rise, the dollar grows stronger and other nations’ currencies weaken, where will the money come from to pay the global debt that will hit an all time high of $247 trillion this year?
The dollar. As U.S. interest rates rise and the dollar gets stronger, currencies, especially in Emerging Markets, will decline. The cost burden to EMs to service their $11 trillion sovereign debt, much of it dollar based, significantly increases.
Not only have EM currencies dropped 8.8 per cent against the dollar in the second quarter, the MSCI’s 24-country EM index, down 17 percent from it year’s high, is approaching bear territory.
Oil. While oil prices suffered in July their biggest monthly declines since 2016, should tensions increase in the Middle East, and oil (dollar based) soar above $100 per barrel, it will deal a devastating blow to equity markets and economies worldwide.
Oil prices, as are many commodities, are dollar based. As the dollar rises and currencies of countries weaken, the pressure of higher oil prices, particularly of those in oil dependent countries, will face powerful downward economic pressures far greater than tariff threats that the media claims. TJ
TREND FORECAST These three trend lines need only a trigger point to ignite significant economic turmoil across the globe.
As the Trump Administration ramps up significant sanctions against Iran, essentially waging economic warfare, Iran and escalating tensions in the Middle East could be that trigger point location.
Among the other hot spots to closely watch are Saudi Arabia, Yemen, Israel, Lebanon and Syria.