Tags: Global | Economies | rebound

Global Economies Struggle to Gain Solid Footing

Wednesday, 14 March 2012 09:52 AM Current | Bio | Archive

The Federal Open Market Committee (FOMC) made no major announcements, but did reveal a central bank that was cautiously more optimistic in its economic outlook than it was in January.

The FOMC also acknowledged recent labor-market gains and added that higher inflation resulting from oil and gas prices, caused in a great part by the Iran-Israel situation, would be temporary.

Let’s hope they’re right because rising oil and gas prices could easily derail the timid recovery we are experiencing.

Unfortunately, Iran announced that it was unwilling to grant a request by the International Atomic Energy Agency to allow global inspectors unfettered access to the Parchin restricted military complex, southeast of Tehran.

The IAEA suspects the military complex may house a chamber designed to test explosives used in atomic-weapons triggers. An IAEA report last year stated there were indications Tehran has conducted high-explosives testing to set off a nuclear charge at Parchin.

As a medium-to-long-term investor, it’s impossible to deny the possibility of an attack on Iran within a 24-month horizon and the impact it would have on oil prices and on the global economy. And if all that wasn’t enough, the International Energy Agency (IEA) warns of falling oil-production capacity.

The latest OECD (Organization for Economic Co-operation and Development) composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, continue pointing to timid positive changes in momentum in the OECD as a whole.

The CLI number for the U.S. confirmed continued moderate growth expansion coming in at 102 vs.101.3 the month before and 101.8 a year ago.

The CLI number of 100 represents the long-term trend of economic activity in a country. The CLI for the 17 eurozone countries weakened slightly further to 98.3 versus 98.5, keeping in mind that 12 months ago that CLI number stood at 104.3 (!) and has been sliding ever since.

The CLI for China came in at 99.3 versus 99.8 and Brazil printed 93.7 versus 93.7 compared to 102.7 a year ago. Both countries continue pointing to below-trend growth. The OECD's Asian Business Cycle Indicators (ABCIs) also show weak growth momentum of most ASEAN economies. It’s not an overstatement to say that the United States has one of the better CLI numbers of all the big economies, which is without any doubt a positive.

At the same time, we also must take notice of recent slowing Chinese exports that rightly fuel concern about and confirm the actual soft global economic recovery.

Keep in mind, as commodities will perform the same as China.

China Premier Wen Jiabao stated that an annual growth target for China's economy of 7.5 percent shouldn't be considered low.

“Housing prices are still far from a reasonable level,” he said. “Therefore, we can't relax property control measures … If we relaxed, all we have achieved would be lost and it would cause chaos in the property market, which is bad for the long-term, healthy and stable development of the housing market.”

He also said that the Chinese currency, the renminbi is “nearing equilibrium” and promises a more-rapid pace of reform.

“Reform has reached a critical stage. Without the success of political reform, economic reforms cannot be carried out. The results that we have achieved may be lost.”

Now that the first playwright of the still ongoing Greek tragedy seems to be coming to its end (remain patient because there are three playwrights in a Greek tragedy), investors should do wise keeping in mind that Greece, but also the other Mediterranean eurozone countries (Portugal-Spain-Italy) remain far from safe even after the first Greek debt swap.

Europe also still has to efficiently address its fiscal, economic, and institutional deficits, and last but not least has urgently to restore trust. Is that achievable? Only time will tell.

The European Commission compliance report already states Greece has to cut another (extra!) 5.5 percent of GDP in government spending in 2013 and 2014 to meet agreed fiscal targets underpinning the second international bailout for Athens.

To me, neither the Greek bailout(s) nor the private-sector involvement (PSI) will make the Greek situation sustainable while ring-fencing Greece is nothing more than wishful thinking. For now, the focus in Greece is shifting on politics and party campaigning ahead of the snap election that should be held after the Orthodox Easter on April 15.

Besides all that, a “leaked” strict confidential Troika Greece’s public debt analysis states: “… Under an alternative, less favorable scenario, the debt ratio in 2020 would still be above 145 percent of GDP. Moreover, given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market at the end of the program are uncertain…”

Reading between the lines, we can see Greece won’t be able to comply with the obligations it agreed on with the Troika.

Meanwhile, Spain also remains in deep trouble and its recent commitment to austerity has now also come under scrutiny after it relaxed its budget deficit target to 5.8 percent of GDP.

The EU’s original target was 4.4 percent and it has now come back with a compromise figure of 5.3 percent.

Once again, it’s starting to look like the EU is bound for “floating” targets.

The question is, how much more austerity can be imposed on Spain and how much more can the people in Spain endure when unemployment stays at an EU record high of 23.3 percent with 49.9 percent of the young people unemployed.

My preference from a long-term investor standpoint is staying away from the ongoing rallies as I am still convinced we’ll see lower prices within the next 24 months, and probably sooner.

To me, there are too many serious disrupting “threats” to global economic growth that are out there…

By the end of the week, we will know more about the U.S. Q1 GDP growth.

Keep in mind the U.S. economic “timid” recovery still doesn’t have strong footing as demonstrated by the M1 money multiplier (MULT) and the velocity of M2 money stock (M2V) whereby both numbers show contraction with M2V falling to below 1.6 last week, a number not seen since the 1960s and as communicated by the Federal Reserve Bank of St. Louis.

To me, these numbers bode ill for the second half of the year and beyond…

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Wednesday, 14 March 2012 09:52 AM
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