Period: 16 – 22 January 2021
Top news story: In previous reviews, we have repeatedly explained the inevitability of a serious structural crisis in the US and the world economy. In this regard, the US presidential election was not a choice between the existence or absence of a crisis, it was a choice between options to manage the crisis.
In our view, a sharp and poorly controlled downturn was chosen. This option is supported by the first decisions of the newly elected President, Joseph Biden, but in theory it is still possible for him to move on to the «Trump Plan», thereby turning the crisis into a controlled option. As a result, news clarifying which fiscal policy options will be adopted by the new administration in Washington will be the most important in today’s agenda.
To answer this question, we have to look at what those persons who may know (or have guesses) about the intentions of the «circle of the close» to Biden do. That is why the main news, in our view, is as follows.
First, European Central Bank head Christine Lagarde, speaking at a press conference after the Governing Council on Monetary Policy meeting, suggested that the eurozone economy could slide back into recession. But it does not need additional monetary stimulus. According to Lagarde, output fell at the end of 2020, with the recession not limited to the fourth quarter. Economists in the first three months of 2021 are also predicting a downturn, because European countries are imposing quarantines and restrictions against a new outbreak of COVID-19.
Note that the description of this scenario by the Mikhail Khazin Foundation for Economic Research gave even in spring, moreover, we have outlined the reasons for this phenomenon. European experts don’t talk about objective reasons for the downturn and blame the COVID-19 epidemic. The good news is that they have admitted that there will be no growth anytime soon. But the key is to forgo monetary stimulus (emissions), since emission does not allow supporting financial markets and aggregate demand. In other words, Lagarde said that the ECB will no longer delay the collapse of markets.
Since this was only expressed as an opinion, it cannot be excluded that this position would change under the influence of political factors. Now we can only state that the EU’s financial leaders are mentally prepared for such a scenario.
Second, experts note that the S&P 500 Dividend Yield chart is in a dangerous zone: the US stock market’s attractiveness indicators have declined markedly following strong quoted price increases. One such indicator is the real rate of return of the US stock market, which is now a source of concern. In particular, the decline below zero preceded the stock market crash of 1987, 2000 and 2008.
Third, a Senate hearing was held on Tuesday to confirm the candidacy of Janet Yellen as Secretary of the Treasury (US Treasury Secretary). At the hearing, the former President of the FED called for extensive action by lawmakers on the next COVID-19 package. Of course, rising spending and increasing public debt in the short term will benefit the economy, but in the future, it is threatened by sharply rising market rates.
After President Joe Biden put forward proposals to stimulate the economy by $1,9 trillion, there were, in general, serious concerns about a huge increase in public debt. Other aspects of the Biden plan, such as tax increases for corporations and the rich, received equally mixed responses. In particular, the onset of such plans could lead to the very collapse of markets that we are warning of.
Of course, all these factors can still be regarded as purely symptoms, but they cannot be ignored categorically. The situation is steadily approaching the moment when the transition from the «Biden plan» to the «Trump plan» becomes impossible.
China’s GDP in the fourth quarter grew weaker than expectations (2,6 %), but annual growth (+6,5%) is higher than it was before the pandemic; overall, in 2020; +2,3% – the lowest since 1976:
Industrial production accelerated in December to 7,3% per year – the peak since March 2019:
China Industrial Production
Retail sales slowed down slightly; 4,6% per year after +5,0% in November.
In Japan, industrial production slumped by 0,5% per month in November (the first negative since May):
Japan Industrial Production MoM
As a result, the annual decline accelerated from -3,0% to -3,9%.
Sales in the Italian manufacturing industry returned to an annual loss:
Italy Industry Sales MoM
The balance of orders in British industry from CBI deteriorated again:
United Kingdom CBI Industrial Trends Orders
And optimism in the manufacturing industry (according to the same version) in the first quarter went down sharply:
The PMI (Industry Peer Review) of Japan’s manufacturing sector returned to recession in January, and in the service sector, deepened into downturn, showing the worst in five months:
Japan Services PMI
In France, Germany and the Euro Area as a whole, services are also deteriorating:
Euro Area Services PMI
Things are especially bad in Britain: 38,8 points – the lowest since May.
CPI (consumer inflation) in Germany in December -0,3% per year – the lowest since January 2015; 0,1% of the lowest since 1986:
The same is true for the Euro Area as a whole:
Japan’s CPI in December -1,2% per year is the lowest since April 2010. The same is true for net inflation (without fresh food) – there -1,0% per year, the lowest since 2010.
Recall that this is the case with deflationary processes, that is, despite monetary stimulus, aggregate demand is falling. It should come as no surprise that Lagarde wants to reduce emissions – it does no good, and the damage (due to a decline in the real disposable income of households) only increases.
The NAHB housing market index in the US declined slightly, but remained very high, with buyers grabbing up everything on the market and few new offers:
United States Nahb Housing Market Index
In the Euro Area, consumer sentiment deteriorated in January:
Euro Area Consumer Confidence
A similar situation in Britain:
United Kingdom Consumer Confidence
Consumer sentiment in Russia in the fourth quarter darkened, the forecast of changes in the country's economy is record-breaking pessimistic:
US initial jobless claims fell slightly, but remained substantially higher than between September and December:
Annual decline in retail sales in South Africa accelerated:
South Africa Retail Sales YoY
Britain’s fiscal deficit in December is the largest since May:
United Kingdom Public Sector Net Borrowing
The ECB has left the rates and bond purchases unchanged, remaining willing to add incentives if necessary.
The Central Bank of Japan did not change rates and incentives, slightly raised its GDP forecast for next year.
The Central Bank of Canada has left monetary policy unchanged. Likewise, Brazil, the Central Bank of Indonesia, the Central Bank of Turkey and the Central Bank of South Africa.
Summary: Based on circumstantial evidence, it is clear that the world’s financial power is preparing for a serious collapse of markets. If only because further monetary stimulus had already stopped producing positive effects, the economy went into recession. And if inflation is yet objectively taken into account, it is possible that the recession will be stronger than official statistics suggest.
The only exception is the United States. But in this country, a new team has come to power, and they have to show some results. It was in this scenario that we predicted that by the middle of the year the new Biden administration would cause a serious collapse, so we will keep the situation under control.
Overall, there is little hope of a positive outcome, in any case, that even officials are postponing the beginning of the expected increase any further.