Will This Time Be Different? (I'm Just Asking)

The following premium content was originally published on the PRO Trader Service on Wednesday, 1-Aug at 8:01 am

I have spent the past six hours reviewing numerous economic reports, analyses and articles as well as a number of market research pieces and various market metrics.

My conclusion:

There had better be some significant central bank actions taken over the course of the next two days. Without such moves being made most of the major equity markets around the globe could be in for some very tough sledding.

China is officially on the verge of entering a contraction phase, not just a slowdown in growth as has been hoped for so long. The soft-landing that many experts had predicted is looking less soft with each new data point. Of course, the unofficial picture looks even more worrisome. The HSBC figures have indicated a Chinese economic contraction for some time now. And let's not forget the sourced story from a few weeks back that highlighted just how distorted the official Chinese economic figures may be.

Europe: just plain ugly. Here's a quick rundown of some of the latest (July's) P.M.I. figures for Europe which were released today (remember that readings below 50 indicate contraction):

• Italy: 44.3 - 12 straight month of contraction.
  
• Spain: 42.3 - Spain's unemployment ~ 25%.
  
• France: 43.4 - 38-month low.
  
• Germany 43.0 - Output/New Orders fall sharpest since April, 2009.
  
• Britain 45.4 - Lowest since May, 2009.
  
• Euro-zone 44.0 - 37-month low.

Not included above are figures from Ireland, Portugal, Greece, Cyprus and Hungary. Though Ireland is making positive strides all these countries also are facing difficult times. Oh, and also reported today were the latest figures regarding UK home prices which posted a -2.6% drop in July from 2011, the biggest year-over-year decline in 3 years. Suffice it to say that Europe is in big trouble. One way out is by increasing exports from Europe to the rest of the world. Unfortunately, China, and the U.S. are the biggest potential markets for European exports and they both are faced with the prospect of reduced economic activity going forward.

Decoupling is a myth.

Turning to the United States, its economic outlook is rather cloudy as well. Economic data for the past several weeks has been mostly disappointing. Many areas such as retail sales (3 months down), consumer confidence (rolling over), and regional Fed surveys have been particularly weak. Adding to concerns is developing evidence of "channel stuffing" by U.S. automobile manufacturers. High dealer inventories relative to sales levels indicate the possibility that car makers have over produced. This would make certain economic reports, especially those relating to manufacturing and industrial production, appear better than they otherwise might. Thus the general economic picture for the U.S. may actually be worse than it seems.

So, basically, the global economic outlook ain't good.

And yet, global equity markets have been climbing since last Wednesday on the hope that massive additional central bank intervention would soon be a reality. We may get it. But then, will it be enough to satisfy the markets?

Finally, let me leave you with this thought. If we are rolling over into a recession (ECRI says yes and I'll go with them) then, by definition, it is just beginning. Historically speaking, the various central banks have often taken significant action in an attempt to repeal the normal business cycle. It could be argued that the severity of some has been lessened at times, though many would disagree. Few would dispute that on more than one occasion central bank actions have made things worse. Out of 47 previous cyclical economic downturns that the United States has experienced over the past 222 years, not one has been stopped.

Therefore, why in the world should we believe that this time will be any different?

And if we are just entering a cyclical downturn during which corporate profits as actually reported will likely come in well short of current lofty projections (they always do), then with the market within a few percentage points of its April high isn't there, potentially, a long way to fall?

I’m Just asking.

Have a good one...

Curtis Bergquist
Manager – PRO Trader Service

Wondering what Curt’s next move will be? Take a Free Trial of The PRO Trader Today P.S. The PRO was well positioned for the recent correction and has gained +11.5% since April 1st while the S&P 500 lost -2.5%

 

 

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