“Economist/Wealth Manager tells it as it is rather than what you want to hear. Advice built on hard economic facts, tailored to your needs”

Roy Duncan FCCA - Chartered Accountant and Recruiter (C London) 2012

The Big Picture June 2016

Posted by jdavis on June 30, 2016

In The Big Picture I show what is really going on and what informs our thinking.

Look at April's to see what I showed then.

The following is a sample of what I see now: (see lots more on Twitter @j0nathandavis)

British Pound (in markets' parlance - 'Cable')

The Pound Sterling has been in a price range of c $1.35 to $2.00 for 25 years.  The idea that BREXIT is a cause of anything to do with the Pound is laughable.  If anything BREXIT is yet another catalyst.  It is definitely NOT a cause.

The Pound has been falling for 2 years (or 9 years or even 100 years depending on your point of view).  That it has been falling for years is the important point.  The direction has been down for years.  Should you need a reason for a weakening Pound it will be the UK has the largest twin deficits in the Developed World (Borrowings aka The Budget Deficit and Imports exceed Exports aka The Trade Deficit).

Here is UK's Trade Deficit, last c 20 years

Current Chancellor took over in 2010.

The all time low for the Pound was the early 90s.  With our dire finances we can expect the Pound to continue to head towards that ie approximate parity with the US$.  Do you remember when the US$ was around $4 to £1?  It is currently c $1.34.  At least a further c30% devaluation can be expected.

If your financial (and other) assets are in Sterling you might want to rethink that.


Share Indices

First, the main US market, the S&P 500.

The main US market peaked in 2000, 2007 and, it seems to me, 2015.  Another ultra short term peak is possible.  However, the head winds are strong now.  Look at earnings:

While the stock market is just off the all time highs, aggregate corporate earnings have been falling since the beginning of 2015.  As you see, there is normally a high correlation.  Can the US stock market hold up?  We would be surprised if it did.

Compare and contrast to around the world of stocks:


The above is World equity indices NOT INCLUDING the US.  Quite a difference.  World indices have been falling since mid-2014 - a full 2 years ago!

For how long can the US, uniquely, stay near all time highs (and bring further down the rest of the world)? 

UK stocks

Been falling since 2014 (other than failed fake rally into 2015).

Euro Stocks

Been falling since 2015.


Been falling since 2015.


Been falling since 2015.

Emerging Markets in general

Been falling for years.


So it does appear as if the US is the odd one out.

Now looking more deeply:

It seems to me if banks are doing well, by dint of strong share prices, in a debt-fuelled economy, the economy is probably doing well.  But if the banks' shares are crashing...

UK and EU Banks are at the lows of the banking collapse of 2008!!! and breaking down further and heading down down down.  It seems to me the market knows there is something huge afoot and have been dumping banks' shares left, right and centre for over a year and a half.

US banks are in a bit better shape but not looking strong at all.  If the lower (ascending) trend line is broken sustainably then it's Goodnight Vienna for global stock markets.  And most folk have c 50% of retirement etc funds in global stocks.

Before leaving stock markets, I'll just point out a stock I have mentioned previously:  Sothebys.  The grand auctioneer of fine art, high end jewellery, cars, property etc.

Historically, the share price has soared with economic expansion and markets' growth.  And collapsed with recessions and crashes.

Since late 2013 the share price has been collapsing.  I'm sure it doesn't mean anything to us mortals does it...?


Now, I'll move on to the most important currency, after the US$.  The Euro?  No.  The Swiss Franc?  No.  Certainly not the Pound Sterling.  It's the Chinese Yuan.

Why?  Well, firstly, China is the 2nd largest economy.  Secondly, China has borrowed hugely more than any other country, in recent years, to pretend that all is well and now sits on $Trillions (!!!) of potential bad debts.  So, if the Yuan crashes it's likely it's because they are desperate to create inflation and attempt to inflate away their bad debts.

What's this to do with Western investors?  Everything.

By devaluing their currency they, in effect, export deflation to the West as they are huge exporters of 'stuff' [sorry about all this technical jargon...] to us.

So, what's happening with the Yuan

As you see the Yuan is at its weakest v the US$ since 2010 and it's trending down, down, down.

China is exporting deflation.  This is so important.  It will / has already impact/ed on stocks, property, govt bonds.  Why people aren't offloading excess property assets right now is beyond my little brain.  Even more, why on earth would you invest or trade up in property just now???

Deflation is a debt-fuelled property bubble killer.  Obviously.


There is so much to say but you only have 26 hours in the day (or something like that).  So, I'll just leave you with my Recession Watch.  It's the chart of US 10 year government bond rates to 2 year rates.  The lower the spread the higher the chance of US - therefore global - Recession and the closer it gets to it.

Recession Watch (US 10 year rate - 2 year rate)

Well, I've been writing about this for over a year and, sure enough, it continues to head down, down, down.  We are now at c 35% likelihood of Recession shortly.  It should be 50% probability soon.  When the difference between the 2 rates goes negative, it's effectively the market saying we are IN Recession.  Remember, the stock and bond markets are, largely, forecasting mechanisms and normally move well in advance of what's obvious, economically.


Thanks very much for the note. Regarding the 10yr-2yr, do you think the model needs to be adjusted given that interest rates are artificially low at the short end? Indeed, normally rates would be higher so actually it would have inverted by now. So, in fact the recession probability would be far higher. Bulls may argue that the low rates actually mean that recession is averted hence the model still works. However, I wonder if the more sinister conclusion to draw is that low rates/QE is being deemed deeply deflationary and ineffective, given that the yield curve is flattening in spite of v low rates.

Posted by Dom Hormaeche on July 1, 2016 at 9:23 a.m.

Hi Dom

I suspect you're right. It's not for me to answer that. I just know that if the spread continues to fall then we move closer and closer to US/Global Recession.

IMHO we're headed for global recession. And they can't slash rates...

Posted by Jonathan Davis on July 1, 2016 at 9:55 a.m.

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