The Paris-based Organization for Economic Cooperation and Development (OECD) released its composite leading indicators (CLIs) for July, which continued pointing to a generalized slowdown in economic activity worldwide with the exception of Japan, which seems to be peaking.
As composite leading indicators (CLIs) are designed to anticipate turning points in economic activity relative to trend, investors can’t do wrong by taking them into account.
The CLI for the OECD area fell -0.5 point in July, which is the fourth consecutive monthly decline. Compared to June’s assessment, the CLIs for Canada (-0.7), France (-0.6), Germany (-1.0), Italy (-0.8), the United Kingdom (-0.5), Brazil (-1.7), China (-0.2) and India (-0.8) all are pointing more strongly to a slowdown in economic activity. The CLIs for the United States (-0.6) and Russia (-0.3) are now also pointing more clearly to a slowdown in economic activity than was shown in June’s assessment. The outlook for Japan seems to be at a turning point in its economic activity as data indicate a peak.
I think investors run very low risk by putting their hopes for global growth “on ice” for some time to come.
Coming back to the eurozone crisis, over the weekend it has become clear that Germany is now preparing for an orderly bankruptcy in Greece. I wouldn’t be surprised that other countries are also taking, albeit silently, the same kind of precautions.
Consequently, it now becomes also increasingly unlikely that these countries will either be prepared to push through the legislation in the weeks ahead to authorize the second bailout that was agreed on in July in Brussels. Of course, this is not an absolute sure fact yet, but investors should certainly keep a close eye on it.
If so, then it also seems unlikely that the troika (ECB, IMF and EC) and the IMF in particular will have any great interest in authorizing the next tranche of money from the first bailout, whereby the EU and the IMF are due to lend Greece eight billion euros ($11 billion) as part of last year's bailout package.
To make things worse, all this comes at a time when the ECB does not seem to have the “wholehearted” support of Germany, now that that two hard-line German central bankers, Juergen Stark (last week) and Axel Weber (back in February), have left the ECB governing council because of their disagreement about the course that the European central bank has taken with its sovereigns bond purchasing scheme of troubled member states.
Besides all that, it now looks imminent that Moody’s will downgrade top French banks. When that happens, it will have its negative impact all over the world.
Of course, positive surprises are always possible. In fact that’s why we call them surprises. Coming back to reality, I must warn you that developments over the next few days could be both rapid and unpredictable. Unfortunately, everything is pointing in the wrong direction… Growing out of our troubles when growth is entering into some kind of a permafrost period seems un-doable for quite some time to come. Confidence is a rare commodity for the time being and uncertainties are all over the place.
Investors should keep in mind that if things in Europe turn really for the worst it will hurt the U.S. very negatively as well as everyone else in the world.
My preferences haven’t changed as I’ve remained, and still do remain, “full risk off” and in favor of the dollar, physical gold stored in a “judicially safe” place and the Swiss franc. Of course this is not for traders and I also don’t have a crystal ball …
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