Reddit-loving day traders are reportedly returning to their day jobs, according to the Wall Street Journal. But back in the world of high finance, professional traders have adopted one of their signature trading strategies, according to one closely followed markets guru.
Archive for category: #economiccrisis
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- Markets should brace for a period of decline that echoes crashes of the 1970s and 2008, according to Nouriel Roubini.
- He predicted that central banks will “wimp out” from fighting inflation, fueling a financial crisis.
- “It’s going to get ugly, the recession, and you’ll have a financial crisis,” Roubini told Bloomberg.
The global economy will experience a period of decline that combines the worst aspects of the 2008 financial crisis and the 1970s, Nouriel Roubini has warned.
The :Dr Doom” economist said Wednesday that he expects red-hot inflation to lead to a recession – before major cracks start to appear in financial markets.
“It’s going to get ugly, the recession, and you’ll have a financial crisis,” he told Bloomberg’s Odd Lots podcast.
Roubini sees supply-side shocks including the coronavirus pandemic and the war in Ukraine as drivers of global stagflation, which refers to a combination of soaring prices and sluggish growth.
That would echo the economic pain of the 1970s, when efforts to tame high inflation plunged the US into a deep recession.
“Inflation is not going to fall fast enough because you have the negative supply shock,” Roubini said.
“Remember when you have negative supply shock, you get a recession and high inflation,” he added. “We’re not going to get a fall in inflation that’s rapid enough to go to 2%.”
But Roubini also compared the current outlook to the 2008 crisis – when the bankruptcy of Lehman Brothers and other financial institutions fuel led a major market crash. European bank Credit Suisse is one major bank under significant pressure in 2022, with its shares plummeting by over 50% as investors fret about the bank’s liquidity.
“This is just the beginning of that pain,” Roubini said. “Wait until it’s real pain.”
“And then you have a major financial institution that may crack globally, not in the US maybe now, but certainly internationally,” he added. “There are a couple of firms that are huge and systemic. They can go under. You might have another Lehman effect.”
The Federal Reserve will have to ease its aggressive tightening campaign if markets start to crack in a similar manner to 2008, according to Roubini.
While that pivot might bring some short-term cheer for stocks, “Dr Doom” believes it could lead to inflation becoming entrenched at a point where a severe recession will have already become inevitable.
“The Fed will have to wimp out. You’ll have a severe recession and you’ll have a financial market shock,” he said.
“I don’t believe central banks when they say ‘we’re going to fight inflation at any cost,’ because they have a delusion of either a soft landing or a hard landing that is short and shallow — two quarters of negative growth and then you return to growth and easing,” Roubini added. “That’s not going to happen.”
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“When the public health emergency ends, many individuals and families will experience the cumulative impact of losing access to both Medicaid and SNAP,” advocates warned.
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- Jeff Bezos said the US economy faces a significant risk of recession.
- Amazon’s billionaire founder advised people to prepare for a difficult downturn.
- Bezos flagged inflation as a critical problem to solve earlier this year.
Jeff Bezos has warned the US economy may be headed for a recession and recommended Americans brace for a painful downturn.
Amazon‘s billionaire founder and executive chairman retweeted a CNBC clip of Goldman Sachs CEO David Solomon on Tuesday. In it, the bank chief advised business owners to be cautious and prepare for more market volatility as growth headwinds mount.
“In the distribution of outcomes, there’s a good chance we could have a recession in the United States,” Solomon said.
“Yep, the probabilities in this economy tell you to batten down the hatches,” Bezos tweeted in response.
Recession fears have grown in recent months, partly because the Federal Reserve is actively trying to cool the US economy. The central bank’s goal is to bring down inflation, which surged to a 40-year high of 9.1% in June and remained above 8% in September.
The Fed has hiked interest rates from virtually zero in March to a range of 3% and 3.25% today, and signaled they could approach 5% next year. Higher rates encourage consumers to save rather than spend or invest and make borrowing more expensive, so they typically reduce aggregate demand and relieve upward pressure on prices.
Leading investors, executives, academics, and analysts have also sounded the alarm on a potential global recession. They’ve cited a slew of risks including huge amounts of private and public debt as well as Russia’s invasion of Ukraine, which continues to roil food, fuel, and commodity markets.
Bezos is well placed to comment on the US economy, given Amazon is one of the country’s biggest employers with 1.5 million full-time and part-time workers as of June 30. The online retailer and cloud-computing titan also commands a $1.2 trillion market capitalization and generated $470 billion in net sales last year, making it a key player in the stock market and the economy.
Amazon CEO Andy Jassy, who took the company’s reins from Bezos last summer, appears to share his predecessor’s concerns. Amazon has been cutting costs, slowing spending, and freezing hiring for certain roles in recent months, suggesting it’s expecting a tougher economic backdrop.
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By Pam Martens and Russ Martens: October 19, 2022 ~ Today, we will be asking the Senate Banking Committee, its Chair, Senator Sherrod Brown, and one of its most knowledgeable members, Senator Elizabeth Warren, to call an emergency hearing and subpoena the testimony of two brilliant researchers for the Office of Financial Research. Those researchers are Andrew Ellul and Dasol Kim. The men have done nothing wrong. In fact, they have done something courageous. They have effectively blown the whistle on how global Wall Street banks have, once again, endangered the stability of the U.S. financial system through their opaque and dangerous use of over-the-counter derivatives. Unfortunately, because of the legions of lobbyists employed by Wall Street that shape and corrupt the rules of federal bank regulators, these men are prevented from revealing the names of the most dangerous banks and their most dangerous counterparties because that information is considered restricted … Continue reading →
On October 7, the U.S. Bureau of Labor Statistics (BLS) reported that the United States’ unemployment rate had fallen to 3.5 percent. The U.S., during the Biden era, has experienced some of its lowest unemployment rates in over half a century; that’s the good news. But the bad news is that the U.S. has also been experiencing its worst inflation since the early 1980s. Even Dollar Tree raised most of its prices by 25 percent.
Republican candidates, in the 2022 midterms, have been blaming President Joe Biden for inflation —although, truth be told, inflation is a global problem that has been aggravated by the COVID-19 pandemic. GOP strategists are hoping that voters, angry over inflation, will also blame Biden and take out their frustration on Democratic candidates.
Washington Post opinion writer Catherine Rampell, in her October 18 column, poses the question: How will Republicans handle the economy if they achieve a majority in the U.S. House of Representatives and/or the U.S. Senate in the midterms? Senate Minority Leader Mitch McConnell has expressed confidence that Republicans will likely “flip” the House, but he considers the Senate a toss-up.
READ MORE: ‘The elephant in the room’: Top Fed official says corporate price hikes are fueling inflation
“After refusing for months to divulge what they’d do if they regained control of Congress, Republicans have finally revealed some of their economic agenda,” Rampell explains. “Unfortunately, it might involve causing a global financial crisis, based on recent interviews with some GOP congressmen.”
The Republican Party, Rampell notes, “has not said how it would tackle inflation or other major economic challenges, including a recession.” But she adds that House Minority Leader Kevin McCarthy and other Republicans “have recently backed proposals to make the 2017 Trump tax cuts permanent, as well as to extend or expand several other corporate tax breaks.”
“The scariest part of the recently disclosed GOP economic agenda, however, has largely gone under the radar,” Rampell observes. “It’s the plan to hold the debt ceiling hostage next year, which could easily precipitate a global financial catastrophe. Republicans have withheld their support from raising the debt limit before, usually framing their hostage-taking as a commitment to fiscal restraint.”
Rampell continues, “But the debt ceiling has nothing to do with new spending; rather, it’s a somewhat arbitrary statutory cap on how much the government can borrow to pay off bills that it has already incurred, through tax and spending decisions that Congress has already made. Refusing to raise the debt limit is like going to a restaurant, ordering the lobster and a $500 bottle of wine, and then declaring yourself financially responsible because you skipped out on the check.”
READ MORE: Robert Reich debunks inflation myths
Rampell warns that if “lawmakers” default on the United States’ debt obligations, they “might accidentally blow up every other financial market on Earth, too.”
“That’s because U.S. debt is now viewed as the safest of safe assets,” Rampell explains. “Virtually all other assets around the world are benchmarked against U.S. Treasury securities. If we default on our debt obligations — or even come close to default — that raises the question of the riskiness of everything else investors buy and can send shockwaves of panic through every other market. Boom, financial crisis.”
READ MORE: Saying that spending hurts the economy is toxic and false
The U.S. economy falling into recession within the next 12 months is a virtual certainty, according to the latest Bloomberg Economics forecast model released on Monday.
Brian Snyder/Reuters
- Ray Dalio, Jamie Dimon, and other market experts are deeply worried about the global economy.
- They fear stubborn inflation, surging unemployment, shrinking economies, and tumbling asset prices.
- Here’s why they’re so concerned about the world today, and what they expect to happen next.
Several of the world’s shrewdest investors, executives, academics, and analysts are sounding the alarm on the global economic outlook. They’re warning that countries face a devastating combination of brutal inflation, shrinking output, plunging asset prices, and soaring unemployment.
They blame years of debt-fueled buying and borrowing, pandemic disruptions, and Russia’s ongoing invasion of Ukraine. They also point the finger at misguided thinking from the central banks and governments in charge of shepherding the global economy.
The easy-money era
Freewheeling government spending and near-zero interest rates over the past decade have spurred people to rack up debt, “Dr. Doom” economist Nouriel Roubini has said. That easy money lifted the prices of stocks, houses, cryptocurrencies, and other assets to unsustainable highs, he believes.
The problem got worse during the pandemic, when authorities rushed to mail out stimulus checks, buy corporate bonds, and bail out struggling businesses, Roubini said.
Insatiable demand met widespread shortages as the COVID-19 virus choked production and disrupted supply chains, and that boosted inflation. Later, the Russia-Ukraine conflict led to cuts in oil and gas supply, and rises in energy prices — which drove food and fuel prices higher, darkening the outlook for European growth.
The upshot? US inflation spiked to a 40-year high of 9.1% in June. The Federal Reserve responded by hiking interest rates from virtually zero in March to a range of 3% and 3.25% today, and has signaled they could approach 5% next year.
Currency swings and market mayhem
The Fed’s aggressive hikes and a robust US economy have propeled the US dollar to a 20-year high, as investors swap their pounds and yen for greenbacks in pursuit of larger returns.
Goldman Sachs’ Kamakshya Trivedi recently explained why that’s a problem. The dollar’s breathless rise has put pressure on other central banks to shore up their currencies by hiking rates too — even if their country has tougher economic challenges or lower inflation than the US, he said.
Its strength is causing debt crises in Sri Lanka, Pakistan, and other vulnerable developing countries with large amounts of dollar-denominated debt, Goldman’s head of global foreign-exchange research noted.
Trivedi emphasized the dollar’s gains are reflected in falls for rival currencies. The British pound recently tanked after the new UK government unveiled tax cuts that threaten to drive up inflation and the national debt.
The yields on long-dated UK government bonds (gilts) also soared. That spurred the Bank of England to launch and repeatedly expand an emergency bond-buying program, as it feared a credit crunch and the potential collapse of UK pension funds.
Economic woes in Europe and China
Europe is similarly under the cosh. People there are bracing for an energy crisis this winter, while worries grow about a prolonged recession and the political and fiscal impact of the Russia-Ukraine war.
Meanwhile, the continent’s big banks like Credit Suisse have been forced to defend their solidity, fanning fears of a Lehman Brothers-style collapse that could spark a financial crisis.
“The euro, are you kidding me?” Ray Dalio said this week. “We can go on about Europe’s situation. Wow. Oh my God.”
The Bridgewater Associates founder also sounded the alarm on another key global player — China.
“China has a debt crisis they’ve allowed to go too far into the bones of the economy,” he said, singling out its heavily leveraged real estate sector.
The billionaire investor underscored the supply disruptions caused by the country’s ongoing lockdowns in response to virus breakouts.
The US may be in a better position, but its economy still faces a grim future. The country is “the center of a financial bubble” and “most at risk from liquidity being pulled,” Bridgewater co-chief investor Greg Jensen recently said.
Jensen expects a tumble in US asset prices, stubborn inflation, slower growth, and a deep, prolonged recession.
A gloomy global outlook
These challenges mean that if the Fed raises rates too high, it “would slay inflation, but create a global depression,” Bill Gross has warned.
“Recent events in the UK, cracks in the Chinese property-based economy, war and a natural-gas freeze in Europe, and a super-strong dollar accelerating inflation in emerging-market economies, point to the conclusion that today’s 2022 global economy in no way resembles Volcker’s in 1979,” the billionaire cofounder of bond giant Pimco recently said.
Gross was suggesting the remedies of the 1980s won’t work today — Paul Volcker is a former Fed chair who conquered runaway US inflation in that decade.
Another Wall Street heavyweight, JPMorgan CEO Jamie Dimon, has underscored the likely global fallout from mounting pressures. He has said those forces will likely plunge the US economy into a recession within the next nine months.
Roubini has gone even further, saying the global stage is set for “the mother of stagflationary debt crises over the next few years.” He was referring to economies shrinking for several quarters, battling stubborn inflation, and suffering higher unemployment.
The economics professor at NYU Stern also said central banks are “damned if they do and damned if they don’t,” as they could trigger a wave of defaults and crush economic growth if they tighten their policies further, but might face double-digit inflation if they maintain their easy-money approach.
Government debt
David Einhorn echoed that sentiment this week, noting that governments are already highly leveraged and may struggle to service their debts, finance bailouts, and shore up their economies if markets crash and a global recession takes hold.
“The systemic risks have built up in the government bond markets all around the world,” the Greenlight Capital boss said. “When you have a down cycle is when these things tend to metastasize.”
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- China’s mounting local government debt is already a crisis, experts say, with nearly $8 trillion at risk.
- Bonds issued by local government financing vehicles are on the verge of default amid a broader property market crash.
- The grim financial picture comes as Xi Jinping seeks an unprecedented third term as China’s leader.
A local-government debt crisis is getting worse in China, as the property market simultaneously crashes and Beijing contends with the reverberations if its zero-COVID policies.
About $8 trillion of debt has piled up from so-called local government financing vehicles (LGFV), which China has used to pay for infrastructure projects and spur growth since the Great Financial Crisis.
Bonds issued by LGFVs, however, are at risk of defaulting and pose another threat to President Xi Jinping as he pursues an unprecedented third term at the 20th National Congress of the Chinese Communist Party, which began on Sunday.
Experts think Beijing will have to step in with a bailout as officials try to prevent an already-slowing economy from deteriorating further.
“To avoid major local dislocations or damage to overall economic recovery, the government is, in our view, still highly likely to intervene to support strategically important state-owned companies and prevent defaults that would trigger localized financial stress events,” said Yating Xu, principal economist at S&P Global Market Intelligence.
LGFVs have been a reliable financial instrument in China, and have allowed the construction of everything from apartment buildings to theme parks.
Then in 2020, the Chinese government started slowing down the property sector, whose ballooning levels of debt were worrying officials. The property market went into freefall, and developers slashed purchases of land, which local governments often rely upon to balance their books. As municipal revenue began drying up, the ability to service LGFV debt weakened.
So far, LGFV defaults have been rare and geographically concentrated in certain inland provinces, according to Tianlei Huang, research fellow at the Peterson Institute for International Economics
“But with zero-COVID and the property crisis continuing to unfold, this could spread to more localities,” he said.
For now, Beijing isn’t keen on offering aid to local governments to resolve debt pitfalls, even though LGFVs usually enjoy an implicit guarantee on their debt obligations, Huang noted.
To avoid a full-scale financial crisis that spills over to China’s broader economy, S&P’s Xu believes government intervention is likely.
But China has a record of tolerating defaults and bankruptcies under President Xi as part of a long-term goal to increase the efficiency of state-owned companies. As recently as late 2020, China saw a string of defaults following the post-pandemic stimulus.
“Local government-backed bond defaults … would lead to further deterioration of financing environment and drive up financing cost in those risky areas,” Xu said.
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September’s hotter-than-expected CPI report is raising the likelihood that corporate earnings next year won’t be able to weather persistently high inflation.