By Sy Harding
September 7, 2012
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 the free market blog Street Smart Post. Follow him on twitter @streetsmartpost.