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

Tell Me a Country Whose Economy Will Not Slow in 2013?

Wednesday, January 9th, 2013
By for Profit Confidential

Whose Economy Will Not Slow in 2013In December, retail sales in the eurozone plummeted. The retail Purchasing Managers’ Index (PMI) fell to 44.5 from 45.8 in November. The reason: Germany, France, and Italy reported retail sales declining at an accelerated pace.

Retail sales in the eurozone have been declining for 19 months straight! (Source: Markit, December 28, 2012) A PMI reading below 50 suggests economic contraction.

China, another economic hub in the global economy, has its problems, too. The country has been experiencing an economic slowdown, which is affecting its trading partners like Australia.

According to the United Nations, Australia lost $2.4 billion in gross domestic product (GDP) and $2.6 billion in exports since 2011—thanks to an economic slowdown in the Chinese economy. (Source: The Age, December 17, 2012.) And as the Australian dollar has been gaining strength, it is bruising the tourism, manufacturing, and exports industries.

India is going through an economic slowdown of its own. Inflation in the country is running at over seven percent. At the same time, the country is faced with large deficits in current accounts and in its budget. (Source: Wall Street Journal, January 1, 2013.)

On the other side of the global economy, Brazil’s once booming economy is slowing quickly. The country is expected to grow less than one percent in 2012. In the beginning of 2012, according to a survey compiled by Brazil’s central bank, economists predicted that the country would see growth of 3.3%. (Source: Reuters, December 31, 2012.) Boy, were they wrong.

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To add to the misery; key indicators of the global economy, such as the Baltic Dry Index (BDI), have been flashing warning signals for months. The BDI is considered to be a well-known indicator for global economic health. When the BDI declines, it shows that exports in the global economy are falling. Look at the chart below.

$BDI Baltic Dry Index stock market chart

Chart courtesy of www.StockCharts.com

The BDI has been falling rapidly. In last few months of 2012, it fell significantly. In late November, it soared above the 1,000 level, but then it dropped 30% to 700 by the end of December.

As I have been harping on in these pages, the global economy isn’t going in the right direction. An economic slowdown is inevitable. For the U.S. economy, this will affect us in a negative way. For those who thought there were prospects of economic growth in the U.S., it may be time to reconsider. The global economy is getting sick and the U.S. just can’t avoid feeling the effects.

Michael’s Personal Notes:

Quantitative easing has taken a toll on the U.S. economy.

The effects are unseen now, but in the long run, they will show. Trillions of dollars in new money has been created to spur growth in the U.S. economy through quantitative easing, but what really has been achieved from it? At the very best, the stock market has gone up—on the other hand, the U.S. dollar has declined in value against other major world currencies, real inflation is rising, and unemployment is still an issue.

As time passes, quantitative easing could be doing more harm than good for the U.S. economy. The Federal Reserve has promised to keep printing $85.0 billion per month until the unemployment rate reaches 6.5% and the inflation expectation for one to two years out is 2.5%. But, despite the approximate $3.0 trillion by which the Fed has expanded its balance sheet since the credit crisis began, and despite the $6.0 trillion in new debt the government has put on since then, the average unemployment rate in the U.S. economy for the year of 2012 was above eight percent.

As for the buying power of the dollar, it’s down since 2009. What cost you $1.00 in 2009, cost you $1.07 at the end of 2012. (Source: Bureau of Labor web site, last accessed January 4, 2013.)

As readers of Profit Confidential are aware, I have been critical about quantitative easing; I believe printing money has no structural benefit to the economy, while actually causing long-term damage to the U.S. economy in the form of inflation, the deterioration of our currency, and eventually rising interest rates.

Even those who originally promoted quantitative easing in the U.S. economy are now showing concern that more printing will eventually lead to deeper issues.

For example, Federal Reserve Bank of Richmond’s President Jaffrey Lacker said early this year, “I see an increased risk, given the course the Fed has set, that inflation pressures emerge and are not thwarted in a timely way.” (Source: Robb, G., “Fed’s Lacker: upside risks of inflation in 2014,” The Wall Street Journal; MarketWatch, January 4, 2012.)

Quantitative easing hasn’t done much for the U.S. economy except take bad debts off the books of mismanaged banks—the same banks that caused the housing boom of 2004 to 2006 with their easy lending policies. All we need to do is look at the Japanese economy and the country’s failing attempts to boost economic growth by printing more money. It doesn’t work!

Where the Market Stands; Where it’s Headed:

I’m sticking with my prediction that 2013 will be a turnaround year for the stock market—the year the bear market rally that started in 2009 comes to an end. Why the top now? The global economy is suffering and the U.S. will not be able to escape being sucked into the global slowdown. U.S. corporate earnings growth has turned negative for the first time in 11 quarters. Each time the Fed announces a new form of quantitative easing, we get a weaker positive reaction from the stock market.

What He Said:

“The conversation at parties is no longer about the stock market, it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate, because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in Profit Confidential, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

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Tell Me a Country Whose Economy Will Not Slow in 2013?, 10.0 out of 10 based on 1 rating
  • Joe Fitzgerald

    With the stock market almost at the close of its 4th year of this bull market, it would not be unreasonable for a 15% correction to occur with a round of disappointing earnings reports. Hopefully the Fed's and the SP 500 companies can guide us through these times; a massive decline in the stock market would result in the loss of trillions of dollars of wealth to people counting on that wealth for retirement. The fact that the stock market has not collapsed in the face of such bad news could indicate that the market sees better times ahead.

    By the way, I enjoy reading your column.

  • Brian Edward Croner

    It seems like all this expansion of the money supply is just increasing the prices of shares of stocks in the publicly traded companies. All of the money is going to people who own stock portfolios and who are involved in Wall Street, and none of it is going into anybody else's pockets.

  • Danny Bravo

    only japan,, because a lot of serve to the planet ,,,there is an slow because wrong used in inviroment but too collapse is too far

  • Danny Bravo

    collapse of economics is not means of disaster this is a kind of funishment how can you give a treatment to one country collapse if her bad doing are continue,,,

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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

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