Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

On the Economy, Forget the Media and the Politicians; Follow these Numbers

Tuesday, October 23rd, 2012
By for Profit Confidential

man looking at horizonMath does not lie. The global economy is in trouble. We are in the midst of an economic slowdown and it is getting worse as the days pass.

“Economics 101” suggests that when there is economic growth in the global economy, trade improves, manufacturing increases, and the overall health of economies is better—none of which is true today.

Here’s where we actually are…

As I was writing this column, news came out that the JPMorgan Global Manufacturing Purchasing Managers Index (PMI) hit a 38-month low in August, while slightly improving in September. In September, the index reached 48.9 compared to 48.1 in August. (Source: Markit, October 1, 2012). Any reading below 50 with this index suggests an economic slowdown.

For the third quarter of 2012, manufacturing for the global economy was the weakest since the second quarter of 2009.

Another key indicator that measures the health of the global economy is the Baltic Dry Index (BDI). This leading indicator goes up during times of economic growth in the global economy and down in coming times. The BDI measures demand for goods in the global economy.

Here’s how it looks today:

baltic dry index stock chart

Chart courtesy of www.StockCharts.com

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This BDI gauge is depressed and has been in a decline for months. There have been some bounces, but the overall trend in the BDI is down—suggesting that demand in the global economy is continuously slowing down. Looking at the long-term chart, the BDI looks even worse.

The economic slowdown in the global economy is spreading quickly. I have been harping in these pages about countries suffering economically. The Chinese economy is experiencing an economic slowdown far worse than 2009. Significant numbers of countries in the eurozone are in recession. The U.S. economy has been struggling since the financial crisis of 2008.

So, here is what I say to you, dear reader: math is fact. The numbers certainly don’t lie. As much as you may not want to hear it, there is an accelerating economic slowdown in the global economy. The International Monetary Fund (IMF), a laggard in economic growth forecasting at this point, recently warned about the global outlook—it downgraded its 2013 economic growth projections for every single industrialized country!

Looking at the Baltic Dry Index, we see shipments for goods in the global economy falling steadily since late 2010. So what then accounts for the increased profits at big public companies and the rising stock market since 2009?

It’s very simple. Companies have slashed payrolls and they have slashed their interest costs. Record-low interest rates and a record expansion of the money supply have done wonders for big companies in the global economy and North American stock markets.

Unfortunately, interest rates cannot fall below zero. Companies cannot slash payrolls further without compromising service. And revenue growth for the S&P 500 companies is turning negative. The year 2013 is not shaping up to be a good one.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles