Tags: eurozone | GDP | CLI | investing

Be Patient in Investing and You Will Be Rewarded

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Tuesday, 14 Aug 2012 10:23 AM Current | Bio | Archive

Last week’s latest composite leading indicators (CLIs) from the Organisation for Economic Co-operation and Development (OECD) pointed to a global fading of economic growth momentum that not only included economic heavyweights like the United States, China, the European Union as a whole and the eurozone in particular, but also included Japan, notwithstanding all the so-called growth stimuli that are in place.

Eurostat, the statistical office of the European Union just confirmed, in some way, the CLI numbers of the OECD in its just-released its gross domestic product Flash estimate, which fell 0.2 percent for the second quarter of 2012 for the 17 countries in the euro area and 0.4 percent for the 27 countries in the European Union as compared with the second quarter of 2011. Relative to the same quarter of 2011, Germany’s GDP increased 1 percent, which was lower than the increase of 1.2 percent in first quarter of 2012. France’s GDP increased 0.3 percent, while Spain’s decreased 1 percent and Italy’s decreased 2.5 percent.

Yes, the eurozone is sliding into recession, and it doesn’t seem to be able to grow out of its huge debt problems, at least not for now. Even Germany, with only 1 percent GDP growth, faces growth momentum slowing further and probably couldn’t be permitted by its electorate to continue financing the weaker eurozone members with German taxpayers’ money. We already see an important and growing opposition to this.

By the way, Eurostat announced today that industrial production in the euro area was down by 0.6 percent in June relative to May, and down 2.1 percent from June 2011.

As a way of comparison, GDP for the second quarter in the United States increased 0.4 percent from the first quarter, which was after it increased 0.5 percent from the fourth quarter of 2011, according to Eurostat. Compared with the same quarter of 2011, GDP rose 2.2 percent in the second quarter after increasing 2.4 percent in the previous quarter, which indicates slowing economic growth momentum, but nevertheless remains in expansion mode.

It is also a fact that, for now at least, the world isn’t facing the threat of an immediate crisis. I wouldn’t get too comfortable because a serious crisis could erupt any moment, and probably at a moment when only very few investors expect it or, better said, are prepared for it.

The financial crisis hasn’t been resolved, let alone gone away, and the possibility for a serious and totally unexpected financial default is still somewhere out there.

In Europe, in my opinion, only political machinations allow gaining some more time for Spain, which is already in a depression, and Italy, which remains in a recession, before these countries, willing or not, will be obliged to ask to be bailed out. The realistic future of Greece is, temporarily or not and better earlier than later, outside the eurozone. Some are convinced that if these events do occur, we’ll face a serious economic disaster. I agree, but I don’t believe in a full-blown financial Armageddon. Those events in Europe, if they do occur, certainly would negatively impact economies all over the world. No doubt about that.

In the United States, when we look at projections provided by the Congressional Budget Office, investors face undeniable uncertainties weighing on the U.S economic outlook because of the expiration of tax and spending cuts approaching rapidly and that, if nothing happens, could cut up to 5 percent from the 2013 GDP, which would translate into a full-blown U.S. relapse into recession. Of course, we aren’t there yet, but neither do we know if a political deadlock can be avoided in due time. Remember, last time around, U.S. legislators merely delayed approval of expanding the debt ceiling.

In the mean time, investors should not expect shale gas to save the United States from a recession in 2013 if it occurs, because of the very simple reason that the shale gas revolution in the United States could easily take 10 to 20 years.

In China, growth continues to slow at a faster pace than generally expected. Morgan Stanley just cut its forecast for China’s GDP to 8 percent for 2012 and 8.6 percent for 2013, down from 8.5 percent and 9 percent, respectively. Besides, before the end of the year, China will have a new government that will be controlled, as has been the case since 1949, by the Communist Party of China. Nobody knows which economic path they will walk, but I think it’s still too early to speak of a hard landing.

Most of the emerging economies are slowing down all over the globe, and any form of growth stimulus will have to come from themselves, which includes easing of their monetary policies. However, it remains to be seen if that will do the trick.

And, unfortunately, we should not forget the issue of Iran’s nuclear proliferation, which could ignite a military confrontation at any time and certainly unannounced. Oil prices could certainly spike to damaging levels if that should happen.

As things are today, I certainly don’t have confidence that all these uncertainties will go away very soon. Yes, we are in a widespread crisis of confidence and I certainly don’t share optimism on the future of the eurozone in the way that it’s functioning today.

To get a better view where we are going in the eurozone, we will first need things to get worse than they already are today, which are much worse than most think they are.

Long-term investors should remain patient. I’m convinced they won’t get disillusioned and will be rewarded for their patience.

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2012-23-14
Tuesday, 14 Aug 2012 10:23 AM
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