Q3 2018 Z.1 and THE Cycle Peak

Doug Nolan

Total Non-Financial Debt (NFD) expanded at a 4.4% annual rate during Q3 to a record $51.324 TN. Since the end of 2008, NFD has increased $16.3 TN, or 46%. Q3’s NFD growth rate was down from Q2’s 5.2% and Q1’s 6.3% - and lower as well than Q3 2017’s 4.9%. Total Household borrowings accelerated to 3.4% growth from Q2’s 2.9%, led by a jump in Consumer Credit growth (5.4% from 3.7%). Household Mortgages expanded at a 3.1% pace, up from Q2’s 2.7% and the year ago 2.9%.

Evidence of tighter financial conditions, Total Business borrowings slowed markedly. After Q2’s 6.9% rate (strongest since Q1 ’16), Total Business debt growth slowed to 3.9%. The expansion of Corporate borrowings slowed markedly, from 7.2% to 4.1%. State & Local government debt contracted at a 1.4% pace (Q2 -0.38%). Winning the Piggy Borrower contest, perennially, was our federal government. Federal borrowings expanded at a 6.8% pace, down slightly from Q2.

Yet percentage growth rates don’t do justice late in a Credit Cycle. Outstanding Treasuries expanded $1.187 TN over the past four quarters (7.3%) and $1.774 TN over eight quarters (11.3%). On a seasonally-adjusted and annualized rate basis (SAAR), federal borrowings expanded $1.180 TN, almost the same as Q2. So far in 2018, federal debt has expanded the most since 2010.

It’s also worth noting that federal borrowings this year have accounted for in excess of half of Total Non-Financial Debt growth (SAAR $1.180 TN of SAAR $2.228 TN). Total Household borrowings expanded SAAR $516 billion (mortgage SAAR $314 billion and Consumer Credit SAAR $210 billion) during Q3. Total Business borrowings expanded SAAR $575 billion, with Corporate borrowings increasing SAAR $389 billion. Foreign U.S. borrowings grew SAAR $292 billion.

Outstanding Treasury Securities ended Q3 at $17.419 TN, having now inflated 188% ($11.367TN) since the end of 2007. Treasuries ended the quarter at 84% of GDP, up from 41% at the conclusion of ’07. And let’s not overlook the government-sponsored enterprises (GSEs). Outstanding Agency Securities (debt and MBS) surpassed $9.0 TN for the first time during Q3, expanding $263 billion, or 3.0%, over the past year. Total Treasuries and Agency Securities ended the quarter at a record $26.439 TN (up $1.450TN y-o-y), or 128% of GDP.

Total outstanding Debt Securities jumped nominal $433 billion during the quarter to a record $44.455 TN, with one-year growth of $1.850 TN. Debt Securities ended Q3 at 215% of GDP, up from 200% and 157% to end 2007 and 1999. Equities Securities increased nominal $2.269 TN during Q3 to a record $50.602 TN (one-year growth $5.493TN). Equities Securities ended the quarter at a record 245% of GDP versus 172% at the end of 2007 (1999=202%). Total (Debt and Equities) Securities increased nominal $2.701 TN during Q3, and $7.344 TN in four quarters, to a record $95.057 TN. Total Securities ended the quarter at a record 460% of GDP. This compares to previous cycle peaks 379% (Q3 ’07) and 359% (Q1 ’00).

Securities market inflation continued to inflate Household Assets during the quarter, while the Bubble in Household Net Worth remains fundamental to the U.S. Bubble Economy. Household Assets increased nominal $2.238 TN during Q3 to a record $124.934 TN. Household Assets increased $8.810 TN (7.6%) over the past year. Household Liabilities gained $167 billion during the quarter ($539bn y-o-y) to a record $15.895 TN.

Household Net Worth (Assets less Liabilities) expanded $2.070 TN during the quarter ($8.271 TN y-o-y) to a record $109.039 TN. It’s worth noting that Net Worth surged $15.795 TN, or 16.9%, over two years (Assets up $16.810 TN, or 15.5%, less Liabilities up $1.015 TN, or 6.8%). Household Net Worth ended the quarter at a record 528% of GDP, up from the year ago 514% and Q3 2016’s 498%. Household Net Worth to GDP set previous cycle peaks at 484% (Q1 ‘07) and 435% (Q4 ‘99).

Still, most would dismissively ask, where’s the Bubble? Well, Household Net Worth has inflated $50 TN (85%) since the end of 2008, which certainly has supported elevated confidence, spending and economic activity. And it’s clear that booming securities markets have been integral to the record expansion in Household perceived wealth. So, what have been the driving forces behind bubbling markets?

Rest of World (ROW) holdings of U.S. Financial Assets jumped nominal $558 billion during Q3 to a record $28.087 TN. ROW holdings were up $1.598 TN over the past year and $3.830 TN over seven quarters. ROW holdings increased to a record 136% of GDP, up from 100% ($14.646 TN) to end 2007 and 57% ($5.639 TN) to conclude 1999. Where in the world has all this “money” been coming from? Sustainable? Reversible?

ROW holdings of U.S. Debt Securities increased nominal $44 billion during Q3 to $11.218 TN, following contractions in Q2 (nominal -$113bn) and Q1 (nominal -$120bn). Treasury holdings added nominal $11 billion and Agencies $20 billion. U.S. Corporate Bonds gained nominal $13 billion. In contrast, ROW holdings of Total U.S. Equities (Corporate Equities and Mutual Fund Shares) jumped nominal $529 billion during the quarter and $1.426 TN over the past year – to a record $8.343 TN (vs. previous cycle peak $3.225 TN in Q4 ’07).

The jump in Equities holdings masks a pivotal slowdown in ROW purchases of U.S. Debt Securities. Though purchases were positive during Q3, ROW holdings of U.S. Debt Securities actually contracted nominal $190 billion during the first three quarters of 2018. This contraction in ROW U.S. Debt Securities holdings is in stark contrast to 2017’s gain of $747 billion and the $324 billion increase in 2016.

The y-t-d contraction in ROW U.S. Debt Securities is largely explained by a $174 billion contraction in U.S. Corporate Bonds. To put this into perspective, ROW increased Corporate Bond holdings by $442 billion in 2017 and $348 billion in 2016. Indeed, ROW U.S. Corporate Bond holdings surged $1.383 TN in the six years 2012 through 2017. It’s worth noting as well that after increasing $282 billion in 2017, ROW Treasury holdings contracted $62 billion in the first three quarters of 2018.

I would posit that tightening global finance – in particular, the de-risking/deleveraging dynamic that took hold in the speculator community – contributed to waning international demand for U.S. Corporate Bonds. At the same time, EM outflows and pressure on EM central banks to support faltering currencies led to sharply lower international demand for Treasuries (not to mention geopolitical frictions). Overall, it points to an important inflection point in international financial flows into U.S. securities markets. For much of the year, major flows into outperforming U.S. equities helped to conceal adverse repercussions. With U.S. equities succumbing to de-risking/deleveraging, markets generally will now confront momentous changes in the liquidity backdrop.

If the market liquidity environment has indeed transitioned, the lackluster growth in U.S. Bank credit now becomes a more pressing issue. Bank (“Private Depository Institutions”) Loans expanded nominal $96.5 billion during Q3, down from Q2’s $174 billion and Q3 2017’s $112 billion. On a SAAR basis, Bank Loans increased $393 billion during Q3 (only two weaker quarters in the past five years). Mortgages expanded SAAR $153 billion, the slowest growth in four years, and down from Q2’s SAAR $193 billion, Q1’s SAAR $204 billion, and Q4 ‘17’s SAAR $224 billion. Bank’s Consumer Credit continued to swell, expanding SAAR $127 billion. Non-mortgage and consumer Loans “Not Elsewhere Classified” expanded SAAR $114 billion, a notable drop from Q1’s SAAR $279 billion.

Security Broker/Dealer holdings increased nominal $56 billion to $3.194 TN, up from Q2’s $47 billion increase and the strongest growth since Q2 ’17. Most of the gain was explained by increases in Security Repurchase Agreements and Miscellaneous Assets. Debt Securities holdings actually contracted nominal $11 billion (Treasuries down $30bn).

The confluence of the powerful global tightening of financial conditions, a significant decline in ROW debt purchases, the slowdown in bank lending and the now tenuous backdrop in the equities marketplace creates an extraordinarily fragile backdrop. Moreover, the current quarter has experienced a sharp slowdown in junk bond issuance and leveraged lending. What’s more, significant deleveraging has commenced in U.S. equities. Overall, it points to a troubling liquidity backdrop for both the markets and the U.S. economy, more generally.

I’ll add that “Periphery to Core Crisis Dynamics” are coming home to roost. Keep in mind that the initial faltering Global Bubble phase – de-risking/deleveraging at the “Periphery” – worked to exacerbated flows to - and speculative excess at - the “Core.” The huge increase in ROW Equities holdings is emblematic of speculative “blow-off” dynamics right in the face of rapidly deteriorating fundamental prospects. It recalls heightened systemic fragilities created by dysfunctional market dynamics in early-2000 and, even more so, in the second-half of 2007.

At this point, I’ll posit a (not unlikely) possible scenario. De-risking/deleveraging exposes problematic underlying speculative leverage in both equities and corporate Credit. A sharp tightening of corporate Credit conditions weighs on debt issuance and business borrowing more generally. Tighter finance and sinking equities prices engender some reassessment regarding the rationale for aggressive stock buyback programs. Further weighing on inflated market valuations, the rapidly deteriorating backdrop will also provoke some overdue rethink on the M&A front.

Meanwhile, the vast chasm between elevated consumer confidence and fading economic prospects will have to narrow. Household Net Worth has inflated $20 TN, or about 100% of GDP, in just the past three years ($50 TN since the end of ’08!). This surge in perceived wealth spurred consumption and boosted auto and home purchases (along with boats, campers, timeshares, cruises, etc.) After stoking discretionary and luxury spending, it’s reasonable to begin anticipating a problematic change in spending patterns.

There are many aspects of the unfolding downturn that go unappreciated. I worry about deep economic structural maladjustment. How many thousands of uneconomic enterprises have propagated from all the easy finance and surging asset prices? I have deep concern for Silicon Valley. If the unfolding trade and cold war with China wasn’t enough, they’re about to get the rug pulled out from under them by the financial markets. How much perceived wealth could be lost in a bursting Bubble of inflated technology shares and private business equity, compounded by a deflating Bubble in wildly inflated real estate prices surrounding the tech hubs? I fear a complete lack of understanding and preparation.

It’s difficult not to see the arrest of a top Huawei executive on the same day as the Trump/Xi summit as an ominous development. The CFO and daughter of the founder of one of China’s most powerful international technology conglomerates faces fraud charges and possible extradition to the U.S. In China, outrage. Sure, there was a weird level of ambiguity regarding the true gains from Saturday’s U.S./China trade meeting. But to see global markets convulse on the arrest of a Chinese executive rather starkly illuminates the acute fragilities the world now confronts.

Ten-year Treasury yields dropped 14 bps this week to 2.85%. German bund yields fell six bps to 0.25%. Not to be outdone, 10-year Japanese JGB yields declined three bps to 0.06%. No signs of confidence in the soundness of the global financial system from those three. Safe havens showed a pulse this week. Gold jumped $26 to an almost five-month high $1,248. The Japanese yen gained 0.8% and the Swiss franc increased 0.6%.

It was curious to see the U.S. dollar under some selling pressure (dollar index down 0.7% this week). But, then again… If our asset markets (i.e. stocks, fixed-income, real estate…) are as vulnerable as I believe and the American economy as maladjusted, there’s a credible bear case against the U.S. currency to ponder. We’ve certainly done our level best to swamp the world with dollars over recent decades.

A dollar break would really catch the speculator community (and investors) positioned poorly. It’s reached the point that NOTHING can be taken for granted in these chaotic financial markets. Which portends something really important: ongoing pressure to de-risk and deleverage. Why do I have the feeling I’ll be using Q3 2018 Z.1 data for Household Net Worth (along with both Equities and Total Securities to GDP, etc.) as THE Cycle Peak for years (decades?) to come?

Credit faces worst year since 2008 as strains intensify

Redemptions from corporate bond funds rise amid gloomy performance for asset class

Adam Samson in London and Robin Wigglesworth in New York

Investors pulled more than $5bn from funds investing in corporate bonds in the past week, as the credit market heads for its worst year since the financial crisis a decade ago and concerns mount over the outlook for 2019.

Rising US interest rates, the Federal Reserve shrinking its balance sheet and the European Central Bank ending its own bond-buying programme have stirred worries over a new era of “quantitative tightening” that could rattle financial markets.

Corporate debt has emerged as one of the focal concerns, with Paul Tudor Jones, the veteran hedge fund manager, earlier this month predicting “some really scary moments” and even the Federal Reserve highlighting risks in its inaugural financial stability report this week.

US corporate bond yields have been climbing steadily higher this year, to an eight year high of 4.36 per cent on Thursday. That has inflicted a 3.9 per cent loss on investors so far in 2018, putting it on track for it the worst year for credit since 2008 and the fourth worst year since at least 1973.

After gargantuan inflows for most of the post-crisis era, investors are now tiptoeing out of corporate bond funds — especially riskier ones. Junk bond funds racked up outflows of $2.9bn in the week to Wednesday, according EPFR, a data provider. Redemptions have totalled almost $9bn over the past three weeks and nearly $65bn so far this year.

“Central bank liquidity has dried up,” said David Albrycht, chief investment officer of Newfleet Asset Management. He argued the economy is still in decent shape, but said that he had been “de-risking” his bond funds over the past year.

Investors have also shifted out of more highly rated investment grade corporate bond funds, which suffered outflows of $2.5bn in the past week. So-called intermediate-and-long-term funds have sustained year-to-date outflows of almost $34bn, although investors have shifted $8.9bn into funds holding shorter-maturity debt that is more resilient to rising interest rates.

The asset class “continued to face significant redemption pressure alongside further widening of corporate bond spreads,” said Kenneth Chan, Jefferies strategist. Higher spreads point to an increased perceived risk of holding corporate bonds.

In the large US market, corporate debt as a percentage of gross domestic product is at a record high, breaching even the previous top in 2008, according to Edward Marrinan, head of credit strategy for North America at HSBC.

He pointed out that the “bigger concern”, however, was the “degraded credit portfolio” of the US non-financial investment grade arena. About half of the debt capitalisation of a Bloomberg basket of the asset class carries a triple-B rating, according to Mr Marrinan, the lowest possible investment grade rung.

“In an adverse economic environment or in the event of an exogenous shock, we believe further downgrades to the constituents of this segment would present a serious challenge to the broader US dollar credit complex,” he said. “Hence, discretion is advised.”

Adding to the sense of gloom, Morgan Stanley told clients at the start of this week that the bear market in US credit is already under way. It said spreads had probably reached cycle lows in February.

The credit market faced headwinds this year from “weakening flows and tighter liquidity conditions” but has been propped up by a “solid” American economy, said Adam Richmond, Morgan strategist.

“In 2019, we think it gets tougher on both fronts — monetary policy will likely near restrictive territory for the first time this cycle, while the tailwind from a booming economy fades as growth decelerates and earnings growth potentially slows to a standstill,” he said.

This suggests risk that the market is late in the cycle, given the years-long recovery since the financial crisis, may “morph into end-of-cycle fears, continuing to break the weak links along the way, especially the more levered parts of corporate credit markets.”

China’s Four Traps

During its 40 years of reform, China has mastered learning by doing, engaged in bold policy experimentation, and become steadily more integrated into global economy. It will need to bring all of this experience to bear, as it attempts to avoid the pitfalls that could derail its effort to achieve high-income status.

Andrew Sheng , Xiao Geng

deng xiaoping billboard

HONG KONG – On the 40th anniversary of the launch of China’s “reform and opening up,” the country is well on its way to recapturing its former status as the world’s largest economy, having made substantial progress toward modernizing its agricultural sector, industry, defense systems, and scientific capabilities. But four major traps lie ahead.

The first is the middle-income trap. With a per capita annual income of around $9,000, China remains significantly below the threshold for high-income status, set at around $12,000-$13,000 by the World Bank. Only a few countries in history have managed this leap during the last half-century.

A major reason is that reaching high-income status demands a strong network of modern institutions that define individuals’ rights and obligations, enable market exchange and non-market interactions, and enforce the rule of law by resolving disputes fairly. While China has been working to develop its institutions for four decades, it still has a long way to go.

Second, China may become ensnared in the so-called Thucydides Trap: when an established power (Sparta in Thucydides’ time; the United States now) fears a rising power (Athens then; China now), war becomes inevitable. With US President Donald Trump’s administration targeting China with trade measures that are clearly designed to reduce China’s access to markets and technology, this outcome seems increasingly plausible.

The third potential trap is what Joseph Nye calls the Kindleberger Trap. Charles Kindleberger, an architect of the Marshall Plan, blamed the breakdown of the international order in the 1930s on America’s failure to match its provision of global public goods to its new geopolitical status as the world’s dominant power. If China does the same, according to Nye, chaos could erupt again, especially at a time when the US is withdrawing from global leadership.

Finally, there is the climate-change trap. High-income countries in general, and great powers in particular, consume a disproportionately large share of resources. But China’s economy and influence are growing at a time when, as dire warnings by bodies like the Intergovernmental Panel on Climate Change demonstrate, that is not really an option. China’s leaders thus have an additional imperative to support international cooperation and adopt forward-thinking policies that account for environmental realities.

Avoiding these four traps will be extremely difficult. China’s leaders must navigate complex and conflicting pressures, as they seek to address domestic economic inequalities, manage relations with an insecure and isolationist US, cooperate effectively with the rest of the world, and pursue effective climate action.

The good news is that China’s governance system – characterized by centralized policymaking and decentralized experimentation and implementation – has proved well-suited to rapid decision-making in times of crisis. Over the last four decades, the Chinese model has proved more practical and efficient than democratic systems, which have often been paralyzed by dysfunctional and polarized politics. Its success in guiding China to high-income status will be determined largely by four factors – talent, competition, public goods, and accountability – all of which the country has managed to harness effectively in the past.

Adhering to thousands of years of tradition, China has devoted considerable resources to the identification, selection, and grooming of administrative and technical talent. This has been essential to China’s ability to develop the strong state capacity needed to manage large-scale public projects. As China confronts the four traps, its ability to develop and retain human talent will be vital to success.

China has also effectively used competition among individuals, companies, cities, and provincial bureaucracies to ensure that all stakeholders are contributing to productivity and GDP growth. But China’s markets have developed faster than its regulatory framework, so that now policymakers must close loopholes and resolve weaknesses that are undermining fair competition. At the same time, they need to tackle the consequences of those loopholes and weaknesses, such as corruption, pollution, excessive debt, and overcapacity.

This is the other side of the public-goods challenge: while China has plenty of experience delivering physical infrastructure, it has been less successful in delivering soft infrastructure, such as competition rules, accounting standards, tax systems, and regulatory norms. China will not achieve high-income status unless and until this changes.

When it comes to accountability, China has an indirect and imperfect system that is poorly understood by outside observers. Chinese leaders earn their legitimacy not by winning the most votes, but by delivering results such as economic prosperity and progress on implementing reforms. As China’s global influence grows, international pressure will become another mechanism for accountability.

The challenge China faces in this area relates to some of the tradeoffs Chinese leaders have made in their pursuit of results. In particular, monopoly is on the rise, with Internet platforms that provide social benefits in the form of low transaction and communication costs (Alibaba, Tencent, and Baidu) securing massive market share. That, together with policy subsidies, has created monopoly rents that are subject to capture by small interest groups.

This escalating market concentration – which, to be sure, is not limited to China – can lead to worsening inequality of income, wealth, and opportunities. China’s leaders will thus have to make significant progress toward addressing it in the coming decades.

During its 40 years of reform, China has mastered learning by doing, using dynamic markets as a guide for price signaling and problem-solving. It has engaged in bold policy experiments, such as the creation of special economic zones. And it has become steadily more integrated into the global economy. As it attempts to avoid the pitfalls that lie ahead, it will need to bring all of this experience to bear.

Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance, is a former chairman of the Hong Kong Securities and Futures Commission, and is currently an adjunct professor at Tsinghua University in Beijing. His latest book is From Asian to Global Financial Crisis.

Xiao Geng, President of the Hong Kong Institution for International Finance, is a professor at Peking University HSBC Business School and at the University of Hong Kong's Faculty of Business and Economics.

Global Growth Cools, Leaving Scars of ’08 Unhealed

By Peter S. Goodman

A textile factory in China. The country’s growth is slowing more than experts anticipated.CreditCreditAgence France-Presse — Getty Images

LONDON — Only a few months ago, the world’s fortunes appeared increasingly robust. For the first time since the wealth-destroying agony of the global financial crisis, every major economy was growing in unison.

So much for all that.

The global economy is now palpably weakening, even as most countries are still grappling with the damage from that last downturn. Many nations are mired in stagnation or sliding that way. Oil prices are falling and factory orders are diminishing, reflecting slackening demand for goods. Companies are warning of disappointing profits, sending stock markets into a frenetic bout of selling that reinforces the slowdown.

Germany and Japan have both contracted in recent months. China is slowing more than experts anticipated. Even the United States, the world’s largest economy, and oft-trumpeted standout performer, is expected to decelerate next year as the stimulative effects of President Trump’s $1.5 trillion tax cut wear off, leaving huge public debts.

The reasons for this turn run from rising interest rates delivered by the Federal Reserve and other central banks to the unfolding trade war unleashed by the Trump administration. The likelihood that Britain’s torturous exit from the European Union will damage trade across the English Channel has discouraged investment.
None of this amounts to a screaming emergency, or even a pronounced drop in commercial activity. The Organization for Economic Cooperation and Development, a think tank run by the world’s most advanced nations, recently concluded that the global economy would expand by 3.5 percent next year, down from 3.7 percent this year.

Yet in declaring that “the global expansion has peaked,” the brains at the O.E.C.D. effectively concluded that the current situation is as good as it gets before the next pause or downturn. If this is indeed the high-water mark of global prosperity, that is likely to come as a shock to the tens of millions of people who have yet to recover from the devastation of the Great Recession.

Though the slowdown appears mild, it also holds the potential to intensify the widespread sense of grievance roiling many societies, contributing to the embrace of populists with autocratic impulses. In an age of lamentation over economic injustice, and with political movements on the march decrying immigrants as threats, weaker growth is likely to spur more conflict. Slower growth is not going to make anyone feel more secure about the prospect of robots replacing human hands, or jobs shifting to lower-wage lands.

“It’s just going to exacerbate the tensions that have led to the socioeconomic and political problems we have seen in the United States and parts of Europe,” said Thomas A. Bernes, an economist at the Center for International Governance Innovation, a Canadian research institution. “Inequality is going to become even more pronounced.”

In Greece, Spain and Italy, the youth unemployment rate is stuck above 30 percent. In Britain, the typical worker has not seen a pay raise in more than a decade, after accounting for inflation. South Africa’s economy is smaller today than it was in 2010, and now the country is ensnared in recession. 

A wheat farm in Argentina. Higher American interest rates have prompted investors to abandon developing economies like Argentina in favor of safer, more-rewarding opportunities in the United States.CreditIvan Pisarenko/Agence France-Presse — Getty Images

In the United States, the unemployment rate has plunged to 3.7 percent, its lowest level since 1969. Yet so many people have given up looking for work that less than two-thirds of the working age population was employed as of October, according to the Labor Department. That was a lower share than before the 2008 financial crisis.

“We see a lost generation,” said Swati Dhingra, an economist at the London School of Economics. “There was already wage stagnation and productivity stagnation. The trade war has exacerbated all of that.”

The biggest risk to global growth appears to be that the trade war is, at least in part, working as designed.

Although the United States and China agreed on Saturday to further trade talks, Mr. Trump has excoriated China as a mortal threat to American livelihoods, accusing Beijing of subsidizing exports and stealing intellectual property. He has affixed tariffs on some $250 billion in Chinese exports in an effort to pressure Beijing to change its ways.

This has produced little change in China’s economic practices. It has actually increased the American trade deficit with China, contrary to Mr. Trump’s stated aim.

But it has thrown sand in the gears of China’s industrial juggernaut. As of September, China’s rail freight usage, bank lending and electrical consumption had increased about 9 percent compared with the previous year, down from a pace of more than 11 percent in January. 
China’s growth was already slowing as its leaders seek to transition from an economy powered by prodigious exports, in enterprises that have spewed pollution, toward a cleaner future propelled by domestic consumption. But the American tariffs have prompted multinational companies to shift orders from Chinese factories to plants in other lands, from Vietnam to Mexico. Uncertainty over the future has postponed some business.

“There’s now potential for bad news on the trade front to trigger shifts in equity markets and a pullback on investment,” said Steven J. Davis, an international business expert at the University of Chicago Booth School of Business.

Given that China is the world’s second largest economy, the consequences of its slowing ripple out widely, helping explain a pronounced drop in factory orders in Germany. American farmers have suffered lost sales as China has responded to tariffs by slapping duties on imports from the United States, not least on soybeans. Stock markets and oil prices have plunged in part on fears that China will buy fewer goods.

Much of the dip in American share prices reflects the increasingly embattled state of major technology companies like Facebook, which has drawn public ire for failing to prevent its platform from serving as a primary conduit for hate speech and misinformation. But technology shares have also plunged because many companies, Apple among them, now depend on China for enormous volumes of sales — sales now at risk in the face of the trade war.

Spain’s economy is expected to expand by only 2.2 percent next year, down from nearly 2.6 percent in 2018.CreditSamuel Aranda for The New York Times

A glance at Mr. Trump’s Twitter feed reveals that share prices are one of the data points he cares about deeply. As the markets recoil, the Trump administration has flashed signals that it may be prepared to entertain a cease-fire with China to limit economic damage.

But the conflict goes far beyond trade, with hawks inside the Trump administration seeking to inflict harm on China to impede its continued ascent as a global superpower. If that is the mission, Mr. Trump may be willing to absorb economic costs as the price of containment.

That take appears consistent with Mr. Trump’s growing fixation on the Federal Reserve, which the president just branded “a much bigger problem than China,” in an interview with The Washington Post.

In lifting interest rates, the American central bank has been acting under the accepted wisdom that too much easy money sloshing around for too long tends to produce trouble, from higher prices to financial mischief. Yet the effect of raising rates is to limit American economic growth, hence Mr. Trump’s unhappiness.

The Fed’s action has also visited distress on emerging markets. Higher American interest rates have prompted investors to abandon developing economies in favor of safer, more-rewarding opportunities in the United States. The changing of the tide has contributed to crises in Turkey and Argentina, while denting the value of currencies and slowing growth prospects from India to South Africa.

The European Central Bank has also been withdrawing the cheap money it unleashed to attack the crisis, phasing out purchases of bonds. This has made credit more expensive across the continent, depriving businesses of capital needed to finance expansions. And that has muted once-hopeful talk that Europe had finally transcended the torpor of the last decade.

A populist government in Italy is engaged in a standoff with European authorities over its spending plans, which breach the union’s limits on deficit spending. That has prompted investors to demand higher returns for Italian debt, further squeezing credit. Mr. Trump’s tariffs on steel and aluminum also appear to be cooling growth in Europe. Ditto, Britain’s exit.

Only last year, Spain had emerged from a veritable depression to become a leading example of Europe regaining vigor. But Spain is expected to expand by only 2.2 percent next year, down from nearly 2.6 percent in 2018, according to the O.E.C.D. The rest of the 19 countries that share the euro currency are expected to dip from an already weak 1.9 percent rate of expansion to 1.8 percent.

“It’s a bit like watching a heavily overweight bird try to take off,” said Peter Dixon, a global financial economist at Commerzbank AG in London. “It staggers to the end of the runway and starts to take off but never really soars.” 
The same can be said for the global economy. It is clearly far removed from the terrifying days of the financial crisis. Yet it never really got its groove back enough to generate impressive numbers of jobs, or put meaningful pay increases in the pockets of ordinary people.

And now, despite all that, leaner times are unfolding.

A fight to remember: the visual arts in Peru

All over the country, artists are making powerful work about the impact of decades of violence and isolation

Maya Jaggi

‘Who is to Blame?’, one of 24 collectively made Tablas de Sarhua

Barranco, a 19th-century summer resort in Lima overlooking the Pacific, has a growing cluster of artists’ studios and galleries. In a white, early 20th-century villa, work in the Livia Benavides Gallery includes an exquisite semi-abstract painting of tiny rubber tyres on a gold background by William Córdova, who grew up in Peru and Miami, and Chinese-ink drawings by Fernando Bryce, a Limenean who spent 25 years in Berlin. Contemporary art now has vital support from local collectors, according to gallerist Livia Benavides, and Bryce’s work will be shown by Galerie Barbara Thumm at Art Basel Miami Beach.

“Peru’s link with the past is strong,” says the critic and curator Fietta Jarque, citing Inca mythology in the abstract paintings of Fernando de Szyszlo, who died last year. Victor Delfin’s monumental sculpture “The Kiss”, in Love Park in neighbouring Miraflores, recalls erotic sculptures in the city’s Larco Museum, a private collection of pre-Columbian art in an 18th-century villa, which opened in 1926. Barriers between “high” and popular arts have meanwhile been breached. Now, Jarque says, “you have indigenous artists and video installations in the same space.”

Peru’s ancient past invites comparison with Mexico. Yet, “Mexico had a revolution — a democratic nationalist one. We did not,” Bryce tells me in his studio in a high-rise in San Isidro district. State support came late to Peruvian art and the Museum of Art of Lima (MALI) only opened in 1961. Its excellent survey ranges from contemporary work to abstract Inca art, with colonial painting after the 1532 conquest. Anonymous indigenous artists, taught to imitate Italianate and Flemish oil painting, inserted local flora, fauna and symbolism into Catholic scenes — hence angels with multicoloured Amazonian wings, or guinea-pigs (an Andean delicacy) served at the Last Supper.

Fernando Bryce's 'Untitled (Paralelo 38)' (2018) Galerie Barbara Thumm © Galerie Barbara Thumm

Bryce’s ink-and-brush drawings on paper probe Peruvian history with a conceptual twist. “Atlas Perú” (2005), a book of 495 drawings, is his compendious review of “how the representation of the country changed. In the 1990s Peru’s cultural identity disappeared: we were consumers not citizens.” Advertising, official documents and tourist images are all reproduced to ironic effect.

Peru was a “Latin American Albania”, he says of the 1980s and 1990s, decades of isolation when Maoist guerrillas of the Sendero Luminoso (Shining Path) terrorised civilians. Political violence — three-quarters of whose 69,280 victims were rural Quechua-speakers — spawned a wave of memory-themed art. Yet 15 years after the 2003 Truth and Reconciliation Commission (CVR), such art is still heavily contested.

“People couldn’t believe this happened in Peru,” says Edilberto Jiménez, 57, who depicts atrocities he witnessed, or heard of, in 1980-92 in his home province of Ayacucho, centre of the genocide. Along with drawings, 26 retablos (boxed tableaux of wooden figures usually associated with religious themes) were on show earlier this year at the Place of Memory, Tolerance and Social Inclusion, a museum of the conflict that opened on the Miraflores cliffs in 2015, and where I meet Jiménez. Made over the past 28 years, his retablos include “Asesinato de niños en Huertahuaycco” (2007) portraying a massacre of children by the Shining Path and graphic scenes of rape and torture by the military and Sinchis (counter-insurgency police).

A ‘retablo’ by Edilberto Jiménez © Adrian Portugal

From a renowned family of retablistas (“From age eight, I helped my father,” Jiménez says), he broke with tradition to “show what was happening in daily life”. As a Quechua-speaker who had studied anthropology, he later collected evidence for the CVR on Chungui, a devastated community. “I couldn’t take photos — people were crying — so I started to draw. I lived violence and needed to express it, and my artistic language was the retablo,” he says. “Now I understand its value as memory.”

This year for the first time his retablos were exhibited in public. Others were destroyed by the army or police before the Institute of Peruvian Studies stepped in to protect them. “So many are lost,” he says. “I’m still making work from memory; it’s important everybody knows what happened.”

“Traditional artists were the first chroniclers of the war,” says Karen Bernedo, a curator who works on memory. Some had to destroy their work; others sent it abroad. “Piraq Causa?” (“Who is to Blame?”) is a series of 24 Tablas de Sarhua — painted boards customarily given as housewarming gifts in Sarhua, but depicting local atrocities. Made by a collective in the 1990s, they were preserved in the US and gifted to MALI. On their return to Peru last year they were seized by customs under laws forbidding anyone to “exalt, justify, or glorify terrorism”. “Piraq Causa?” is now part of an exhibition, Memories of Anger, at the Carrillo Gil Museum of Art in Mexico City. But a showing at MALI will follow, and last month the culture ministry recognised painted tablas as cultural patrimony.

Ishmael Randall Weeks's ‘Metalized Memory’ (2017)

Peruvian artist Ishmael Randall Weeks tackles memory in sculptures such as a found styrofoam cup cast in copper to resemble the vessels found in Inca tombs. “Families go for picnics to the pyramids on Sundays and dump trash,” he tells me in his Barranco studio. “I metallise the things left behind. This is a country layered by culture; and my work is part of a dialogue about ethics: do you throw garbage in your own patrimony? And how do you recover things from the past and bring them into the future?”

Born in Cusco to US parents, Randall Weeks grew up among Quechua-speakers — “an Andean white man with hippy parents” — and now moves between Brooklyn and Lima. Recalling the curfew in the 1980s, he says, “Cusco was a government-protected tourist zone. Ayacucho, no one cared, so the military attacked. Lima was oblivious till there were bombs in their nightclubs.”

In Arequipa, Peru’s second city, whose white stone cathedral is spectacularly backed by Andean volcanoes, the artist Jesus “Choqollo” Álvarez, 34, adopted a disparaging term for homosexuals as a pseudonym. He spoke last month at Hay Arequipa, an offshoot of the British literary festival. Because of the colonial past, he tells me, “trans people don’t have history. My work tries to gather these memories.” His Holy Week street performances aim “to give up on Catholic dogmas,” and in a Valentine’s Day work he exchanged clothes with a woman artist. As much as the brief public nudity, “it was shocking for people to see me in women’s dress.”

Two years ago, Choqollo “travestied” the Peruvian flag, printing the coat of arms on pink dress fabric, inspired by the sewing skills of his indigenous mother. Before the conquistadors, “indigenous people respected androgynous identities, and women were political leaders,” he says. The flag was one of two works that led to a group show in 2016 closing early.

Now, he says, “there are no galleries for me, so I will take to the streets.”