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Market volatility has been increasing for a number of weeks now. Is this the calm before the storm, and are we in for a global recession?
I would argue that the next global downturn is already upon us. By some indications there are still a lot of positive signals out there in the economy. Politicians in the US talk about the robustness of the US consumer. And yes, the headline figures in spending have been relatively strong given how late we are in a recovery cycle. But if you dig down deeper you start to see some real fragility. US consumers are starting to pare back on credit card debt. They're also spending less on gasoline and motor fuel in the middle of a summer vacation season, which is quite unusual.
If you spread out beyond the borders of the US and look at what's happening around the world, you see the purchasing managers' indexes, which are a very forward-looking indicator of the global economy, are quite weak in places like France and Germany, as well as the US. The bond markets are sending some very negative signals. We've seen inverted bond yield curves in both the US and the UK, and these are one of the best and most important predictors of a coming recession.
I think that the thing that the market is going to be looking for in the future is whether or not there will be a US trade deal with China, and I think that by all indications that's not going to happen. You'll see President Trump trying to step in with a head fake now and again, perhaps pushing tariffs back to help delay the pain throughout the Christmas shopping season. But fundamentally, the US is asking China to make changes in the party, in its economy, in ways that it feels are fundamentally unfair. The Chinese have said that they will not accept anything less than a deal of equals, and I think that President Trump is constitutionally incapable of crafting a win-win deal.
Beyond that, and at a very fundamental level, you're looking at the fact that monetary policy is really tapped out. Central bankers have been the only game in town for the last decade, if not the last four decades, depending on where you would like to put the marker. And the recent rate cut by the Fed simply didn't move markets. I think that we are tapped out on what we can do with monetary policy, and we need fiscal policy now to step in and really create a new growth story.
Unfortunately, governments are gridlocked everywhere - you have leftwing pop parties - rightwing parties growing in many parts of the world. And if the populous come to power you may start to see some real shifts in the licence that companies have to do business as usual. All this to me says that we are headed into the next global downturn.