The Institute of International Finance (IIF) just raised its U.S. recession expectations by 50%…
Bloomberg reports the IIF sees a 30-35% chance of recession within the next 24 months. It draws on information from 500 financial institutions across 70 countries.
The reason: A global, precursor “profits recession” has been underway since late 2014.
The organization blames the worldwide earnings decline on a “drop in corporate productivity growth, weak demand, and a general lack of pricing power.”
The IIF does well to note these serious symptoms of a global economic malaise.
But regular Daily readers know the root cause…
It’s what Tom calls The Great Unwinding. It’s the largest credit contraction in history… and it’s causing the U.S. dollar to soar relative to all other currencies.
The chart below shows the dollar’s latest massive spike. Note the time frame. It began in late 2014… the same time global profits began falling…
Tom explained the dollar’s action in the February 2016 Palm Beach Letter:
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The global economy has been expanding almost nonstop since the end of the Great Depression. When this happens, and when there are opportunities to make money around the world, the machine uses U.S. dollars to fund its growth. The giant institutions that run the global economy borrow dollars at low interest rates. Then, they trade these dollars for profitable investments. They might convert them into foreign currencies and invest in Chinese real estate or Brazilian oil reserves. They might invest them in new higher-yielding loans. They might buy stocks. At its core, global boom finance is simple. You borrow dollars, you trade them for higher-returning assets, you make profits, and then you repeat the trade over and over again. In a credit deflation, the opposite happens. The trade unwinds. Banks, corporations, and governments scramble to cover their dollar loans by selling assets. It’s like a short squeeze on the U.S. dollar. The dollar rises. Everything else falls. |
And that includes global profits…
Barron’s notes each 1% increase in the dollar means a decrease of $30 billion in sales, and 50-75 cents in earnings per share for the S&P 500.
Bottom line: The Great Unwinding is still in its early stages. Expect the global “profit recession” to grow into a full recession as the dollar continues its march higher. Play maximum defense. Stay long U.S. dollars, gold, and select stocks and bonds.
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Like the George Bush Refund Checks All Over Again…
Remember back in 2001 when George Bush sent out stimulus checks to taxpayers all over America? People got anywhere from $300 to $600 in the mail. Well, a similar thing is happening this year. On December 18, 2015, President Obama quietly signed a bill that gives 119 million eligible Americans the chance to collect on “consumer rebate checks” that could go anywhere from $1,230 to $12,900 for some people. There are no income requirements to collect. The rich and poor alike are eligible. But you do have to claim your share by April 18 to get your payout. Details here. |
