Many pundits and the financial media shy away from describing the economy as being in a recession. It’s bad for business, and investors usually freeze up, and stop watching and listening.
But not my colleague, Peter Schiff. He’s calling for a sudden and violent crash in the U.S. dollar sometime in 2016. And he’s not afraid to speak out.
From a technical point of view, a recession is defined as two consecutive quarters of negative growth. But for consumers, workers, employers, and investors, a recession is when nothing is happening.
With only a few exceptions, this is where the world economy sits right now…
First, the big picture is discouraging. The IMF just reduced its 2016 projected dollar world gross domestic product (GDP) to below the size of the global economy in 2013.
The economies of Japan and the eurozone are anemic, and economic growth in America in the first quarter of 2016 was below 1%.
The trend of durable goods orders, auto sales, and retail sales are declining, and the University of Michigan Consumer Sentiment Index fell 9% in March.
Corporate profits look flat for 2016, the labor participation rate is stuck at a lackluster 63%, and non-residential construction has stalled.
U.S. industrial production shrank 1.6% in the first quarter, and the closely watched NFIB survey of small businesses showed declining optimism and no growth in sales. The last time it indicated such a negative view was in 2008 during the global financial meltdown and in 1991 when Iraq invaded Kuwait.
China has gone from being the world’s chief growth engine to its biggest risk factor. While the mandarins in Beijing and many gurus expect 6%-plus growth, my sources peg real growth at around 3% – a far cry from the double-digit growth rates that drove global growth for more than a decade.
China’s Great Reckoning
I’ll get to why America is ailing and what we need to turn things around, but first, let’s look at China’s situation, which is bleaker than many realize.
President Xi Jinping’s greatest concern is growing labor strikes, protests, and layoffs.
In 2015, strikes and protests doubled over the previous year to reach 2,700. So far in 2016, they’re on track to surpass 6,000.
Hebei province will close 60% of its steel mills and lose 180 billion yuan in revenue, and lay off over a million workers as it weans itself off heavy, polluting industries in the next two years. And keep in mind that China needs to produce 15 to 20 million new jobs just to tread water.
After labor issues, President Xi’s and China’s greatest threat is the emerging debt crisis. Some estimate that China’s banking system could suffer write-offs four times larger than U.S. banks incurred during the subprime crisis.
China’s financial sector will have loans and other financial assets of $30 trillion at the end of this year, up from $9 trillion seven years ago, said Charlene Chu, an analyst in Hong Kong for Autonomous Research.
In her analysis, Ms. Chu estimates that at the end of 2016, as much as 22% of the Chinese financial system’s loans and assets will be “nonperforming.” In dollar terms, that works out to $6.6 trillion of troubled loans and assets.
Regaining American Confidence and Momentum
America’s chief problem is the reliance on Fed policy of manipulating money and interest rates. What we really need to regain confidence and momentum is getting capital flowing to the job and wealth generators – small businesses and entrepreneurs.
This is the first time a recovery has taken place against the backdrop of shrinking small business jobs or when more small businesses are closing than starting.
The overregulation of our financial markets and small businesses by both parties has led to steadily higher costs.
In his first seven years, President Obama issued 392 regulations deemed “major,” meaning each carries an expected economic effect exceeding $100 million annually, with 47 more on deck for this year.
The tally issued already tops the totals during the eight-year tenures of George W. Bush (at 358) and Bill Clinton (at 361), according to an analysis by George Washington University.
On top of this, capital and credit has been flowing to the wrong places, with government debt and consumer debt sharply expanding, while corporate debt has been flat. Venture capital investment is at one-third of the level seen during 2000-15, and IPOs are down 50% from that time period.
We will turn things around. In the meantime, stick to your financial plan and keep investing in high-quality companies at home and around the world.
Good investing,