Yesterday, I told you about some positive news on the US economic front. But don't get lulled into a sense of false security. Keep your eyes on warning signs like these -- they could signal trouble ahead in a fragile economic recovery. There are still a lot of dangers to navigate.
FedEx (NYSE: FDX) announced that it will park some aircraft and reduce its workforce, and it has scaled back its forecast for global economic growth from 2.9% to 2.3%. When shipping companies scale back, it is a sign of economic slowing, not expansion.
Gasoline prices continue to rise. So far this year, they are up 60 cents a gallon, which represents a drag of about $100 billion on households. The weather-related drop in heating costs has sheltered the economy from the full effect of rising fuel prices, but as we move into the travel season, these prices are likely to hurt consumers. The rising conflict between Iran and Israel could be devastating to oil prices and the global economy, and the outcome is impossible to predict.
The 2003 tax cuts are set to expire at the end of 2012. That will likely inhibit economic growth and investments, because households will have less disposable income. We once again face a situation on Capitol Hill that will likely keep businesses and individuals guessing until the last minute about what taxes will look like after December 31st. The continued uncertainty is a headwind to growth.
Fiscal cuts are by necessity kicking in at the federal, state, and local levels. Deficit spending inevitably has to be reined in, and the mandatory "cuts" due to the debt ceiling debacle will activate in 2013. Though these cuts are necessary, they will hinder economic growth in the near term. We do believe that, in the long run, reduced government spending is a tailwind to the economy. (A great historical perspective on this topic is This Time Is Different by Carmen Reinhart and Kenneth Rogoff.) We could see a 3% to 4% hit to GDP next year from this fiscal withdrawal, and it would not be surprising to see a recession in the first year after an election as the new kids on the DC block want to get any pain over well before facing reelection.
A recession in Europe and slowing Asian economies are likely to lead to a contraction in US exports, which would be a headwind to GDP growth.
Last week, the S&P 500 experienced the largest weekly drop of the year. The 30-year Treasury yield experienced its largest improvement of the year, and gold moved back into the green for 2012. Volume remains exceptionally weak, indicating a lack of conviction by investors in the bull run. On the other hand, the low volume (with its lack of selling pressure) makes it easier for the Fed to buoy the markets with interventions. Corporate insiders don't seem to share this enthusiasm for their own company stock. The ratio of insider sellers to buyers has surged from 5:1 in January to 14:1 in February to 35:1 in March! Perhaps they know something that other market participants don't?
Lenore Agreed, the signs may have some positive undercurrents but the overall world macro environment remains challenging to say the least. We are far from out of the woods and the market is very fragile.
I have no idea what will happen in China. It is clear that many of their economic "miracles" were manufactured by state spending. This has forced huge amount of debt upon some companies and municipalities. It is clear that China is slowing and I personally believe the real estate bubble is collapsing there. But because it is a centrally planned economy it's possible that they can paper over the troubles for years and years.
Also, ironically, China has also achieved lots of growth by printing tons of money. A little-known fact is that China is actually printing money fast than America! Now they are trying to battle inflation by tightening up. Will this lead to disater? I don't know. They have tons of foreign reserves and lots of flexibility in what they do.
Ultimately I think the transition to a new internal-consumption model in China will benefit N. America. In fact it already has as you can see investment is now flowing back into N. American markets.
From Mike Krieger of KAM LP China is a topic on which I have differed greatly from many analysts and macro commentators with whom I generally share a similar economic philosophy.
...in the aftermath of the implosion in the West there was still this notion that China was ok. That they had figured it out and were about to take over the world. This concept was furthered by the very robust bounce back that they had compared to the weak recoveries in the Western world. Nevertheless, I was extremely disturbed from day one by the manner in which they were going about achieving this recovery.
First of all, almost none of it was related to a sudden preeminence of currency strength based consumption that would have potentially allowed the economy to actually restructure. In fact, the yuan stopped appreciating relative to the dollar in July 2008 and didn't begin strengthening again until June, 2010. the interim, the Chinese did absolutely nothing to restructure and instead went on a Keynesian orgy of stimulus packages and fixed asset investment. Million person cities with no one living in them were built seemingly overnight. The biggest mall in the world was built and there was no one shopping in it.
I saw all of these things and immediately called them out on it.
Undoubtedly Ray Dalio is one of the smartest men in the Financial Space.
He and Jeff Gundlach have got more calls right than most over the last 5 years or so especially regarding the Deleveraging sceanarios going ahead.
I also agree wholeheartedly with what you say here ,when you recommend buying High Quality Stocks(at the right Dividend Yields) and hedge it with Gold.Oil and Plain Vanilla Cash .
This is the best way to combat the managed currency devaluation which America is forcing upon the world.
The only thing is-What happens if these devaluation gets out of hand?
Since Crude Oil and most commodities are priced in US Dollars today-The spillover from QE always enters these markets.
And this is where things get most dangerous.
Its one thing to say the Price of Gold will rise by 20% because of QE3,but if you say the Price of necessities like Rice,Bread or Vegetables will rise by 20% because of QE3.Thats when things become most dangerous.
Global Instability and Wars are returning back on the horizon Soon-Thanks to Ben Bernanke and the Federal Reserve.
I have come to the conclusion that many have: With the size of the debt and the deleveraging, they've decided to deal with it through managed currency devaluation. Obviously it has its risks but those in the deleveraging camp (Dalio and Gundlach) have been spot on on how this will play out.
As I wrote in the market report the way to play this as an investor is to slowly buy high-quality stocks at opportune time and hedge inflation with precious metals and select commodities. I think this is the only way forward.
I don't know what I am more worried about-That the Fed is so "Vigilant" about protecting the Stock market(from correcting) or the fact that Inflation is almost certain to spike like crazy once QE3 is announced.
And the PHD Clowns who inhabit The Federal Reserve will again claim to be "surprised" and "Shocked" when Gasoline Prices cross $6/Gallon....
Good thing is that the end-game is coming in any case.
We are going to see people in the street taking down the Federal Reserve very soon.
Either they do it or the rest of the world will do it for them.
This just in from the BRICS [Brazil+Russia+India+China+South Africa] Summit in New Delhi,India.
We are looking at ways to eliminate the US Dollar entirely as the medium of exchange between us.
But until we see concrete action from these nations,which together account for 33% of Total World Trade;there will be no change in the current behavior of the Federal Reserve.
After all,it was John Connally who said the US Dollar is our Currency but Your problem...This time around, I won't be surprised if we see some real action from the BRICS if QE3 happens in April.
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