Tuomas Malinen @mtmalinen PhD econ. Chief Economist of GnS Economics. Adj. Professor of Economics @ Uni Helsinki. Economic growth, economic crises, monetary unions and central banks. Jan. 08, 2020 3 min read

It's rather baffling, why so many think that #recession of 2020 could be avoided.

Yes, the #Fed has cut rates aggressively and started to support the #stockmarkets and hedge-fund leverage, but it will not save the real #economy. 👇

#recession thread. 1/

We first warned of the impending #recession in March 2019. Then, before the aggressive rate cuts and Not-QE, the timeline for its onset was Q1 2020.

In our recent forecast, the onset has been postponed between Q2 and Q3 due to the aggressive stimulus. 2/

Why so little has changed in our forecast?

First, it should be noted that the #repo -panic of the #Fed was justified. It's evident that there are serious problems in the financial plumbing.

Without Fed's swift response, we'd be in recession already. 3/

Second, China, who has supported the global #economy since 2009, is running out of road.

All through 2019 #China has been engaged in desperate fight to appear economically strong, but that war is already lost. 👇

China's support will wane this year. 4/

This is such a massive issue, because China has accounted for over 50% of all capital investments in large industrialized nations and for over 60% of all new money created globally since 2009.

The global #economy simply cannot cope without China's support. 5/

And that support is nearly gone. China has become a giant with debt-clay feet.

It has already surpassed all historical examples of credit-bonanzas and her #economy has become increasingly unproductive.

#China simply cannot keep the debt-machine running at current speed. 6/

To emphasize the point, China's leveraging/deleveraging has led the global business cycle by 3-4 mo.

The latest turn has been achieved with completely unsustainable, record-breaking stimulus leading only to a sub-par growth, which #China simply cannot sustain. 7/

Like explained in our latest Q-Review, China's true budget deficit is currently north of 11%.

This means that China is unable to conduct massive infrastructure projects à la 2015/2016 implying that a world-economy-saving stimulus will be impossible. 8/

Signals from the US #economy are not encouraging.

The industrial production has fallen for five months in a row. 9/

This has led to dangerous decoupling of equity/bond ratio and the ISM manu prod index. 10/

This is so dangerous, because consumer confidence and stock market performance are highly correlated.

Now, as the service sector is carrying the US #economy alone and as the #stockmarkets are undeniably in a bubble, risk of a catastrophic asset crash are high. 11/

If (when) that happens, consumer and investor sentiments will experience a sudden and violent crash pushing the US #economy into an instant #recession.

But, when the unwinding of such massive financial excess commences, it will not stop there. 12/

Like explained in Q-Review 4/2019, #recession will morph into a global depression with four likely components:

1.Crash of the asset markets.
2.Failure of the European banking sector.
3.Failing zombie companies.
4.Collapse of China.

The depression for it's part, is likely to have five stages:

1) Onset
2) Fight-back
3) Flood
4) Calamity
5) Recovery

And we're now closing the Onset, or "ignition".14/

Currently, there seems to be two possible “ignition points”: the credit markets and/or European banking sector.

Economic slowdown is already building in the over-valued credit markets, which, like the European banking sector, will be unable to withstand a #recession . 15/

Alas, the combination of highly over-valued asset markets, pushed ever higher by the desperate #Fed, slowing growth in the US, China and the Eurozone, and the weak European banking sector form an extremely toxic economic mix. 16/

Averting its implosion in 2020 requires either a miracle or utterly desperate, full-in stimulus measures from #China and #centralbanks .

And, if that would come to be, then there would be nothing left to respond, but the monetary system destroying debt monetization. 17/

We all need to hope that we will not see such a horror unleashed.

Any economic crisis is better than the authoritarian government and central bank command over the #economy . 18/

So, there's only a miniscule chance that we are able to avoid a #recession in 2020, and that's something none of us should hope for.

Still, preparation, for all scenarios, is the key! 👇


You can follow @mtmalinen.


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