2017 was an excellent year for the global economy. For the first time since the Great Recession there was synchronized global growth. This year the IMF is predicting close to 4.0% global GDP growth.
The ECRI Weekly Leading Index is at an all-time high.
Recessions tend to start after the index has fallen from new highs. This condition has not occurred yet.
The business cycle is late stage but I do not expect 2018 to be the recession year.
Currently I believe the global business cycle is in Stage IV. This is the stage where commodities outperform. As the BMO chart showed in the 2017 review their Commodity index is at a multi-year high.
Recently there has been a lot of talk about a “Melt Up” in equity prices before the crash. I am sympathetic to this view. I believe the expectation for US tax cuts will create the sentiment to push equity prices to unsustainable levels. I believe the tax cuts will under deliver and the eventual realization of this will be one of the causes of the next decline.
This stage of the business cycle and the synchronized growth should push oil to $75-80/barrel by year end. Last year oil finished at $60/barrel, $2 below my year in forecast. You can see my charts in this post. The post also identified a $74/bbl target. Elevated oil prices is one requirement for the next recession.
I think this is possible as US inventories are declining while Indian oil demand (the next China) was weak in 2017 (partly due to the demonetization program) but their imports growing.
India’s oil imports rose by about 1.8 percent in 2017 to a record 4.37 million barrels per day (bpd) as the country boosted purchases to feed its expanded refining capacity, ship-tracking data obtained from sources and data compiled by Thomson Reuters Oil Research & Forecasts showed. To meet its growing fuel demand India, the world’s third-biggest oil consumer, raised its refining capacity in the second half of 2017.”
I think this should backstop oil to higher prices in 2018.
The second requirement is rising rates. As the chart above shows rates and oil prices rise together into recessions. I think the FED will raise rates 3-4 times in 2018. This along with oil should set the stage for the 2019-2020 recession. The below chart also makes the same argument.
The US dollar was expected to rally last year. It fooled many people including myself. It appears the USD is at the end of its up cycle.
Higher oil and a weaker USD should put an upward pressure on inflation and wages and keep the FED on track to raise rates and eventually tip the US into recession.
One additional reason I think the 2018 is not the top is Bloomberg published a Pessimism Guide to 2018 and the October 2018 Economist warned about high asset prices. Warnings are not usually prevalent in the media ahead of time. I expect the Economist to heralding a strong economy at the top.
And I expect ZeroHedge, pessimism porn, searches to be below the trend line when the top happens. The thinking on this is people will have got bored of searching for bad news.
The next recession should bring a substantial decline in stocks but I think for a number of reasons, such as declining amount of stocks in the investing universe and the West winning the war on Terror, this is a generational bull market.
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