It's time to retire "The New Normal." The term was coined by economist Mohamed El-Erian following the Great Recession following the 2008 global economic crisis. As the name implies, the term meant we were entering unchartered territory. Past data no longer helped in predicting future outcomes. Volatility had become common and stability had become a rare event. In the eight years since then, we have experienced various phases of the "New Normal," and each successive "normal" can only be described as the newest normal as it so drastically differs from its predecessor.
The tempest that setoff this latest "newest" phase of normality, the sustained inability of the global economy to return to pre-crisis levels, is not waning. The last several years were probably the eye of the hurricane and we may be on the cusp of experiencing the outer edges of it.
The recent "tightening phase" of the United States Federal Reserve (Fed) will be more smoke and mirrors than actual tightening. This is what I predicted in November 2014. At the time I predicted that the Fed would not raise rates until the second half of 2016 at the earliest. With successive Fed meetings and no rate increases, the Fed's hand was forced. It raised the band of the Federal Funds rate from 0-0.25 percent to 0.25-0.5 percent at the last meeting of 2015. At the time I predicted this rate rise would occur in name only. In fact, following the rate rise, the effective Federal Funds rate actually fell back to pre-tightening levels. In other words, the Federal Funds rate was back to the near-zero level.
The psychological impact of a sustained zero percent Federal Funds rate would be more detrimental to markets than a slight bump in the rate. This was probably the thinking of the members of the Federal Open Market Committee that decides the interest rate. In previous Fed Board Chair Ben Bernanke's recently published memoirs, "The courage to act: A memoir of a crisis and its aftermath," Bernanke comments on his state of mind during the economic crisis. He points out that the Fed chair "represent[s] the administration." This means that the Fed is not as independent as we may have believed. So, what does this have to do with the "newest normal?"
There is a U.S. presidential election this year. The new Fed Chairman, Janet Yellen, is a Democratic presidential appointee. Will she "represent the administration" in the way that Bernanke represented the George W. Bush administration? Will she take steps that bolster the Democrats' case that they were good stewards of the economy? Probably, which means while the global economy is in peril, the Fed needs to put on a happy face. While unemployment and average incomes do suggest a pickup in the U.S. economy, the participation rate and median incomes are far from where they were pre-crisis.
So, what does the "newest normal" entail? A collapse in oil prices for the foreseeable future, dissolution of currency pegs globally, a softening in domestic demand and exports in China, global political upheaval as labor markets shrink and consolidation of power for the U.S. and its allies.
The Chinese yuan continues to struggle against the dollar despite the Chinese spending foreign reserves to prop it up while its equity markets continue to collapse. The Shanghai Composite index is at pre-Great Recession levels and continued to fall another 5 percent Monday. China's problems are Africa's problems as well. The South African rand just hit an all-time low against the dollar on the heels of the continued market collapse in China. Other African countries will also feel the pressure as Chinese investment dries up.
Oil-rich countries like Russia and Iran are seeing government budgets shrink and deficits swell. This will translate into political pressure to get out of Ukraine (and Crimea) as well as Syria, cease support of Hezbollah and rebel groups in Yemen. Stability needs to return to the Middle East quickly, lest DAESH use this period of turmoil to bolster its strength and continue to promote terror abroad. This can only be done through consensus by the players on the ground, including Iran and Russia. External disagreements with NATO countries, Russia and Iran do not bode well for cooperation in removing DAESH from Syria and Iraq.
Cash is once again king as investors are weary of risk. A resolution of armed conflicts will need to come quickly should the U.S. and its allies, including Turkey, weather the "newest normal" without being dragged into a much worse global economic crisis.