The Dangers Beyond the China-US Trade War

US markets have had a bad week. After reaching all-time highs recently — the Dow at 26,656.39 on 23 April (not quite new high), the S&P 500 at 2,945.83 on 30 April, and the NASDAQ at 8,164 on 3 May — they’ve spent the last three days in the red.

Monday, the Dow shed as much as 1.8% before pulling back to close only slightly lower.

On Tuesday it had bled 1.8% by the close. The NASDAQ dropped 2.2% during trading before clawing some of that back. It ended trading on Tuesday 2% down.

In fact, the Dow had its worst day yesterday since 3 January.

From the sounds of it, investors are unhappy with The Donald’s China trade deal tweets on Sunday. Really, they could have chosen any issue at hand — there are so many — for a reason to correct, but a correction was due regardless…because a pause is needed before the final blow-off rally in my Dark Window scenario.

All the ‘good news’ lately — the lowest unemployment number in the last five decades, average hourly earnings up 3.2% over 2018, first quarter GDP of 3.2%, as Rodney mentioned yesterday — hasn’t given investors sustained confidence because…well…most of them believe, like us, that it’s all BS.

Just hot air…

Employment numbers, GDP ‘growth’, stock market highs…none of it has any fundamental foundation. It’s all the result of Fed stimulus, the resultant stock buy-backs binge, and then the Donald’s tax cuts last year.

In fact, despite the good Q1 number, our real cumulative GDP growth over the last 11 years has been worse than GDP growth during the Great Depression (19% between 2007 and 2018 compared to 20% between 1929 and 1940).

From what I can see, any connection between the markets and the economy is now tenuous at best.

Stocks are 120% overvalued versus my proven Spending Wave, with all of that due to goosing earnings per share versus total earnings through stock buybacks. And that sets us up for the worst kind of thrashing if and when this bubble bursts.

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The big picture on money printing

Most people see that the Fed stopped printing money by late 2014, after tapering their printing gradually over a year. They see that the Fed started raising short-term rates in December 2015. And they see the large corporate tax cuts at the beginning of 2018.

What most people don’t see is the global picture…

Europe started printing again when we tapered in 2014. Talk about tag-team wrestling.

And Japan? It went off the reservation in early 2013, printing at three times the peak rates of Europe or the US as a percent of their GDP, and never slowed down. Japan’s balance sheet, as a percent of GDP, is now 101%…with most of that added since early 2013.

Europe’s is at 40%. We’re only at 19%, cumulative, after a peak of 24%. We’re the best house in a worsening neighbourhood.

We tapered first. We shifted from lowering to raising short-term rates first. No major central bank has raised short-term rates yet. But we alone passed major tax cuts, which are a direct stimulus to businesses and stock prices. Again, despite this, our real GDP growth is slightly worse than those Great Depression years.

Here’s the big picture on money printing from PIMCO.

GLobal Central Bank Printing Over $16.5Tr Since QE 10-05-19

Source: Pimco

[Click to open in a new window]

Note that this chart includes the big four — the US, ECB, China, and Japan — along with 18 other central banks. Sure, the big four account for about 76% of the global money printing, but that extra 24% is added stimulus that we don’t see or hear about.

At the beginning of 2018, cumulative central bank assets were just over $26 trillion, up 173% since QE started in early 2009.

Our tapering, as long as Trump will permit it to continue, and the little from China have brought that number back down to near $25 trillion. But I don’t think that will last. Not with slowing economies around the world.

Europe has been slowing markedly since the beginning of 2018. Japan is still slowing with breakneck speed.

Every brick counts…

Those extra smaller central banks account for about $6 trillion of the total global balance sheet and $3 trillion in additional printing since QE. Nevertheless, it’s more bricks to the wall of money and printing.

That $16.5 trillion of printing we’ve seen since 2007 is 37% of developed country global GDP and 21% of total global GDP. Adding Trump’s tax cuts of $1.5 trillion takes those numbers to 40% and 23%, respectively.

That’s enough stimulus to add 4.0% annual growth since 2009 to developed countries, or 2.3% a year to total global GDP…

Yet the best we’ve managed in the US is 3.2% recently for one quarter, and we’ve still averaged closer to 2% since 2008.

Australia is ahead of the curve here actually. In March it recorded its second straight quarter where the economy shrank on a per capita basis.

The RBA continues to don rose tinted glasses with its growth projection, in my opinion.

Quantitative Easing (QE) is likely to come back with a vengeance — since 2008 it is all central banks know how to do.

Without it all, we would have endured the second Great Depression. Instead, we got a great recession followed by the lowest growth in history.

But I believe the worst part is ahead.

Oh, and right on cue within my 90-year Bubble Buster Cycle!

I have to admit, years ago I didn’t think we could get to where we are today.

The first major financial crisis (in 2008) played right into my demographic Spending Wave cycle, as I forecast all the way back in 1988.

The second major financial crisis that I see just ahead, created entirely by unprecedented central bank stimulus, plays into this most extreme of all 90-year Innovation and bubble cycles.

Be ready to grab the Dark Window opportunities AND the sale of a lifetime opportunities that could appear.

Regards,

Harry Dent,
For The Rum Rebellion

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Harry Dent is an economic realist. His market predictions and strategies, as well as his general views of the economic and political state of the world, are based solely on his own knowledge. And, as a Harvard University MBA graduate and Fortune 100 consultant, it’s not as though he’s lacking in this resource. But if experience isn’t enough to convince you, perhaps his accuracy is. In 2017, Harry Dent was making calls about the Australian property market that are coming into play as we speak. And yet, the media portrayed him as ‘crazy’. At The Rum Rebellion, this sort of biased, inaccurate media that isn’t accepted. Dent and his fellow editors aim to give you the information you should know, rather than what the media wants you to know. Dent believes in facts and facts alone when forming an opinion, and such is The Rum Rebellion mission.


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