Bank of America Predicts Recession and Negative Market Change
Bank of America has unsettled investors this week by raising the spectre of a global recession. Their report that came out at the end of last week on “Peak Everything” predicts that major changes are coming to the markets. Britain's difficulties post Brexit came into sharper focus as a flash crash caused the pound to drop six big figures in a matter of minutes. Deutsche Bank's problems refused to go away as well. With 671 interest rate cuts around the world since the Lehman Brothers' bankruptcy, the lack of a significant sustainable economic recovery is a good reason to hold onto your retirement gold holdings.
Bank of America Sounds Asset Alarm of “Peak Everything”
This past Thursday, Bank of America Merrill Lynch sounded an alarming warning about a potential global recession in the cards. They stated that many of the most popular trades from the last several years could suffer from a stunning reversal. They attribute this to the uphill challenges facing world markets in peak free trade, liquidity, and income inequality. This big picture forecast from BOA Merrill Lynch blames a failing central bank enthusiasm for the negative interest rate policies in both Japan and Europe for the upcoming problems. BOAML calls this “Quantitative Failure” the product of the 671 global interest rate cuts that have not boosted a significant economic recovery or encouraged businesses and consumers to start spending again.
BOA Merrill Lynch's predictions do not mean that they think all assets will plunge in value. Instead they see a central banker policy change coming that will cause deflation assets to decline while inflation assets rise, per the Chief Investment Strategist Michael Hartnett led team. This means that many of the past bullish asset trends will be reversed in coming years as liquidity and globalization unwind. “A reversal of these trends, together with a shift toward fiscal stimulus and higher interest rates strongly argues that the excess returns from stocks and bonds in the past eight years are also likely to reverse,” the team said. The International Monetary Fund agrees with their assessments that a looser fiscal policy is unlikely in the coming year.
The logic for how this leads to recession comes from rising trade and immigration tensions around the world. BOAML believes that there will be more restrictive trade policies in the next several years. They argued that the 2016 prediction for the expansion of global trade is only 1.7% of global GDP. This makes it lower than the forecast for the economic expansion rate at the same time. Historically, a slower expanding global trade than economic expansion rate has led to recessions. The expectations of inflationary policies make BOA Merrill Lynch negative on bonds but still positive on stocks. A call for inflationary investments to gain is also good for the precious metals like gold prices.
Flash Crash Proves Brexit Problems Not Over
The post Brexit United Kingdom saga continues to unfold painfully. This past week in Britain, Prime Minister Theresa May admitted that it is possible the United Kingdom will have a final settlement that is a “hard Brexit.” The phrase implies that the U.K. would obtain only limited access to the all important single market of the European Union. At the same time, Amber Rudd the Home Secretary began to propose stricter rules for the foreign workers living in the United Kingdom. These developments unsettled markets enough that a phenomenon known as the flash crash came to visit the British pound sterling in overnight trade in Asia. In a matter of only two minutes, the one time most valuable currency in the world free fell 6.1 percent to as low as $1.1841. This brought the pound briefly down to a 31 year low against the U.S. dollar. The Bloomberg chart below tells it all:
Mark Carney the Bank of England governor has taken the matter extremely seriously. He requested the Markets Committee at the Bank for International Settlements to investigate what happened to the pound in the overnight session on October 7th. Initial speculation was that a human error pushing the wrong buttons in trading may have started the problem. Computer algorithms then likely took the low liquidity environment and snowballed the selling into a rapid plunge. The pound did manage to recover to 1.24 as the chart shows. This still left the U.K.'s currency down 16 percent since the results of the June 23rd referendum shocked the world. Nordea Markets of Copenhagen Strategist Aurelija Augulyte blamed the entire incident on poor liquidity. “The pound flash crash tonight was not explained by any fundamental reason but the lack of liquidity. The pound weakness will be a boon for U.K. industry and a headache for the BOE.”
It remains to be seen if the benefits to British exports and industry will outweigh the dangers of inflation that a sharply lower currency often bring. The heightened volatility is something to watch carefully as the pound is one of the major trading and reserve currencies of the world.
Deutsche Bank Problems Refuse to Go Away
Over the last several weeks Deutsche Bank has been embroiled in concerns that its capital base may be inadequate for the bank's needs. This has been aggravated by the U.S. Justice Department asking for $14 billion to settle claims of wrongdoing in the sales of U.S. mortgage securities before the financial crisis hit in 2008. Investors had been holding on to hopes that the bank would reach a significantly lower settlement with the Department of Justice regarding these investigations. After meeting with the DOJ Friday, the bank still had nothing to announce this morning. Deutsche Bank shares dropped around 3 percent in early trading on the lack of progress.
Concerns that a settlement may not be negotiated came from reports provided by a German newspaper Bild am Sonntag. They stated that the bank's CEO John Cryan was unable to reach agreement with the U.S. DOJ senior level representatives. Other sources have since confirmed the lack of a deal. Last month there were rumors circulating that the bank was nearing agreement on a $5.4 billion arrangement with the DOJ. Investors and observers are worried with good reason that the largest bank in Germany may need to raise substantial capital now. Funding troubles with the major banks of Europe can easily infect other banks throughout the continent and the world. Hold on to your gold.