The Global Economy Is a Stephen King Movie

You might recall that moment from the film Stand By Me, written by Stephen King. It was the moment in that movie when everything changed.

Well, today I’m going to show you a dead body. Figuratively, not literally.

Ok, I’m not really going to show you a dead body. But I am going to show you a body on life support. And just like the movie, once you see it, there’s no turning back.

I’m talking about a global economy only Pennywise the Clown could love. 

We're seeing signs that the global economy isn’t just weak - it’s on life support. 

China

Earlier this week, China's central bank cut interest rates by 50 basis points, but they did much more than that. China signaled further rate cuts, reduced rates on existing mortgages, and made it easier to purchase a second home.

China lowered the required reserve ratio for banks, adding liquidity and making it easier to borrow. There are also proposed stimulus programs to prop up China's shaky real estate market. 

That’s an aggressive set of measures, especially since they were all either proposed or announced within a span of a few days. 

There’s more. Here comes the scary part.

Have you ever heard of the Plunge Protection Team? It’s a running joke among traders, implying that there is a secret department of the U.S. government that props up the stock market.

Well, this isn’t a joke. China is weighing plans for a stock market stabilization fund. 

Try to imagine the U.S. Federal Reserve lending money to financial institutions for the specific purpose of investment, or possibly market speculation. That’s not exactly what’s happening in China, but it’s close. 

Just how bad are things in China anyway? 

Europe

China’s moves reek of desperation. As we know, China doesn’t operate in a vacuum.

This brings us to Europe, where a horrific series of PMI (purchasing managers index) reports were released on Monday.

PMI reports are scored using a diffusion index system. This simply means that any result above 50 represents growth, and any figure below 50 indicates contraction. 

Now take a look at that row of red numbers. Red indicates that a specific PMI report came in below expectations. A green number would indicate a PMI report coming in above expectations. 

As you can see, there are no green numbers. 

The majority of the results are below 50, indicating contraction both in services and manufacturing. My biggest concern is that 40.3 egg laid by Germany’s manufacturing sector.

40.3 is so far below 50, it’s not in the same postal code. German manufacturing is contracting rapidly. 

I consider this the most important European PMI figure. Here’s why:

Germany is the engine that pulls Europe. It has the largest economy in the Eurozone.

What’s the engine that pulls Germany? Exports. Globally, Germany trails only China and the U.S. in this category.

What does Germany export? Autos, precision machinery, aircraft, plastics, and chemicals. In other words, mostly stuff made in factories. 

The German Manufacturing PMI figures indicate that factories in Germany have hit a brick wall. That’s not just bad for Germany, it’s bad news for Europe as a whole. 

Just how bad are things in Europe anyway?

Unites States

Compared to China and Europe, the news in the U.S. seems positively upbeat.

The trouble is, the U.S. is part of a global economy. Overseas problems can easily become domestic problems.

Luckily, everything’s going great with the U.S. economy, right?

Check out the CME FedWatch tool. This indicator currently suggests an additional 25 basis point Fed rate reduction on November 7, with a 51.4% chance of another 50 basis points. This comes on the heels of the 50 basis point cut on September 18. 

Within a six-week period, the Fed will cut by at least 75 basis points, with a strong possibility of 100 basis points. According to the FedWatch tool, before year end, we could see 150 basis points in cuts. 

Just how bad is the U.S. economy anyway? 

All of this stimulus is good for stocks, for metals, and for crypto. All are rallying, and woe to those who are on the wrong side of those trades.

But you have to ask yourself: Why does China suddenly need massive amounts of stimulus? Why is manufacturing in Germany falling off a cliff? Why are U.S. interest rates plummeting?

And if all of these things are happening at the same time, what does that tell us about the global economy?

At the time of publication, Ponsi had no positions in any securities mentioned.