In 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.
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.
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.
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.