By Christian Takushi MA UZH, 10 Oct 2015 – Switzerland.
As West loses Middle East initiative, new risks drive oil prices higher and Economic prospects lower. Credibility of FED and Pres. Obama at multi-year lows. Rising recession risks to overlap with risk of US government shutdown. QE4 becoming more likely. Stocks and USD likely victims.
Geopolitics dominating Q4
Against the backdrop of accelerating geopolitical events – Washington now losing control of what it started in the Middle East in 2003 – more and more economists are downgrading Economic Growth estimates. The decisive move by Russia to re-enter the Middle East and prevent the Syrian regime from being toppled by neither IS nor the West has stunned the world. The scenario we pictured last year is beginning to gather pace and shape. Oil prices are not up because of a rebound in Emerging Economies, but the escalating proxy wars in the Middle East (Shia, Sunni, USA, Russia, Turkey, China and Pakistan etc).
The resolute action by Russia has stunned Western capitals and media. As I wrote this week, people in Asia-Africa-Latin America are growing critical of Western interventions in the Middle East and more open to give Russia a chance. Unreported by our media a significant number of the so called moderate fighters the West was training & arming to fight the Syrian government were radicalized shiites, former terrorists or Islamist sympathizers that have in combat joined the IS.
As many Muslim and Arab analysts warned us, it is utterly impossible to differentiate between moderate and radicalized Islamist fighters. The only reliably constant force in the Iraqui-Syrian battle ground were the Kurdish fighters. But Washington gave green light to Turkey to bomb and attack them this summer. In a desperate change of course, Washington said this week the strategy of training moderate fighters has failed and the USA now wants to support Kurdish fighters.
Seldom since the Vietnam war has a US administration lost so much credibility. And seldom has the FED also lost so much credibility in a matter of months. Just as we need a trustworthy leadership the most, they are tossing away the little credit they still enjoyed.
Economics driven by Geopolitics and policy makers
Over the past few days more economists are joining the IMF and are downgrading their GDP forecasts for the US and World economy. And more respected thought-leaders like David Rubinstein are mentioning the word “recession”. As a result Goldman Sachs is saying the FED rate hike will be next year. This is bad news for thousands of investors who were talked into SELLING THE EURO to buy the USD. The Euro is strengthening. Just as we have been expecting since June. There is a chance triggered USD stop-losses may overlap with US government shutdown risks.
We haven’t changed our economic forecast since early summer. We stick to our forecast of weaker (and possibly much weaker) economic activity in Q4 2015. I still see the likelihood of a recession during Q4 2015 and Q1 2016. And, a QE4 may be necessary, because the FED is in the trap and cannot cut rates. Investors and businesses are demanding yet more government stimulus, and policy makers are nodding. This expectation of yet more stimulus is supporting Western stocks.
We can’t point fingers only at the FED, the US administration and Wall Street. The growing vulnerability of our World Financial System is systemic. Retirees, consumers, employees and shareholders are all part of the problem too. They demand no asset price correction, no economic contraction, no pain. Something that used to be healthy and to be expected every 5 to 7 years is no longer accepted by fast aging majorities. With older generations dominating the popular vote, a “hijacked” democracy is showing her ugliest side. Thus, popularity-seeking policy makers go back to doing whatever it takes to prevent the healthy correction that equilibrium-seeking down-swings bring along.
We are throwing our precious resources, money and time at the futile effort of avoiding a recession and propping up CPI. The World Economy – but in particular the US economy – has been artificially supported by FED-inflated stock prices, FED-Inflated Government Bonds, FED-inflated high yield bonds etc. Yet we are told to seek inflation only within a government-sanctioned CPI. This is a flawed concept. Our policies have reinforced the Demographics-driven shift of inflation from consumer goods to assets.
Big potential for the Economy held back
Despite all geopolitical and systemic risks, the overhaul of outdated targets would liberate amazing positive forces for the world economy. Policy makers and universities need simply to be pragmatic and move away from their dogmatic 2% CPI targets, dogmatic 3% US Potential Growth and dogmatic maximization of Real GDP. The backwards-looking targets of FED-ECB-BOJ fit the past rather than the future. They fit a post-WW2 World that no longer exists. A –1% to +1% CPI target, a 2% US Potential Growth target and the striving for Nominal GDP per capita and real Net Wealth per capita could soon lead to positive interest rates, savings, investments and more balanced growth.
Beijing and other governments are overstating economic growth – FED holds on to excessive Growth and CPI targets to keep extraordinary “free hand”
All over the world governments – including the IMF as it relies on official government data – are overstating Economic Growth as officials are rewarded for economic performance of their provinces and nations. But monetary leaders and policy makers are also overstating estimates. Given the systemic global risks and in the absence of external audits and independent agencies calculating data, it is understandable. Economic growth has been said to be close to 3.5% for a good part of the year. In fact it was stuck between to 2.5% and 3% for most of 2015. Governments have learnt from corporate leaders to manage expectations. It works. There are several smart ways how institutions take advantage of the collective reliance on the market and herd behavior. Very few market agents do their own calculation and questions government data. At the onset of 2015 and during its first half growth was overstated, that led companies to order & consume more. It subtly supports economic growth. Had the IMF said in December that 2015 may see growth of 2.5% only, expectations and behavior may gravitated downwards earlier and probably faster. Yes, if most