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Rajveer Rawlin received his MBA in finance from the Cardiff Metropolitan University, Wales, UK. He is an avid market watcher having followed capital markets in the US and India since 1993. His research interests includes areas of Capital Markets, Banking, Investment Analysis and Portfolio Management and has over 20 years of experience in the above areas covering the US and Indian Markets. He has several publications in the above areas. The views expressed here are his own and should not be construed as advice to buy or sell securities.

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Tuesday, 26 April 2016

Is a Recession Imminent?

Definition of a Recession:
The textbook definition of a recession is two quarters of negative GDP growth. Some examples of recessions include the great depression of the 1930’s, the dotcom crash of 2000 and the great recession of 2008.
Causes of a Recession:
Recessions are caused by several factors. These include:
Hyper Inflation
Deflation
Prolonged Fall in Exchange Rates
Credit Crunches
Collapsing Consumer Confidence
Collapsing Asset Prices
Collapsing Global Trade
Bust following Excessive Speculation – e.g., Property Market in Japan -1989
Evidence so far:
1) Collapsing Commodity Prices:
Recessions caused by deflation see massive collapses in asset prices. There has been a well over 50% plunge in the prices of industrial commodities such as copper and oil:
            
copper chart

              
crude oil chart


            2) Collapse in Global Trade:
Freight rates as measured by the Baltic dry index have collapsed over 95% from their highs set in 2008. While temporary dislocations can cause the index to fluctuate quite a bit, the well over 95% collapse in the index is an indication that all is not well with the global economy as far as trading activity is concerned.
baltic dry index
                                                        source: INVESTMENTTOOLS
            3) Collapsing Stock Markets:
Stock Markets across the world have been collapsing despite record low interest rates globally.
Emerging markets are down significantly from their recent highs:
            China Stock Market - Shanghai Composite Index
         
shanghai stock market index
             The US S&P 500 is all set to break down from a massive multi year megaphone top:
           Macrotrends
         
s and p 500 long term chart

         4) Dollar Strength:The Dollar  strengthened against virtually every other currency during the             recession of 2008 and is about to do it yet again post the termination of QE from the FED:
dollar index chart

5) Excessive Speculation & Risk Taking:
We are all familiar with the excessive speculation in the housing market that led to the great recession of 2008 following the collapse of Bear Sterns and Lehman Brothers. Fast forward to 2016 and the risk exposures at some big banks are reaching alarming levels as is the case with Deutsche Bank:Is Deutsche Bank AG (USA) The Next Lehman?
deutsche bank collapse
Additionally speculation has erupted in alternate asset classes like bitcoin which are commanding ridiculous valuations much like other asset bubbles that occurred prior to earlier recessions in 2000 and 2008 :
speculative bubbles
6) The velocity of Money is below Great depression levels:
As forecaster Martin Armstrong points out the velocity of money is currently below that observed in the great depression of the 1930’s. This implies that despite multiple rounds of quantitative easing by global central banks the attempt to circulate money throughout the global economy has failed and money has reached only a few pockets. The velocity of money typically declines during recessions and is probably forecasting one ahead:
velocity of money
7) Kondratieff Winter Wave Suggests a Collapse Ahead:
Finally looking at long term economic cycles we are entering a traditionally weak period for risk assets which tend to make lows every 8 years or so marked by economic troughs. We recently had major economic downswings in 1992, 2000 and 2008 and are due one in 2016. Other than this we have entered a kondratieff winter wave in 2000 and are set to emerge out of it only in 2020. The last few years of the winter wave could produced the most pronounced down swing in economic activity much like the last winter wave that was characterized by the Great Depression of the 1930’s:
kondratieff wave
Conclusion:
In conclusion several hall marks of a recession such as collapsing commodities, stock markets and collapsing currencies have already started to play out as we enter 2016 and deflationary forces seem to be taking control. Flight to quality in safe haven assets such as the Dollar and Yen suggest risk appetite is rapidly declining. The massive fall in shipping activity is also providing evidence that a massive slow down is at hand. Excessive speculation as evidenced by the risk exposures of prominent global financial institutions is also a major concern. Additionally the velocity of money has collapsed suggesting that the circulation of money through the economy is simply not occurring despite record low interest rates. Last but not least long term economic cycles also are suggesting that the upcoming recession could last at least till 2020 and the final effects of this major down cycle are yet to be felt. 

5 comments:

  1. Will it affect the Indian economy or it may cause the major impact to our economy?

    ReplyDelete
  2. With FII's having a significant stake in our capital market, capital outflows could present a major problem for the Rupee and the stock market.

    ReplyDelete
    Replies
    1. Implementing the taxation for the FII is to winding up or reducing the investments in the Indian market or is it to encourage the Indian investors. Is there any other fact in that decision of the government

      Delete
  3. FII's are major investors, so we don't wan't to turn them off. This is more intended to bolster the governments tax receipts long term and in the process it evens the playing field for the domestic investor on the taxation of capital gains.

    ReplyDelete
    Replies
    1. Will it make any change in the investment from the Indian investors in the market

      Delete

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Cash - 40%
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My belief is that stocks are relatively overvalued compared to bonds and attractive buying opportunities can come along after 1-2 years. In a deflationary scenario no asset class does well other than U.S bonds, the U.S dollar and the Japanese yen, so better to be safe than sorry with high quality government bonds and fixed deposits. Cash is the king always. Of course this varies with the person's age.