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Praying for growthNow that the old year is over and a new one has begun, hopes for a brighter future are rising. A recent holiday upswing in U.S. GDP has people ready to through a party. 5% growth, while not astounding, is respectable if it lasts beyond a single quarter, but no one expects that.

5% Percent Growth for ChristmasBy Nate Beeler – December 25, 2014

The last jobs report was also greeted with much Enthusiasm.  321,000 is respectable job growth even if it is still not near what is needed. With participation rates near record lows and stagnant to dropping incomes any positive news is worth celebrating, even if it is not as good as what one would hope for. Those that like to burn through the numbers found an anomaly that puts a fly in this tasty bit of good news. The total number of Americans employed only went up a measly 4,000.  Now that the holidays are over how many of those will still be employed come January is unknown. The world will have to wait until February to see how much of this is just a holiday bump. An additional caveat to the jobs numbers, over the last year is large number of them have been service sector related.  The truth is, low paying jobs dominated much of the payroll reports over the last year.November Jobs ReportOf course, those that follow the business news know that the American economy is not at all what some think it  to be,  If it were, the Fed would not still be at a 0% interest rate.  Money for nothing and stocks for free has been theme song for American markets for years now.  Even with the end of quantitative easing, there is a huge amount of money setting around. More money than at anytime in world history. At the same time the velocity of that money is extremely slow. This is the reason inflation has been relatively quiet (but higher than the CPI would indicate).  While some could argue that if were not it for this upside down situation deflation would of destroyed the U.S. economy.  Of course, no one is saying what will happen if the upside down money situation starts going back to normal, which it will.  MI1 and VelocityThere are actually several signs of possible problems facing the U.S. economy as it enters a new year. With inventories high and durable goods purchases dropping off, the next quarter will not be a repeat of the last. For economic geeks, the PMI (Purchasing Managers Index) is in line with this prediction. It has dropped to the lowest in 11 months. Even with the increased purchasing power granted by lower energy prices, the American consumer is not likely to be of much help. With personal debt running around 3.2 trillion and nearly non-existent savings, Americans are living on the edge.

Many have also been warning of a bubble, especially in the tech sector. The rise in IPOs (Initial Public Offerings of companies going public) has risen to beyond pre-crash numbers and are heading into the stratosphere. This is a refection of the massive amounts of cheap capital on the market seeking investment opportunities. Many see the massive rise in IPOs as a positive sign of an improving economic landscape, but it could also be the bright flash before the lights go out.  Even if was all driven by market fundamentals, as was seen in the previous tech bubble, a mad rush to invest means things get carried too far.  In this case, something besides euphoria is driving the IPO surge. The lure of quick profits with cheap money is bait in this mousetrap.

IPOs by yearOf course, not all the growth is a FED created mirage. The oil industry has been booming due to fracking and low oil prices have given a real boost to families and the economy. The boost due to the low fuel prices, while much needed, probably will not enough to have a huge long term impact. Still, a few dollars more in the pocket of those living paycheck to paycheck is welcome all the same.

While low oil prices have been a boost to the U.S. economy, they have been poison to others. Russia in particular is being hit hard by dropping cost of crude.  Russia’s economy was in trouble even before oil prices started to slide, but now it is in a full fledged free fall. The Ruble is collapsing and that’s not all. Its banks are in trouble, sanctions are taking a bite out of GDP and the population is in decline while the number of retirees is booming.

Ruble Versus Dollar

HSBC Russia Composite IndexAbove 50 means growth, below 50 signals contraction


Unfortunately, Russia’s problems are not Russia’s alone. As the world learned during the sub-prime crisis, everyone is connected. When it comes to Russia, this is especially true of Europe. As the ruble falls so does the ability of its borrowers to pay back their loans. Many of these loans are held by European banks. Additionally, parts of Europe do a substantial amounts of trade with Russia, trade that could evaporate as European goods become too expensive for Russians to purchase.

None of this is good news for a region barely treading water economically and politically. The EU has been leaping from one crisis to the next while all the time trying not to slip back into recession. Given the scanty margins, a Russian economic collapse could be all that is needed to push the whole zone into an economic tailspin.

Chart of EU Economic GrowthThere are those that see all of this as an opportunity. The ECB (European Central Bank) has signaled it is likely to introduce stimulus, IE: expand the money supply to raise inflation. Hopes are this will hike the stock market and help the well healed make some money off of stocks. Hopes are, that those on the street might pick up some crumbs as well. Of course, the poor scavenging at the bottom will likely see what little they manage to get a hold of eaten up by the inflation the ECB hopes will increase. European ProtestThis is not to say all of Europe is in the same situation, some are much better off than others. The strongest acting as life boats to those an the verge of drowning. This mish mash of richer countries feeling like they are being held back by those that are struggling, the poor feeling the rich ones are not doing enough, and all countries cracking under the strain of multiculturalism, has had huge consequences for Europe. The end result is a groundswell of anti union sentiment and the rising popularity of radical factions on both the left and the right. Given all of this, a betting man would be wise not to wager on the EU existing in its present form much longer.

Japan GDP Growth Compared to China and the U.S.On the other end of the world, political upheaval  is not so much a threat, but dangers await all the same. Japan is practicing the fine art of insanity. That is to say, doing the same thing over and over again and expecting different results each time. Caught in a Keynesian rut, the keep spending and hoping that somehow things will get better. Despite the massive government attempts to jump start the economy the country fell back into recession. In fact, Japan’s nominal GDP has been essentially stagnant since the 1990s, the same time it adopted Keynes as their guiding economic light. What has not been stagnant is its debt to GDP.

The coming year will see increased taxes and increased spending. Given that spending has not done any good, having it counterbalanced by new taxes means things are probably going to get worse. There is also a pair of gorillas in the room that no one is talking about, population demographics and debt are going to make future economic policy even more challenging.

Japan like Russia, and even the U.S., is facing a changing population. Which means in the long term Japan is going to have to expand its economy and increase worker productivity to support its aging population. There are not on track to do either.

Japan's aging populationDebt is Japan’s other big problem.  Its insane economic model, spend until you grow, is coming to a brick wall called reality. It has shoved aside structural reforms like reducing the regulatory burden faced by companies and small businesses and followed a road of reckless government spending. Its debt has grown to be the highest compared to GDP in the industrialized world. Now forced to raise taxes to subsidize its spending it is in a position where it might have nothing left it can do, nothing that is except what it should of been doing from the beginning; expanding growth by making doing business easier and cheaper.Japanese Soaring Debt

Even China’s prospects are not what they once were. Its problems are debt and intrinsic inefficiencies of a country where the government has its hand in everything. The good news for China is it can move around its economic chess board as it pleases, meaning it can delay economic reckoning for a long time. The bad news is that it by delaying the day of reckoning when things go bad they are more likely to really go bad. China knows this and is trying to manage its declining growth. But, its efforts are not close to what they need to be, in a world where image is everything, allowing a full adjustment to the new paradigm is hard pill for the leadership to swallow.

China's Falling GDPAdding to the concerns regarding China, is the fact all is not what it seems. The numbers coming out of Beijing are being developed by wizards behind communist party curtains. Transparency is not a Chinese strong suit, and neither is honesty. This means whatever one sees in the headlines, the truth is worse. China says all is fine but lowered its interest rates anyway. It is keeping factories running that are better off closed and its shadow banking industry is collapsing. All signs are pointing to the fact, that while the headlines are worry some, the reality might be much worse.
China Economy In TroubleThe world is at a point that in many ways mimics the late 1990s.  A time that saw the Reagan Boom in the U.S. finally take a rest, Japan enter its period of malaise and Germany struggle to stay out of recession. Of course, China was not the player it is today nor was the U.S. in the state it is in. The biggest difference is that the world was in better shape to handle economic issues. Having come off the boom of the 1980’s and early 90’s, there was enough cushion to weather the storm. Japan wasted this advantage but for the United States the end of the decade was a mere bump in the road.  Today the world is worn down, there is no economic cushion to soften the blow if things get worse.

If things go well, the U.S. is predicted to grow at about 2% next year. In other words, the economy will remain pretty much in a state of stagnation. Europe will be lucky to be in the 1% range with Japan and Russia hoping to stave of a depression. This is all predicated on things not going south. Pravda calls the Western economies a house of cards, and in this instance it might be right.

China will likely continue to see a drop in GDP and suffer increasing pressures from its debt and overcapacity. There will be bright spots here and there, places that have the flexibility to take advantage of others woes. These will be small more nimble economies like Malaysia but for most of the world it looks like a long year ahead, a long year indeed.

“The Conservative Mind”

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