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BEING STREET SMART by Sy Harding Are Rescue Efforts Too Late To Avoid Global Recession?
Economic growth continues to
slow at an accelerated pace globally, not just in Greece and Spain, and other
euro-zone countries in the headlines, but in the world’s ten largest economies
of the U.S., China, Japan, Germany, France, the United Kingdom, Brazil, Italy,
India, and Canada. The 17-nation eurozone as a whole is already in a recession.
Many other nations are just barely keeping their heads above water.
A number of global stock
markets saw the problems coming and are already in bear markets. The market of
China, the world’s second largest economy, is down 32% over the last 24 months
on concern that its economy is coming in for a hard landing. Japan’s market, the
world’s third largest economy, has lost 19% of its value over the last 18
months, and in spite of the June rally is down 14% just since May. Brazil’s
stock market is down 20% over the last 18 months as its previously booming
economy slows significantly.
In the U.S., even though its
stock market is at multi-year highs that might have one think its economy must
be booming, the economy is just scraping along and slowing further, with GDP
growing at just a 1.7% pace in the 2nd quarter, and corporations
warning of still slower conditions ahead.
The problem, another stall in
the recovery from the Great Recession of 2008, has been obvious all year. But
those who could at least try to come to the rescue have been reluctant to do so
again, perhaps because their previous rescue attempts were not lasting and
they’re running out of ammunition.
Panicked by the market
correction of April to June, in which even Europe’s strongest economy, Germany,
saw its market plunge 16%, European Central Bank President Draghi issued his now
famous promise that “The ECB will do
whatever it takes to save the euro”.
Markets waited for six weeks,
but the ECB finally revealed yesterday what those efforts will be - unlimited
buying of the bonds of troubled euro-zone governments that request bail-outs.
It’s the ECB’s third bond-buying program in recent years.
This one is more aggressive than the previous two and is given better odds of
working to solve the euro-zone’s debt crisis. But I was surprised the ECB’s “whatever it takes to save the
euro” effort did not include cutting interest rates to also stimulate the
eurozone economy. Meanwhile, concerns are already rising that its announced
program of unlimited bond-buying may even worsen the euro-zone’s recession,
since the program requires governments that request the debt bailout to adopt
and adhere to strict austerity measures in order to qualify for the bond-buying,
including reducing government spending, and cutting wages, pensions, and
services even further. Meanwhile, in China, the hoped for aggressive economic
rescue has not been forthcoming, with analysts expecting any major stimulus to
be put off until after the new Chinese leadership takes over later in the year
and gets a chance to act, probably not until early next year. In the U.S., the Federal Reserve has already cut interest
rates close to zero, and provided several rounds of aggressive bond-buying in
the form of QE1, QE2, and last year’s ‘operation twist’. It has seemed reluctant
to act again, saying only that it’s monitoring the situation and will take
action if needed, while successfully fueling a stock market rally on that
assurance. As revealed in the minutes of its last FOMC meeting and Fed
Chairman Bernanke’s recent speech from Jackson Hole, the Federal Reserve’s
biggest worry is employment. Over the last few weeks it looked like the Fed might get by
with putting off action again. The employment picture seemed to improve
dramatically since its last FOMC meeting. It was subsequently reported that
163,000 new jobs were created in July, much better than expectations, and this
week’s ADP jobs report showing 201,000 new jobs created in August indicated the
improving trend continued. So the Fed may have been shocked when the Labor Department’s
report on Friday showed only 96,000 new jobs were created in August, and the
previous report of 163,000 new jobs in July was revised down to 141,000. So now the pressure is back on the Fed to act at its meeting
next week. But does all the previous reluctance of central bankers to
act have them so far behind the curve of a potential global recession that by
the time the actions are announced, implemented and begin to have an effect, it
will be too late? The ECB estimates it will be a month before it gets all the
approvals it needs and can begin to implement its new bond-buying program.
China’s central bank and the U.S. Fed have yet to even announce a new program. It’s still a time to be cautious about investing in
equities. Economic slowdowns worsened even as markets spiked-up in a rally since
June fueled entirely by hope, a rally that already factored in much of what can
be hoped for from the belated and in some cases still absent rescue efforts, a
rally that has the market at multi-year highs, a feat usually accomplished only
in times of booming economic conditions. So, it’s not just that central banks are behind the curve,
but that markets may be well ahead of not only the central banks, but economic
prospects. On the positive side, I like gold on which our indicators
triggered a new buy signal (after being on a sell signal since February 29). And
in the interest of full disclosure, I and my subscribers have a 20% position in
the gold etf GLD.
Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com. He can also be followed on Twitter @streetsmartpost Editors: You are welcome to quote from this article, or use it in its entirety, in your publication or on your website, as long as the credit in the above paragraph is also included. Readers are also welcome to e-mail, or print and snail-mail it to friends. These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance. Back to the Top Home Subscribe to RSS Feed
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