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We Are Heading Into Extremely Dangerous and Unpredictable Storm

We Are Heading Into Extremely Dangerous and Unpredictable Storm
(Dollar Photo Club)

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Friday, 08 January 2016 08:01 AM Current | Bio | Archive


Chicago Fed President Charles Evans’ first speech of the year didn’t have any impact on the markets.

Nevertheless it had some interesting, albeit not surprising comments:

“… My forecast also assumes interest rates will stay quite low for some time …  Developments abroad, however, are offsetting the positive momentum in domestic fundamentals to some degree. The slow-down in global economic growth — notably in emerging markets — and uncertainty about future prospects have contributed to a rising dollar and declining commodity prices over the past two years … these factors that hold down the potential growth rate of the economy are temporary or more permanent is a matter of considerable debate … I believe that policy should plan to follow an even shallower path for the federal funds rate than currently envisioned by the median FOMC participant.”

Anyway, if it were up to Mr. Evans it certainly would be “Lower for Longer,” which markets seem to agree with as market expectations now indicate a first 2016 rate hike by the FOMC in June and not in March as was the case in December.

When Mr. Evans says, “Developments abroad, however, are offsetting the positive momentum in domestic fundamentals to some degree,” we could say he only points “mildly” to serious problems like the slowing growth in China, further problems in the Emerging Economies, dislocations caused by weak oil prices, etc., which, when we put them all together, or even one by one, are certainly not supportive for the U.S. economy, notwithstanding the U.S. remains the best protected important economy in the world against another global slowdown.

When we look at what damage the turmoil in the Chinese markets  and the further weakening of the Chinese currency, notwithstanding massive intervention by the Chinese authorities, have caused to themselves and markets all over the world, a legitimate question becomes if these chain of events in China are the proverbial “canary in the coalmine” signs (yes, plural!) there is worse to come for China’s economy, currency, etc. that could end up in a full blown “hard landing.” 

This would imply, in case that would occur, a hugely damaging impact on global growth overall, at a moment when the World Bank is expecting the world to grow only by a meager 2.9 percent this year and 3.1 percent in 2017 and 2018.

Now, when the World Bank itself forecasts (of course, this is not written in stone!) China’s growth to decline by about 2 percent from now until 2020 and the same World Bank says a 1 percentage point decline in China’s GDP growth will cause a 1.2 percentage points decline in Emerging Economies' growth and that are commodity exporters and a 2 percentage points decline in commodity prices (on impact) and a 6 percentage points decline over a 1 year time span, you don’t have to be rocket scientist to know we are headed for unpleasant times.

Now, and I think it’s important for all investors to get some kind of hint of where China could be headed for, is to take a look at the Baltic Dry Index (BDI), which is a shipping and trade index issued daily by the London-based Baltic Exchange that provides an assessment of the price of moving the major raw materials by sea and that takes in 23 shipping routes measured on a timecharter basis and covers ‘Handysize’, ‘Supramax’, ‘Panamax’, and ‘Capesize’ dry bulk carriers carrying a range of commodities including coal, iron ore, grains and fossil fuels.

The bad news is the Baltic Dry Index just fell to 447 points, which is its “all-time” low and from experience we have learned as where the BDI goes, so goes China’s GDP, but not only China but also the rest of the world.

No, that doesn’t bode well.

No doubt, as investors we should take it seriously we are heading into an extremely dangerous and unpredictable storm, where the wisest advice could be staying safe in port, especially if you are a U.S. based investor.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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HansParisis
No doubt, as investors we should take it seriously we are heading into an extremely dangerous and unpredictable storm, where the wisest advice could be staying safe in port, especially if you are a U.S. based investor.
investors, financial markets, stocks, money
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2016-01-08
Friday, 08 January 2016 08:01 AM
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