Weekly Market BriefingBy Dean Heskin, CEO Swiss America
SWISS AMERICA ECONOMIC POSITIONS - WEEK of MARCH 14th 2016
Economy
Clearly the world is in economic peril. The IMF itself has said the world risks "economic derailment." Global growth has slowed and Global GDP projections have also been lowered. The worldwide malaise is being fueled by several phenomena fairly unique to 2016.
a) This first is China. Once the engine of world growth, Chinese markets continue to flounder. They have systematically devalued their currency in pursuit of a domestic agenda that comes at the expense of global stability. Many are losing confidence in the strength of the yuan as well as the wisdom of the Chinese government's long-term economic policies and aspirations. In light of declining exports, Chinese officials have now lowered economic growth targets while the outlook for Chinese government bonds has gone from stable to negative.Currencyb) Oil is also weighing heavily on world economic health. Low oil is triggering large cuts to capital expenditures which, in turn, impact the GDP of several countries. Historically low oil prices have hit the US manufacturing sector with mounting layoffs. The weak demand for energy is impacting other commodities like steel and aluminum as well as demand for extraction equipment, machinery, refinery technology and transportation services. The plummeting price per barrel has sent oil company shares and profits tumbling, impacting investors domestic and foreign that are exposed; including central banks. With energy sector bankruptcies now climbing, lenders are also on the hook for energy business loans. And as cheap oil slams the economies of oil producing countries, government revenues have evaporated in Canada, UAE, Kuwait and Qatar. Case in point "¦ Standard and Poor's downgraded Saudi Arabia, Oman, Bahrain, Brazil and Kazakhstan last month.
c) And along came negative interest rates. This fairly radical stimulus policy charges banks to hold money rather than pays them to secure funds. The problem is banks will always look to find revenue and will likely pass costs on to the consumer in the form of higher fees, lower interest on savings accounts, higher deposit requirements, larger account minimums and/or whatever means necessary to survive. The ECB has taken additional steps to stimulate the Eurozone by cutting an interest rate that is already below zero. Japan, Denmark, Switzerland and Sweden have all gone negative but none have had an economic recovery. This raises the question; have global economic woes now risen to a level where monetary policy cannot reach them? Have we run out of ammunition to set things right? The bottom line is that negative interest rates take the global financial world into an environment of complete uncertainty which raises investor fear and trepidation.
d) Lastly, there is a pessimism pandemic. The US continues to battle a long and pronounced un-recovery. China is solidly in crisis, emerging markets like Brazil and Russia are on life support, ISIS threatens world safety and stability and Europe continues to apply some of the most radical stimulus measures in history in an effort to spur growth and inflation. Perhaps most concerning is that CEOs around the world are more cynical about the global economic outlook than they have been in years.
World currencies are suffering from a credibility problem. Everyone is printing money and central banks are experimenting with rates and valuations in untried and unproven ways. China is facing a currency crisis along with the UK, the Eurozone, Emerging Markets and much of Latin America. The pressure on national currencies is really just a symptom of a larger global debt crisis. The world's indebtedness has triggered global credit challenges causing central banks to seek unconventional monetary tools to solve systemic debt and growth problems. The larger difficulty is that the world has lost faith in money and it strikes at the very core of the fiat system. With all of the market turbulence, risk, fear and global pessimism, the Fed is unlikely to raise rates next week "¦ or for some time. With Wall Street on a hair trigger and negative interest rates now "on the table," we fully expect Yellen to suggest a rate pause and for world markets to take a much needed deep breath.
Gold
Gold in 2016 has become the beneficiary of a high-risk financial world besieged by a variety of complex challenges including slow growth, sovereign debt, slumping productivity, weak currencies, aging populations, geopolitical tensions, displaced immigrants and all the structural changes brought about by globalization. Gold is enjoying the best start to a year since 1974. But in 2016 it has broken many of the established rules about its own valuation trends. It has traditionally been considered a hedge against inflation; yet, global inflation is dangerously low as gold continues to soar. Gold prices also tend to move lock-step with silver prices; but silver is up just 10% while gold has climbed 20%. Gold and the dollar have historically had an inverse relationship but this year both have moved higher and higher. So the rush to gold in 2016 is different, deeper and more seemingly entrenched in globality and an increasingly interconnected marketplace. As global currencies continue to falter, gold's intrinsic value has never been more critical. With world banks teetering on the edge of solvency, gold is one of the few assets that sustains them. Gold is global money and a tangible investment at a time when money, currency, credit and valuations have grown more and more intangible.
