Rates Back to 'Normal'? Not Likely...

Nov 23, 2015

27

Dublin, Ireland

Elections nowadays are mostly contests between cronies and zombies. The leftists favour the zombies. The rightists favor the cronies. In Argentina yesterday...the zombies lost. It's time for the cronies to take over.

More on that tomorrow...

Meanwhile...

How's the renovation work coming? Glad you asked.

We have been fixing the outside walls of an eighteenth century stone farmhouse. We use a miniature jackhammer to chisel out the cement. Then, we replace it, filling the joints with a mixture of lime and sand, just like they did in the old days.

Back in the 60s, 70s, and 80s, people thought they were doing these old buildings a favour by modernising them, often covering them with cement. It was harder, more water resistant, and longer lasting than the old-fashioned lime and sand mortar.

Later, they discovered that cement didn't allow the building to breathe. Moisture rose up from the ground and couldn't get out. The limestone used to build the house decomposed. Inner walls were humid. Outer walls crumbled.

Until this past weekend, we were fixing the fixes, repairing the house with the materials and techniques that were used to build it in the first place.

But now, the nights have turned frosty. You can't work with cement or lime when the temperature gets close to freezing. So, we will have to wait until spring to finish the job.

Besides, it's time to head back to the US for Thanksgiving. We're travelling today, so our notes will be limited.

The financial news continues to confound and confuse investors. The Fed is telling one story. The world economy is telling another. The Fed is talking about a rate increase (eventually getting rates back to 'normal') because the US economy is so healthy. Meanwhile, the world heads to deflation.

Says Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management:

  • We are now just one big shock away from a global downturn, and the next one seems most likely to originate in China, where heavy debt, excessive investment, and population decline are combining to undermine growth...

But it looks to us as though the global downturn is already here.

First, the Baltic Dry Index, which measures the cost of shipping, is at a record low. Here's Bloomberg with the full story:

  • The cost of shipping commodities fell to a record, amid signs that Chinese demand growth for iron ore and coal is slowing, hurting the industry's biggest source of cargoes. The Baltic Dry Index, a measure of shipping rates for everything from coal to ore to grains, fell to 504 points on Thursday, the lowest data from the London-based Baltic Exchange going back to 1985.

And as we reported last week...

Caterpillar posted another month of falling sales, making it 35 in a row. But the latest figures show something new - sales are now dropping in the US as well overseas.

Corporate profits have begun to fall too. And earnings per share are going down too, despite record buybacks (which have reduced the number of shares.)

Sales meanwhile, weak for the last seven years, are slipping badly in some sectors.

Default rates are increasing, with corporate debt back at 2008 highs. (Corporations used 100% of this debt, unwisely in our view, buying their own shares.)

Fed policy rates, back to 'normal?' Not likely.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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