Navigating the Complexities: A Comprehensive Overview of Today's Global Economy

the bear case and the bull case in full display. Something will break, especially the....
by Yoaquim
August 12, 2023

We can all agree, right? There's a lot going on in the economy and the world. Way too much for one person to keep track of, but fortunately, all I keep track of is the economy, so this will be the most complete overview of the economy you will find anywhere.

It’s important to put all the cards on the table and look at them objectively. Both from a positive and a negative perspective. And today I'll start with he negative side of things, hopefully leaving you with a positive outlook at the end of this.

Bear case:

Currently, the war in Europe surrounding Ukraine and Russia is still ongoing, meaning NATO resources are being spent on an expensive endeavor.

This continued conflict can remain a bottleneck for economic recovery due to the oil crisis imposed upon Europe by the Russian pipelines being cut-off.

The “cold winter” many analysts spoke of during the Winter of 2022 is not a contained one time event, if the war continues and European countries don’t find a proper solution to Energy production, the cold winter can occur in late 2023 as well.

To shift focus on the world’s leading economy and therefore global economic indicator & world reserve currency holder, the United States, let’s talk monetary policy complications in the US.

Currently, as of 8 August US consumer credit card debt hit $1 Trillion, an all-time-high.

If this is assessed in the proper scope, a scope that contains the dangerous dissonance that is made up out of the remaining high inflation, high interest rates, high consumer spending, high debt and high employment, we have a recipe for disaster.

Regrettably, the persistent conflict observed among consistently high levels of contradictory economic indicators suggests that the economy is seemingly detached (so to speak), largely overlooking significant threats illuminated by these divergent signals.

As the prices paid component of the ISM Service Sector report increased in the most recent report, moving from 54.1 to 56.8, any optimism that the path of inflation is continuing to cool off at a faster clip and that the move higher in Treasury yields is simply a reaction to the Fitch [U.S. credit downgrade] report must be reconsidered.

And this is in addition to gasoline prices across the country climbing to an eight-month high.

Fitch Ratings has lowered the U.S. government's foreign-currency default rating from AAA to AA+.

The downgrade is due to projected fiscal deterioration over the next three years, a growing government debt burden, and declining governance compared to higher-rated peers.

Fitch cited repeated debt limit disputes and last-minute solutions. The decision comes after a drawn-out fight to raise the borrowing limit, which raised default risks.

The White House disagreed with the decision, arguing that it was based on outdated data. Fitch highlighted the lack of a medium-term fiscal plan and complex budgeting process, leading to successive debt increases.

The U.S. now holds an average rating below AAA, as two of the three major credit agencies have downgraded its debt. Economists debate the potential economic impact, with some seeing it as a political talking point.

The downgrade could fuel discussions on addressing the country's debt size in the long term.

Moody's decision that came out on Monday the 8th of August, to review the debt of major banks, like State Street and Bank of New York Mellon, for a potential downgrade seems confusing, especially since it comes five months after the collapse of regional lenders like Silicon Valley Bank and Signature Bank.

These earlier collapses were caused by mismanagement of asset durations and depositors seeking higher interest rates. Despite other banks overcoming such issues and regulators affirming the sector's health, Moody's warning implies a belated response.

This parallels Fitch's recent downgrade of U.S. bonds, which also appeared untimely. However, investors shouldn't dismiss these updates as outdated; they might reflect speculative future assessments by the agencies.

Finally, to address stock market price action, the current stockmarket rally is being carried by major tech companies.

Major tech companies are often more volatile and bubble-prone, meaning the excitement surrounding them is often based on speculation for future events and possibilities.

Currently there is a lot of market hype surrounding micro-chips and AI, as seen in the stock rallies of AMD, NVDIA, & AAPL this hype can quickly die off if expectations are not met.


Bull case:

Referring back to my previous statement regarding the continuous high levels of many major economic indicators: “Regrettably, the persistent conflict observed among consistently high levels of contradictory economic indicators suggests that the economy is seemingly detached (so to speak), largely overlooking significant threats illuminated by these divergent signals.”

A nuance can be made, with all these economic indicators indicating conflicting conclusions a bearish and a bullish stance can be taken.

With so many conflicting indicators and high levels of numerous economic metrics it becomes a coin flip for which direction the market takes. The question becomes, can we get things under control in time before something breaks? Let’s hope we can, and let's list some reasons why we might be able to do it.

The recent June reading for the Us economy raised optimism that the Federal Reserve is managing to steer the economy into a soft landing, the July numbers have shown the headline rate rise again due to the sticky inflation that we’re seeing. The core figure is expected to hold at 4.8%.

That’s better than it used to be, indicating we’re heading in the right direction, although it still remains way too high for the Fed’s comfort.

Traders are also taking a bullish outlook not just on stocks, but on bonds. The bond market is certainly paying attention.

The yield on the 10-year Treasury nudged above 4% again on Friday and climbed higher still early Monday. It’s lower than the 14-year high seen last October, but getting back up there.

There are several reasons for this, none of which are exclusive. One is that traders anticipate more inflation over the long run. Next, they predict that Fed rates will remain higher for a longer period of time. Third, they believe that the economy will continue to be resilient, which would likewise maintain higher Fed rates than would otherwise be the case.

Regarding consumer spending, contrary to concerns that they would falter in the face of high inflation and rising interest rates, consumers have shown unexpected resilience throughout the most of the last two years. A robust labor market and salary increases contribute to this resilience in some ways.

Retailers and consumer product manufacturers are also preparing for back-to-school purchasing. Recent financial data from retailers and restaurants also imply that Americans may have reached a ceiling with regard to pricing rises.

Finally, the cost of office supplies increased by 9.6% in June over the same month last year, while the cost of apparel increased by 3.1%.

However, some economists now claim that after a year of constant spending cuts, customers may be more inclined to indulge this year as a result of savings weariness.

Economic resilience has been proven over the last year, although amidst high inflation, high rates, and high debt, this doesn’t always indicate a positive ending.

And to further address the Fitch & Moody’s situation, Moody’s intervention on Monday evening feels like a meek warning that the economy isn’t as strong as we’d like to think, similarly to Fitch. And to reiterate they both seem behind the curve. Additionally, Barron’s stated:

“And it might seem like a long time ago, but it’s worth remembering that these ratings firms kept the highest marks on the complicated financial products that brought the financial system to the brink in the 2008-09 financial crisis even as the subprime sector was in flames. – Moody’s call may be an opportunity to buy the dip in bank shares–the S&P Banks Industry Group index is up 15% over the past three months. But investors should also be wary of getting too bullish.”

This seems to indicate the stance of Barron’s being rather bullish with a tinge of disregard for Fitch & Moody’s rating updates.

Ultimately, my previously made case, of the economy being on a sort of tipping scale, remains in play. We either turn things around and fix things soon, or wait for something to break because something will break.