Global Slowdown Rattling Markets

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by FS

Andrew Zatlin at Moneyball Economics says two of the three engines of global economic growth are stalling with China, in particular, showing signs of panic borrowing.

China Faltering

While China has been the greatest contributor to global economic growth in recent decades, Zatlin says it is essentially a house of cards built on a massive amount of debt.

“China’s rising debt levels across all areas of its economy are seen as a major risk to global growth, with some analysts estimating that the next financial crisis could crystalize from the world’s second largest economy,” Business Insider wrote last week.

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Contrary to popular opinion, Zatlin noted, this slowdown hasn’t been driven by the trade war with the U.S. While the trade war doesn’t help, the fundamental driver is massive debt.

“The Chinese are trying to figure out how to navigate a slowdown,” he said. “Things are now in a panic situation… They’re going to put everything aside and say, ‘We don’t care anymore. Just get this stuff back up. Let’s re-inflate and do whatever we can.’”

china germany us pmi
Source: Bloomberg, Financial Sense® Wealth Management

Europe’s Screaming for a Trade Deal

In Europe, especially Germany, we’re seeing another slowdown. Europe has been engaged in a massive level of fiscal spending for the last three years.

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Near $100 billion was spent in 2017 to integrate the migrants that came into Europe. That’s a substantial amount to throw into the economy, Zatlin noted, and of course it has driven GDP higher as a result. But this effect is fading now.

What we’re currently seeing in Europe is reversion to the mean. If we strip out the influx of capital that’s come in from the public purse in Europe, the continent probably has a negative GDP.

“The number of widgets going in and out of Europe is less than it was last year,” Zatlin said, “and that’s again the trend before Trump came out with the tariff war.”

U.S. Economy Still Booming

From the recent Fed surveys, to industrial production reports, everything is showing a booming U.S. economy.

The issue right now is timing and opportunity, Zatlin stated. Europe is screaming for a trade deal, and China likely will be soon. Trump’s timing at picking this trade war has been brilliant, Zatlin added.

The goal when it comes to the trade war is to force manufacturing to return to the U.S. To accomplish this, inflation has to kick in, Zatlin noted. The best way to prevent damage from the trade war is to start in a place of strength, which Trump’s tax cuts accomplished.

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When the next round of tariffs kicks in around November, the prices of items in which China has a dominant share — such as in air conditioner units — will begin to go up. But because of seasonality, this won’t impact the U.S. until the spring, meaning Trump has a lot of runway to win negotiations.

“He’s breaking a lot of eggs and he’s pissing a lot of people off,” Zatlin said. “I do think that the U.S. is going to be hit somewhat by a slowdown, but then Trump is going to pull a rabbit out of thin air, and that rabbit is going to be an infrastructure bill. … If we talk about an infrastructure bill, we’re really talking about spending a trillion dollars to make it make sense. I think everyone around the world would buy those bonds… and the U.S. economy takes off again, heading into the election 2020.”


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