“One Big Shock Away from a Global Downturn…”

Submitted by William Bonner, Chairman – Bonner & Partners

Zombies vs. Cronies

DUBLIN – Most elections these days are contests between cronies and zombies. The left favors the zombies. The right favors the cronies.

In yesterday’s presidential elections in Argentina the zombies lost. It’s time for the cronies to take over.

 

Mauricio-Macri-e13547230287911New Argentine president Mauricio Macri – the era of the Kirchner dynasty is over.

Photo via diarioz.com.ar

 

More on that tomorrow …

 

Big Shock

The financial news continues to confound and confuse investors. The Fed is telling one story. The world economy is telling another.

The Fed is talking about increasing the federal funds rate – eventually getting rates back to “normal” – because the U.S. economy is so healthy. Meanwhile, the world heads toward deflation.

Says Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management:

 

“We are now just one big shock away from a global downturn, and the next one seems most likely to originate in China, where heavy debt, excessive investment, and population decline are combining to undermine growth…”

 

But it looks to us as though the global downturn is already here. First, the Baltic Dry Index is at a record low.

 

BDIThe Baltic has been hung out to dry – click to enlarge.

 

Here’s Bloomberg with the full story:

 

“The cost of shipping commodities fell to a record, amid signs that Chinese demand growth for iron ore and coal is slowing, hurting the industry’s biggest source of cargoes.

The Baltic Dry Index, a measure of shipping rates for everything from coal to ore to grains, fell to 504 points on Thursday, the lowest data from the London-based Baltic Exchange going back to 1985.”

 

And falling shipping costs aren’t the only sign of global deflation…

In October, construction and mining equipment maker Caterpillar posted another month of falling sales – making it 35 in a row.

The latest figures reveal something new, too. Sales are now dropping in the U.S. as well as overseas.

U.S. corporate profits have also begun falling. And earnings per share (EPS) – a key measure of profitability that looks at the portion of companies’ profits allocated to each outstanding share – are falling too.

 

Non-fin corporate debtUS non-financial corporate debt issues plus US sourced bank loans (foreign loans not included) – a page from the new “Spot the Great Credit Crisis” game – click to enlarge.

 

Average third-quarter EPS for S&P 500 companies has fallen by over 2% from the same quarter last year. And this figure would be even more disappointing if it weren’t for their massive share buyback binge (which, by reducing the number of outstanding shares, increased the earnings that accrue to each share).

According to Citi Research, since 2004, S&P 500 companies have spent 2,848% more money buying their own shares than investors have moved into the stock market.

With corporate debt levels now more than double their pre-crisis levels, this all could have a big impact on corporate bond default rates… especially if the cost of carrying all that debt goes up.

Fed policy rates, back to “normal”?

Not likely…

 

Charts by stockcharts, St. Louis Fed

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