What’s going on – Are we heading for another Great Recession?

Originally Published Jun. 13, 2016

  • Eight years on from the Great Recession
  • US unemployment rate is reaching pre recession levels
  • But Fed rate hikes could lead to another stock market crash

We are now eight years on from the global catastrophe of the “Great Recession”, but with the US stock market (SPY, DIA, QQQ) banging up against all time highs and global stock market indices (ACWI) recovering to all time peaks reached twelve months ago, can one assume all is swell the global economy?

Unemployment levels in the US are fast approaching levels pre Recession and in Europe it is finally showing meaningful reduction from the peaks of 2013 a story repeated in many of the worlds largest economies.

The policies to get us here have been a mixture of both traditional and extreme. From the US we’ve had traditional government spending unmet by tax collection together with interest rate cuts, to the extreme with the Central Bank purchasing the government debt with conjured money. Europe has avoided expanding government spending but have gone to the far side of extreme with negative interest rates. Japan is using all of the above and China has gone the way of massive relaxation of lending restrictions to the private sector that comically sloshes around.

If all was well with the world it would be time to stop these policies, and indeed the US stopped magically producing money several months ago and have even had an interest rate increase.

However the information content of the developed world government bond markets (BWX) are signalling something very sinister, most are providing a yield around the current inflation rate or, expectations of no inflation usually caused by coming slow growth or recession. This indicates that we are again in the era of potential policy mistakes.

In an appraisal of the policies that have already been installed, US government debt relatively reaching WWII leaves very little room for further support unless in desire of a centrally planned economy. The EU have been late to the party on cutting interest rates and conjuring money but should be applauded for government austerity in the face of a reducing tax base. Japan has morphed into a basket case but China continues to grow at an envious rate for the time being. Unfortunately negative interest rates for retail and corporate banks have not made them lend more but punished pension plans, mainly due to increased financial regulation.

Even more comical than which quarterly bubble private lending is funding in China, is that they have embarked on empowering the private sector, where as the US is empowering the government and the previously failed establishment. It is in fact a shame that the US information technology revolution of the last forty years have passed their rulers and central bankers by. Today “community” platforms (LC, TREE) are enabling borrowing from highest quality risk takers, to increase productivity and create growth, with enviable interest rates and data collection to the lender. Central bankers, however, continue to support their former work alumni and ignore calling for mandates to fund “community” platforms.

In support of the old school at the US Federal Reserve, they correctly watched the stock market or as they call it “data” to help determine when to make their first interest rate rise, but now is the time to start waiting for yields in their unsupported bond market (TLT) to recover. Although employment is at high levels, US central bankers can be relaxed with their inflation mandate, as corporate profitability is very tight, lay-offs are preferable to reduced margins.

There is little room for error but a policy mistake can take us back to the last decade including a stock-market crash.

“Now This Is Not The End. It Is Not Even The Beginning Of The End. But It Is, Perhaps, The End Of The Beginning.”

Originally Published Aug. 25, 2015

We’ve just had the first 10% correction in the US stock market in over 3 years, immediately preceded by a halving of equity valuations in the Chinese stock market, together with most other country stockmarkets moving into bear or correction territory.

This has been driven by two factors; a slowdown in Chinese economic growth and the probability of a September interest rate rises in the USA.

However we believe that the probability of a US September interest rate rise (from near zero) has now been removed and the probability of Chinese interest cuts (from 4.85%) have increased.

This should benefit economic growth and allow many country stockmarkets to recover recent losses.

Put in the context of the USA’s seven year bull market, there may not be many more years left in the bull market, but now is not the end, it is not even the beginning of the end, but it is, perhaps, the end of the middle.

The Swiss God Of Money

Originally Published 19th January 2015.

Last Thursday the Swiss National Bank (SNB) suspended it’s support for a Euro floor against it’s currency of 1.20, the Euro promptly fell 45% against the Franc. i.e. Swiss investors lost 45% in value of their European assets. Eventually the Euro recovered for a loss on the day of 17% to settle near levels of the August 2011 Franc crisis. The Swiss stock market also fell 15% in two days, implying the only safe haven were Swiss Franc denominated bonds and cash accounts. However the SNB also lowed the target deposit rate to negative 0.75% per annum, whilst holders of 10 year Swiss government bonds have to pay 0.13% per annum (pa) for that pleasure.

Whilst the timing of the decision was a surprise the market reaction was supreme shock, only days before a member of the SNB publicly supported the previous policy. The previous policy was also beneficial to growth and price stability in the Swiss economy. After the announcement investors, traders and global companies scrambled to hedge their exposure, supplemented by any future SNB commitment to foreign exchange stability already losing credence. In sympathy with the SNB the Swiss economy at only the 20th largest economy in the world, inhibits the risk tolerance for limiting external influence.

The Swiss Banking industry has a long history in lacking moral discrimination of deposit ownership. Swiss regulators also condone misrepresentation by financial intermediaries (when referring suspect money drug traffickers or terrorists to them). All-in Swiss financial system participants are the most rational in the world. Some may therefore not be surprised in a conflict between Swiss words and deeds.

Investors with Swiss liabilities, long investment horizons and generating non-investment income in Swiss Francs: should continue to seek growth in the equities of high growth areas and value companies (the US stock-market has outperformed the Swiss currency by 5% pa over the last 30 years); maintaining fixed income in the major trading block currencies with potential for recovery back to fundamental levels before increasing allocation to Swiss fixed income. Those with short investment horizons and not generating non-investment income in Swiss Francs, continue to be inhibited by negative domestic interest rates and domestic equities that are presently penalised by an uncompetitive exchange rate.

Steven J Cohen CFA, BSc (Econ) Hons Lond. 19th January 2015.


Originally Published July 26th 2010.

On February 25th 2009 the Fed released details of how US banking organizations were to be assessed to ensure that they had sufficient capital to perform on an ongoing basis. The S&P 500 closed that day on 764.9 and, reached a further inter-day low of 666.79 on March 6th 2009. Since then, the S&P 500 had reversed direction, to reach a high of 1219.8 on April 26th 2010.

However by July 1st, the S&P 500 had fallen-back to it’s year to date low of 1010.91. On July 14th the FOMC released minutes of their June meet that included the phrase “the economic outlook had softened somewhat” and on July 21st Bernanke release his “economic outlook remains unusually uncertain” testimony. Could these pronouncements be as significant in allowing a bottom to form as the Fed’s stress test announcement?

Bernanke served as a member of the Fed Board from 2002 and became Chairman on February 1st 2006. He will always be fondly remembered for his November 2002 speech that included both the terms “printing press” and “helicopter drop” in a discussion on how to prevent deflation. In his role of Chairman, he tried to prevent the financial market crisis with upbeat economic assessments, to no avail. He now appears to have learnt that a candid assessment, allows markets to respond to the expected monetary policy changes quicker.

He was certainly complicit in the bubble’s that formed, leading to the financial crisis. He’s certainly THE MAN who knows the necessary policy responses to that financial crisis. Now his communication to market participants has improved. And, in his January 3rd 2010 speech he has even accepted that, monetary (secondarily to regulatory) policy should be used to prevent damaging asset price bubbles. A well rounded Central Banker appears to have developed.

CME 30-day Fed Fund Futures are now indicating that, the FOMC may increase the federal funds rate (from their sub 0.25%) to 0.50% only in Sept 2011. This still gives the S&P 500 plenty of time to recover, till it will have to start discounting the interest rate rise.

Published July 26th 2010.


Originally Published July 19th, 2010.

According to the Nationwide Building Society, UK new home prices have risen 3% in the first half of 2010, following a previous flat year. This amounts to an astonishing recovery from the global pessimism that remains in most developed economies. So is it sustainable, and why? Like gold bullion, London realty appears to be a safe haven play in troubled political and economic times. Britain possesses one of the oldest democracies, a tolerance of extremists and, a language that is used globally in business, medicine, computing, movies and music. London specifically, has extensive cultural and leisure facilities and, the world’s busiest international airport. Wealthy Russians and Arabs, concerned Greeks, and many other nationalities, purchase holiday or rental properties in the Capital without due regard to the economic situation in the UK.

Whilst after the 1989 housing bubble burst it took four years, for new home prices in the UK to start showing positive gains; recent gains are in line with long term historical performance. Since 1964 UK new home price increases have outperformed US by an average 3.25% annually (in national currencies), however during the same period the pound has fallen an annual average of 1.62% against the dollar. This outperformance may have something to do with relative population density. So there may be some justification to believe that UK home prices can continue to outperform US.

Sources: US Census Bureau: Average Sales Prices of New Homes Sold in United
States, Nationwide Building Soc. Price New Houses (UK)

However, when we look at the affordability to nationals of their new homes (measured by the annual differential from the average new home price / GDP / population) justification for continued home price growth in the UK seems less justifiable. As at the end of 2009 UK new home prices were seven times the average gross domestic product per person.

Further source IMF: GDP/capita, current prices.

The battle lines between local and foreign residential house traders in the UK are drawn. Higher taxes, high unemployment, government austerity measures and, lack of credit, are holding back the British, while cash rich foreign buyers continue to invest. The question is, what do these foreign buyers know that the British don’t?

Published July 19th, 2010.


Originally published Thursday October 16th, 2008

Setting aside blame for the current credit crisis, the use of fiscal policy to remedy monetary problems continues to use 1930’s solutions to 2000’s problems. In addition if banks, that have the best understanding of each others problems, do not trust themselves, why should savers or government. In addition banks have been given access to borrowings by central banks but refused to accept it, due to stigma association, however banks share prices continued to fall. Therefore the commitment of greater and greater amounts of fiscal and monetary resources to the financial industry will only have a slow effect with drastic side issues, and is equivalent to throwing the whole universe down a black hole.

In addition financial institutions are only getting used to the implications of short selling, mark to market and capital ratios, all of which are reasonable and correct policies. Therefore a temporary suspension of these policies, of approximately a year, would give banks and regulators the time to adopt correct working practices for the use of financial products that are or have been developed.

The essential problem is that the velocity of money has shrunk to an unreasonable low level. Therefore to compensate the amount of money in circulation needs to rise to maintain the present global output growth at reasonable price growth. Addition problems are that: individual savings are at an unreasonably low level and job creating entities cannot gain access to capital in the form of borrowings.

The monetary solution requires that all individuals savings and deposits at financial institutions needs to be guaranteed by the respective central banks of that country and currency.

There needs to be a policy of immediately replacing all terminating borrowings of job creating entities, to reduce the possibility of a recession or depression. Securitised borrowings, from institutions with the necessary credit rating quality (rating), that have come up for redemption and that cannot be refinanced in the market at reasonable rates, should be refinanced by national central banks, creating new money. Assistance to inter-bank lending can continue to be given to through central bank lending windows (with the attached stigma).

Loan officers from financial institutions that have stopped refinancing non-financial job creating entities should have secondments to local central bank offices, with their pay still furnished by their permanent employers. Any loans not renewed by the loan officers present employers should be provided by central banks, again creating new money. This requires access to the data bases and records of banks that are not lending, the internet and, a new data base at central banks; with supervisory and approval officers at central banks.

Once problemed financial institutions and the regulators have established the correct working practices and are in the position to start to lending to non-financial institutions, increasing the velocity of money, central banks can then reduce the amount of money by selling their loan books back to the previous lenders or, in the
case of securities selling to the market.

The net effect will be a reduction in the size of employment in banking (fundamentally a structural issue) whilst maintaining the amount of employment in the rest of the economy. The penalising of future generations by increasing national debt would have been avoided, and any issues of moral hazard would have also been prevented.

Steven J Cohen, BSc (Econ) Hons CFA
Thursday October 16th, 2008
950 N Kings Road, Suite 151
West Hollywood
CA 90069