Tags: eurozone | US | GDP | CPI

Buying the Dips Might Change to Selling the Bounces

By    |   Tuesday, 14 October 2014 08:50 AM

Now that the International Monetary Fund (IMF) and World Bank Annual Meetings in Washington, D.C., have concluded, I don't think there remain a lot of insiders who still have optimistic expectations for global economic growth in the short to medium term.

Since July 2010, the IMF has been obliged to revise "continuously" its growth forecasts for the world economy downward, from 4.5 percent in the summer of 2010 to now 3.3 percent in 2014 and to 3.8 percent in 2015. In its most recent World Economic Outlook, the IMF stated, "Downside risks have increased. Short-term risks include a worsening of geopolitical tensions and a reversal of recent risk spread and volatility compression in financial markets. Medium-term risks include stagnation and low potential growth in advanced economies and a decline in potential growth in emerging markets."

To put it simply, of the four engines of global growth, which are the U.S., the EU, Japan and China, only the United States is expected to grow reasonably smoothly, with "real" GDP growth, and as expected by the Federal Open Market Committee, to be in the 2 percent to 2.2 percent range in 2014 and in the 2.6 percent to 3 percent range in 2015. The other three global economy growth engines are all sputtering and looking for additional fuel in some way or another.

The eurozone seems to be stuck in, at best, a far-too-low and extremely uneven growth environment and way-too-low inflation while there is growing fear for a triple dip recession.

Additionally, Japan hasn't regained its feet after the large consumption tax increase in April, and China seems to be struggling with a deep housing downturn, excess capacity, excess credit growth and a profound impact of the ongoing anticorruption actions.

In the meantime, the disinflation, and maybe deflation, threat in the eurozone continues to grow. September's consumer price index (CPI) confirm that disinflation is alive and well in France, where CPI decreased 0.4 percent from August but rose 0.3 percent year-on-year, and Italy, where the CPI decreased 0.4 percent from August and decreased 0.2 percent year-on-year.

The downward trend has also taken hold in the UK, which is not a member of the eurozone, where the September CPI slowed down to an increase of 1.2 percent year-on-year, which is its lowest level since 2009.

Besides all that, the German ZEW Indicator of Economic Sentiment for October 2014 dropped 10.5 points, which puts it at negative 3.6 points, or 30.1 points below its long-term average of 24.5 points. The ZEW index has now fallen for the 10th consecutive month and is now back into negative territory for the first time since November 2012. No, that doesn't bode well for Germany and the eurozone as a whole.

I hope French Finance Minister Michel Sapin exaggerated when he said last week in Washington, D.C.: "When the eurozone struggles, the global economy struggles." But I must admit, so far at least, it seems he was right.

As a long-term investor, I wouldn't put the eurozone on my investing shopping list simply because of the growing disinflation, if not deflation, risk that apparently continuous to strengthen.

In my opinion, there are too many indications the eurozone is starting to look like we are on our way to 2012 all over again, when inside the eurozone tensions took a turn for the worse during the summer and when major actions had to be taken about the sustainability of the euro and where promises were given by the European Central Bank (ECB) and the eurozone policymakers. Until today, only the ECB has delivered on its promises, but the policymakers failed to imply their promised structural reforms as well as their actions on the fiscal front.

I think a new crisis in the eurozone could once again erupt at any time and this for months to come. Long-term investors should take notice that there is vigorous disagreement within the ECB Governing Council between ECB President Mario Draghi and Bundesbank President Jens Weidmann about the size, on how and on exactly when the ECB would perform its European form of quantitative easing.

Leaked information reveals that Draghi now finds cooperating with Weidmann has become "almost impossible" and that he no longer divulges his plans to him beforehand. It's an undeniable fact there is very little consensus in the eurozone between the core, which now excludes France, and the others on how to craft the much-needed stimulus programs. All this shows the ECB is under very heavy stress, which is never good. All we can hope for is the disagreements remain contained and all the members come to an acceptable solution.

Also, and this could be interesting for long-term investors, when we compare tracks of the real GDPs of the eurozone and of the U.S., we see that until three years ago the European recovery was very similar to the U.S. recovery, but then the eurozone got into problems because of its debt crisis, which caused an enormous setback to the recovery of the eurozone GDP in real terms. Real GDP in the eurozone stands today 2 percent below its pre-crisis level, while in the U.S., real GDP now stands 7.5 percent above its pre-crisis level.

Therefore, I still believe the U.S. and the U.S. dollar still provide one of the most secure places for people who want to invest now. However, that doesn't mean the U.S. is safe from having to face a sizable correction in the markets in the future.

In this context, I think it's noteworthy to point out that on Monday, the CBOE Volatility Index (VIX) jumped to 24.64 at the close, which was its highest level in 2 ½ years, but still well below the 40-plus numbers we saw in 2011.

I think in today's context we can't exclude, somewhere in the foreseeable future, the possibility for the VIX to exceed its 2007-09 extremes, which peaked near the extraordinary extreme of the 100 mark in the latter part of 2008.

In case that should occur, in my opinion, that would become the historical period in time when "buying the dips" (for speculators going long) would change into "selling the bounces" (for speculators going short). Of course, we aren't there yet.

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Now that the International Monetary Fund (IMF) and World Bank Annual Meetings in Washington, D.C., have concluded, I don't think there remain a lot of insiders who still have optimistic expectations for global economic growth in the short to medium term.
eurozone, US, GDP, CPI
Tuesday, 14 October 2014 08:50 AM
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