Tags: Global | Economic | Clouds

Global Economic Storm Clouds Won't Lift Anytime Soon

By    |   Monday, 27 February 2012 02:58 PM

The largest container ship operator and supply vessel operator in the world, the A.P. Moller – Maersk Group from Denmark, reported a fall of 43 percent in its full-year net profit.

Moller-Maersk expects its container business, which is its main operation, to continue to operate at a loss in 2012. It expects to achieve full-year 2012 net result “lower than the 2011 result” because of excess capacity.

At the same time, we see the Baltic Dry Index, which provides an assessment of the price of moving the major raw materials by sea on a worldwide scale, continue at record low levels we haven’t seen since the crisis in 2008. To get an idea of what we are talking about: On May 14, 2008, the index stood at 10,649 and on Friday it closed in London at 718.

Long term investors should keep in mind that when the shipping business is doing well, economies are doing well. Obviously, that’s not the case today.

Serious improvement in the near future doesn’t seem to be in the cards.

Over the weekend, the G-20 gathered in Mexico and its final communiqué states: “…growth expectations for 2012 are moderate and downside risks continue to be high. The international economic environment has continued to be characterized by an uneven performance, with weak growth in advanced economies and a stronger, albeit slowing, expansion in emerging markets. Structural problems, insufficient global rebalancing, a persistent development gap and high levels of public and private indebtedness and uncertainty continue weighing on medium-term global growth prospects."

It continued: "While volatility in international financial markets has declined, it generally remains high and we are committed to further reduce downside risks. We are alert to the risks of higher oil prices and welcome the commitment by producing countries to continue to ensure adequate supply. With unemployment still too high in many countries, we are firmly committed to supporting growth and job creation…”

Regarding Greece, we saw a first serious crack appearing in the German support for continuing to throw good money (of the German tax payer, of course) after bad.

Germany’s interior minister, Hans-Peter Friedrich of the conservative Christian Social Union, said in an interview with the German weekly Der Spiegel: “Greece's chances to regenerate itself and become more competitive are certainly greater outside the currency union than they are if it stays in the eurozone … I'm not talking about throwing Greece out, but rather about creating incentives for an exit that they can't pass up…”

I don’t it will take too long before we will see other cracks appearing in other core eurozone countries…

All that said, and generally in contradiction to what is mentioned here before, now we see investors’ optimism at very high levels. The bulls appear clearly convinced that central banks in the U.S., Europe and Japan will continue to be able to keep inflation going.

As a long term investor, I would prefer to remain patient and wait until “pessimism” comes back – and that will be with force, I’m afraid. I’m still looking for substantially lower prices before I consider stepping back in again. Keep in mind that long term investors aren’t traders and vice versa.

There are still a lot of indicators that don’t give me sustainable confidence in the actual timid recovery we see in the U.S.

Low interest rates and plentiful liquidity aren’t being channeled to the real economy in many of the major mature market countries.

The “money multipliers” that represent the relationship between the level of base money and the broader money supply that supports credit growth have literally broken down both in the U.S. and Europe. The money multiplier for the U.S. stands today at only 50 percent of its 2000-2010 level and in the eurozone it stands at roughly 65 percent.

As illustration, on Feb. 8, the U.S. money multiplier (M1), stood at 0.828 while on July 30, 2008, it stood at 1.625 As long as that doesn’t change, we aren’t out of the woods yet.

To me, the still ongoing rally is unsustainable, but, of course, I could be wrong. Nevertheless, it looks more like it is on autopilot while the fuel gauge is getting closer to empty. I can’t get enthusiastic about it.

I’m still waiting before stepping back in as a long term investor at much lower prices when:

• there is falling confidence;

• there will be more broke private and sovereign debtors than we have now;

• tapped-out taxpayers will see rising interest rates on oceans of debt coming back.

Once that takes place, it will be very negative for stock prices and a whole range of so-called investments. About timing, I think this could happen within the next 24 months.

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Monday, 27 February 2012 02:58 PM
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