Posts Tagged ‘global economy’
The International Monetary Fund (IMF) has lowered its growth forecast for the global economy. It says the world economy will now grow by 3.6% in 2014 and 3.9% in 2015; it grew at three percent in 2013. (Source: International Monetary Fund, April 8, 2014.)
I see the IMF forecast on global growth as being far too optimistic. In fact, I think we’d be lucky to get three percent growth in the global economy this year. Key indicators I follow suggest demand in the global economy is close to outright collapsing.
Consider the chart below of the Baltic Dry Index (BDI). This index tracks the shipping prices of dry goods in the global economy. If it declines, it suggests global demand is declining. The BDI has plunged more than 48% since the beginning of the year, pointing to slow growth for the global economy ahead.
Manufacturing is another indicator of demand in the global economy that we follow. If manufacturing activity increases, it means demand is increasing and that consumers are buying more. Sadly, global manufacturing is suggesting an economic slowdown is the most likely scenario ahead.
The JPMorgan Global Manufacturing Purchasing Managers Index declined to its lowest level in five months in March. (Source: Markit, April 1, 2014.)
Adding to the misery, most economic hubs are telling the same tale.
The eurozone is still in trouble; the European Central Bank is contemplating its own quantitative easing program as Italy just reported its highest unemployment rate ever recorded. China is pumping out weak economic data. Japan’s economic slowdown isn’t taking any break despite the central bank … Read More
Copper is considered an industrial metal, used in industries across the board. When copper prices fall, it’s usually an indicator of a slowdown in the global economy. On the contrary, gold bullion isn’t much of an industrial metal; rather, it is used as a hedge against uncertainty in the global economy.
When you look at these two metals together, often referred to as the gold-to-copper ratio, they tell us something very important: the ratio of how many pounds of copper it takes to buy one ounce of gold bullion has long been an indicator of sentiment in the global economy.
If the gold-to-copper ratio is in a downtrend, it means investors are betting on the global economy to grow. In contrast, if it is increasing (if the number of pounds of copper it costs to buy an ounce of gold is rising), it tells us investors are concerned about protecting their wealth in a slowing global economy.
Below, you’ll find a chart of the gold-to-copper ratio.
Looking at the chart above, it is clear something happened at the beginning of 2014. Investors became very worried. Since the beginning of the year, the gold-to-copper ratio has increased more than 28%—the steepest increase in more than two years.
And the weekly chart of copper prices looks terrible too:
Copper prices have been trending downward since 2011. In 2013, these prices broke below their 200-day moving average and recently, they broke below a very critical support level at $3.00. While all of this was happening, on the chart, there was also a formation of a … Read More
Understanding the economic slowdown in the Chinese economy is very important because not only does it impact American companies doing business there, but what happens in the Chinese economy—now the second-largest economy in the world—affects the global economy.
While media outlets tell us the Chinese economy will grow by about seven percent this year (30% below the 10% the economy has been growing annually over the past few years), the statistics I see point to much slower growth.
In February, manufacturing activity in the Chinese economy contracted and hit an eight-month low. The final readings on the HSBC Purchasing Managers’ Index (PMI) for February showed manufacturing output and new orders declined for the first time since July of 2013. (Source: Markit, March 3, 2014.)
And there are other troubles. The shadow banking sector in the Chinese economy shows signs of deep stress, but we don’t know how much money is really on the line here. China keeps much of its real economic news to itself, but we do hear how firms that are involved in the sector are defaulting on their payments.
And the Chinese currency, the yuan, keeps declining in value compared to other major world currencies. The Wisdom Tree Chinese Yuan Strategy (NYSEArca/CYB) is an exchange-traded fund (ETF) that tracks the performance of Chinese money market instruments and the yuan compared to the U.S. dollar. Look at the chart below:
Since the beginning of February, the Chinese yuan and Chinese money market instruments have been showing signs of severe stress, largely unnoticed by mainstream media and economists.
There is no doubt in my mind … Read More
There’s a big push on buying green stocks, a move that has the ability to make investors feel good and make money at the same time. Here, we are talking about alternative energy stocks and companies that have mandated that their impact on the environment be one of their core values. (Read “My Top Stock Pick in the Innovative Alternative Energy Sector.”)
Then there are the stocks on the other end of the spectrum. Here I’m talking about the defense, gun, and military stocks that produce weapons and technology to defend and harm. These companies have made investors a lot of money, despite the fact that not everyone might agree with their line of business.
There are also those companies that are sought out due to their use of cheap and exploited labor. Of course, since so many goods are now made in China and other cheap labor markets in Asia and Latin America, it would be safe to say that many companies are pursuing this practice of seeking really cheap labor in order to maximize profits for investors. This is also the major reason why there are so many people looking for work across America; because companies cannot return strong margins while they’re paying the much-higher American wages or those of other Westernized countries, compared to the obscenely low wages found in places like China and Mexico and other low-wage countries.
While I’m not here to favor or condemn one group of companies, the reality is that nothing is perfect when you are operating in an extremely capitalistic global economy that needs to satisfy investors.
There’s … Read More
On February 24, the S&P 500 broke to a new all-time high. There was panic buying as soon as the markets opened that day, as the chart below depicts.
Looking at this, I can’t help but ask if investors have completely lost touch with reality. It seems the fundamentals that drive stock prices higher—corporate earnings—have been ignored.
And as investors are driving key stock indices higher, the state of the global economy is becoming worrisome. This can’t be stressed enough: the U.S. economy isn’t immune to a disturbance in the global economy. But this isn’t all; if the global economy sees an economic slowdown, the companies on U.S. key stock indices suffer as well.
One clear example of this, as it stands, is Caterpillar Inc. (NYSE/CAT), a giant industrial goods manufacturer and component of the S&P 500. The company reported that annual sales declined 16% in 2013. Caterpillar’s revenues were $55.65 billion compared to $65.87 billion. The company’s corporate earnings per share were down more than 32% in 2013. The reason for this: a challenging business environment in the global economy. (Source: Caterpillar Inc., January 27, 2014.)
The global economy is going to disappoint in 2014.
First in line is Asia. Look anywhere on that continent, and you will see economic slowdown looming in the air. China, the biggest economic hub in the region and the second-biggest in the global economy, is outright slowing down. In February, the manufacturing activity in the country dropped to a seven-month low. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) registered at 48.3 in February compared to 49.5 in … Read More
Whenever I got stuck solving a problem in elementary school, my teacher would say, “go back and see where you went wrong.” This lesson—“learn from your mistakes”—was taught again in high school, and then throughout my life. It’s very simple: you can’t do the same thing over and over again and expect different results. Albert Einstein called it “insanity.”
When I look at the Japanese economy, I see the most basic lesson you learn in business school being ignored. The Bank of Japan, and the government, in an effort to improve the Japanese economy has resorted to money printing (quantitative easing) over and over, failing each time to spur growth. One might call it an act of insanity.
Through quantitative easing, the central bank of Japan wanted to boost the Japanese economy. It hoped that pushing more exports to the global economy from its manufacturers would change the fate of the country. It wanted inflation as well.
The result: after years of quantitative easing, the government and the central bank have outright failed to revive the Japanese economy. In fact, the opposite of their original plan is happening.
In January, the trade deficit in the Japanese economy grew—the country’s imports were more than its exports. Imports amounted to 7.70 trillion yen and exports were only 5.88 trillion yen. The trade deficit was 3.5% greater compared to the previous month. (Source: Japanese Customers web site, last accessed February 20, 2014.) Mind you, January wasn’t the only month when imports were more than exports in the Japanese economy. This is something that has been happening for some time.
Inflation in the … Read More
In the first five weeks of this year, investors bought $22.0 billion worth of long-term stock mutual funds. (Source: Investment Company Institute, February 12, 2014.)
But as investors poured money into the stock market, hoping to ride the 2013 wave of higher stock prices, stocks did the opposite and went down. The Dow Jones Industrial Average is down three percent so far this year.
Looking at the bigger picture, corporate earnings and key stock indices valuations are still stretched. The S&P 500’s 12-month forward price-to-earnings (P/E) ratio stands at 15.1. This ratio is currently overvalued by roughly nine percent when compared to its 10-year average, and 15% compared to its five-year average. (Source: FactSet, February 14, 2014.)
This isn’t the only indicator that says key stock indices have gotten too far ahead of themselves. In the chart below, I have plotted U.S. gross domestic product (GDP) against the S&P 500.
The chart clearly shows a direct relationship between GDP and the S&P 500. When U.S. GDP increases, the S&P 500 follows in the same direction, and vice versa. When we look at the 2008–2009 period (which I’ve circled in the chart above), we see that when GDP plunged, the S&P 500 followed in the same direction.
Going into 2014, we saw production in the U.S. economy decline; consumer spending is pulling back, unemployment is still an issue, and the global economy is slowing. U.S. GDP is far from growing at the rate it did after the Credit Crisis. Take another look at the chart above. In 2011, you’ll see U.S. GDP was very strong; but after … Read More
In 2013, the U.S. economy, as measured by gross domestic product (GDP), rose at an average rate of 1.9% compared to 2.8% in 2012. And as it stands, GDP may slow further in 2014.
What makes me think this?
In January, U.S. industrial production declined by 0.3% from the previous month. This was the first decline in production since August of 2013. Production of automotive products in the U.S. economy declined by 5.15%, and appliances, furniture, and carpeting production declined by 0.6% in the month. (Source: Federal Reserve, February 14, 2014.)
And factories in the U.S. economy just aren’t as busy as they used to be. The capacity utilization rate, a measure of companies using their potential production, was 78.5% in January. The average rate between 1979 and 2013 has been 80.1%. While a difference of two percent in factory utilization isn’t a big number, because overhead is often fixed in factories, a two-percent decline in production is a big deal.
Then there’s the inventory problem; inventories in the U.S. economy continue to increase. In December, inventories at manufacturers increased by another 0.5% to $1.7 trillion. From December 2012, they have increased by 4.4%. (Source: U.S. Census Bureau, February 14, 2014.)
We have a situation in the U.S. economy today where factories are working at lower capacity than they have historically, while business inventories are rising—two bad omens for the economy; hence, you can see why I’m concerned about economic growth in 2014.
It’s a domino effect…
Inventories increasing suggest consumer demand is stalling. Examples of consumer spending declining in the U.S. economy are many. As I have … Read More
Fasten your seatbelt, dear reader. We’re in for a global financial crisis, a currency fiasco, and a stock market collapse all in the same year!
I’m being too bearish? Not after you read this…
In their search for economic growth in 2009, the Federal Reserve and other major central banks in the global economy started lowering interest rates and printing paper money.
While the central banks of the world wanted economic growth, they inadvertently created the “trade” for big investors like financial institutions and banks. I talked about this last Friday. (See “Stock Market: The Great Collapse Back to Reality Begins.”)
The “trade” had investors borrowing money from low interest rate countries and buying bonds in high interest rate countries, pocketing the spread. In the world of finance, this is often referred to as the “carry trade.” It works as long as the currencies of the low interest rate country and the higher interest rate country stay stable.
But now, the “trade” is backfiring as the currencies of emerging markets go into free fall.
China, the biggest economy in the emerging markets and second-biggest in the global economy, got most of the “trade” money. According to the Bank for International Settlements, in 2013, foreign currency loans and borrowing by Chinese companies from other countries was close to a trillion dollars. In 2009, it was only $270 billion. (Source: Telegraph, February 1, 2014.)
European banks have the biggest exposure to emerging markets, having lent them $3.0 trillion. Breaking down this number even further, British banks have loaned $518 billion to the emerging markets; Spanish banks come in second … Read More
Copper prices are collapsing, a sign that manufacturing activity in the global economy is slowing.
The chart below shows copper prices are down more than five percent so far this year. Notice the steep decline in copper prices starting this January.
Copper is a major commodity used as a material ingredient in a wide variety of manufactured goods. If copper prices are declining, which means demand is falling, we get an early indication that manufacturers are producing less because customer demand is soft.
At the same time, in another startling development, the Baltic Dry Index (BDI), the next chart below, has collapsed 50% from the beginning of the year.
Chart courtesy of www.StockCharts.com
The BDI basically tracks shipping prices of raw materials in the global economy. When the BDI declines, it means fewer goods are being shipped in the global economy, a sign that the worldwide economy is slowing.
Chart courtesy of www.StockCharts.com
Last but not least, as we have been hearing in the news, the emerging markets in the global economy are in trouble.
Manufacturers in the global economy, not being able to sell enough to developed countries like the U.S. and Europe, were hoping to sell more of their goods to once “fast”-growing emerging markets. But now, economic growth in these countries is slowing, too.
Russia, one of the major emerging markets in the global economy, reported its 2013 economic growth rate was the lowest since 2009! The Russian Federal Statistics Service said the economy grew by 1.3% in 2013 compared to 3.4% in 2012. (Source: Bloomberg, January 31, 2014.)
Other emerging markets like India and China have … Read More
The stock market has just put in its worst first-seven-days-of-the-year trading action since 2005, as concern over where key stock indices will head this year rises. Can the stellar year the stock market had in 2013 continue?
Among those who try to predict where key stock indices will go, Wall Street industry analysts believe that the S&P 500 will rise 4.8% this year, while market strategists believe the S&P 500 will see a decline of 2.3% this year. (Source: FactSet, January 6, 2013.) This tells me that even the professionals can’t figure out which way the market is headed.
On a valuation basis, key stock indices are reaching some dangerous levels. Based on the closing price of the S&P 500 on December 31, the forward 12-month price-to-earnings multiple (P/E) was 15.4. This is the highest forward P/E ratio since May of 2007…and we all know 2007 was the peak for the stock market for five years!
And optimism among stock advisors towards the key stock indices is getting into dangerous territory, too. The indicators I follow suggest the optimism towards key stock indices is at the same level as it was in 2007, while the number of those who are bearish (like me) is at a multi-decade low.
As we move into 2014, I am one of the very few left who are saying key stock indices are dangerously overbought and overpriced.
And if I turn to the economy, the situation looks worse. Four major global economies are in trouble:
In December, China’s manufacturing activity witnessed a shakedown. The HSBC China Manufacturing Purchasing Managers’ Index (PMI) declined to a three-month … Read More
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