Steen Jacobsen, Chief Economist and Chief Investment Officer of Saxo Bank sees economic slowdown ahead.
Specifically, his “Four Horseman” indicators: the drivers of economic growth, are all flashing red.
Jacobsen believes that the central banks will continue their liquidity tightening efforts for as long as they can get away with (i.e., until the financial markets start toppling over). In his opinion, they eased way too much for way too long; and the malinvestment and zombification that resulted needs to clear the system — and it will likely do so more violently and painful than the central banks will like:
I like to make things simple. Right now we have the Four Horsemen: the four drivers of the global economy. They are the quantity of money, which is falling; the price of money, which is rising; the price of energy,which is a tax on consumers and is rising; and globalization/productivity, which is falling.
So, if you look at the economy as a black box, I really don’t know what happens inside of it. But I can observe what goes into the black box: it’s these four things.
Globalization / productivity, we know that’s all about Trump, trade war and the likes. It’s not exactly improving; it’s actually worsening.
As for the quantity of money, a lot of people argue with me that the Central Banks are still expanding their balance sheets, but the fact of the matter is that the QT in terms of the U.S has been reducing the Federal Reserve balance sheet. And we have a stealth reduction of the balance sheet in terms of the Bank of Japan. The EBC would love to cut and is publicly committed to doing so. The Bank of England is doing its first hike. So the quantity of money is falling.
As for the price of money, I think Powell is really in the mold of Volcker. He’s a practical guy, and what he’s decided to do is pretty much just to hike interest rates until the market collapses. That would indicate that pausing from this tightness is probably 5-10% below the recent low that we saw in the stock markets. If we don’t get to that level again, he’s going to continue the hiking.
So you almost have a self-feeding process by which, ultimately, the stock market will have to collapse because behind the scene, the pragmatic way that Powell does his policy really means the interest rate is going up and, hence, you haven’t seen your move to safety yet in terms of Treasurys.
And then, the final one, which is often ignored, the price of energy. Before the dramatic drop over the past few weeks, the price of energy was up at 15 to 20 percent this year in terms of the oil price input. But, if you add to the fallout from the emerging market selloff and the currency-negative impacts, you will have prices on petrol in energy-intensive countries like India, Indonesia, China where the prices are up somewhere between 50 and 100 percent. Imagine how much of the purse that expensive energy takes away from these developing economies in terms of the purchasing power.
So I think the full force of these Four Horsement that drive the world economy is now going to slow economic growth dramatically after this recent boost from the twin tailwinds of the tax cut and repatriation of capital. So even the U.S. now seems to be swimming naked.
Click the play button below to listen to Chris’ interview with Steen Jakobsen (48m:35s).