May 25, 2011
Financial markets are looking sickly again because of an accumulation of weaker global economic data over the last two weeks and because of the dark cloud of European sovereign debt. I suppose you could say that America’s inability to create a credible deficit reduction agenda is another ominous omen. Global industrial production has slowed from over 9% to somewhere around 2% currently because of adverse weather, the sudden recession in Japan, related supply chain interruptions, soaring gasoline prices, and an inventory swing. Furthermore, a number of the developing economies, particularly China, have been tightening fiscal and monetary policy. In fact, the Chinese PMI released over the weekend tipped markets into the sharp drop we saw on Monday.
The bears are talking of global growth remaining at this low level for some two or three quarters at best, in other words, another prolonged soft patch, with a double dip and whiffs of deflation not inconceivable. In fact, with the 10-year Treasury bond approaching 3%, clearly a lot of fixed income investors buy the latter scenario. Equity investors argue stocks, since the lows have had a big run and profit margins are unsustainably high so earnings forecasts are going to transition from being too low to being too high. Reversion to the mean it’s called. The end of QE2 is cited as another negative, and they mutter gloomily about the inventory of repossessed homes causing further pain in house prices. Incidentally, ...