Tags: EU | copper | S&P | reforms

The Global Crisis Is Still Continuing

By    |   Tuesday, 16 October 2012 11:13 AM

Today, Angel Gurría, Secretary-General of the Organization for Economic Co-operation and Development said the global crisis is still continuing.

Last week’s Annual Meetings of the International Monetary Fund and World Bank Group (IMF-WB) in Tokyo made it definitively clear global economic growth is slower than anyone expected before, and there remains a lot of uncertainty about where economic growth could be headed in 2013, as it could turn out to be even weaker than the most predict.

In this context, it’s interesting to take notice that the price of copper, which is the most economically sensitive metal in the world, has been “de-linking” somewhat from the Standard & Poor’s 500 index this year, after having moved together since the Lehman Brothers crisis in 2008. The falling correlation of the price of copper to the S&P 500 so far this year could point to confirmation of slower economic growth worldwide and more specifically in China and in several other main emerging markets, because their respective infrastructure booms are slowing down and therefore they need less copper.

But, that divergence of the respective price paths could also have been caused because of good demand for defensive and high-yielding dividend stocks of the S&P 500, which have pushed the index higher. We’ll have to wait and see if the divergence will continue to widen or if it will contract and in what direction both will move from here on.

On Thursday, China will release its gross domestic product numbers, which are expected to confirm the ongoing slowdown. Last week, engine manufacturer Cummins warned it could cut up to 1,500 jobs because, in part, of the declining market in China. Earlier, earthmoving equipment manufacturer Caterpillar and aluminum producer Alcoa both warned about sizable slowing in China affecting their results. We’ll see if China's five-year growth plan, which officially has a target of 7 percent GDP growth till 2015, holds or not. We’ll also learn if Paul Markowski, president of MES Advisers and long-time consultant to China's financial authorities, is right when he said this week to Reuters that China’s GDP growth is already down to 6 percent. One thing is for sure, when the GDP number comes out, we’ll have a lot food for thought.

Not surprisingly, the eurozone problems took center stage at the IMF-WB meetings, which, also not surprisingly, irritated the block of emerging economies, because time and again, the continuing eurozone crises have dominated these meetings. In fact, still relatively very few expect serious, transparent and “final” euro solutions or even “plans” anytime soon. For now, concerns over the potential for a shock to the eurozone from a disorderly default have eased, or better said, have been postponed once again. Yes, I agree with Swedish Finance Minister Anders Borg who said in Tokyo that Greece might leave the euro in the first half of 2013, notwithstanding German Chancellor Angela Merkel and German Minister of Finance Wolfgang Schaeuble now openly “support” Greece staying in the eurozone.

In the meantime, long-term investors should keep in mind that 45 percent of the EU sovereign ratings are on negative outlook by Fitch Ratings for the third quarter and 37 percent of the EU financial institution ratings are on negative watch or outlook. That’s not a situation that should provide investors confidence in the short term. By the way, Moody’s Investors Service warned Spain of an imminent downgrade today. This comes after S&P already downgraded the country last week.

Besides that, in Tokyo there were also serious concerns about how politicians in Washington will manage the looming fiscal cliff in the United States. It’s somewhat surprising that, for now at least, Americans don’t seem too much concerned about the potential risk that stumbling over the fiscal cliff would represent for the country and the world economy as a whole. No doubt, there is only a small chance we could see a quick and severe fiscal tightening in 2013, but as a long-term investor it remains important to get a clarification on the subject sooner rather than later. The U.S. public finance sector still gets a 90 percent stable outlook from Fitch Ratings for the third quarter. Keep in mind that if the U.S. fiscal cliff situation doesn’t go where most market participants expect, it could evolve. The U.S. economic and financial picture could deteriorate extremely quickly. On the contrary, if everything goes as most expect for now, the United States could become once again the place of choice for growth and surely for investing. Of course, we aren’t there yet, and a lot of substantial risks remain that could derail any form of recovery, of which geopolitical risks shouldn’t be disregarded at all.

Long-term investors should also keep in mind that we will continue to see for a long time to come structural reforms being implemented in all serious places on the globe, and these structural reforms will, without any doubt, be favorable for investors in the long run but could provide shocks in the short run. The big unknown here is that nobody really knows how serious all these different places will behave.

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Long-term investors should keep in mind that we will continue to see for a long time to come structural reforms being implemented in all serious places on the globe.
Tuesday, 16 October 2012 11:13 AM
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