AEP of the U.K.’s Telegraph shows us why Europe’s problems are now less likely to stop with Spain or even Italy. A greater disaster than I previously feared could be hoving into view. Here are some quotes from his latest article, Another domino falls as Hollande pushes France into depression (he is known for his apocaltypic wording):
His tragically-misguided budget offers no strategic plan to reverse — or even to stop — thirty years of slow national decline. He offers no worthwhile measures to slim the Leviathan state, now a Nordic-sized 55pc of GDP, without Nordic labour flexibility or Nordic free markets.
He does not tell us how he will stem the slide in France’s share of eurozone exports over the last decade, down from 17pc to 13pc, or what he will do about the disastrous swing in France’s trade balance from a surplus of 2.5pc of GDP to a deficit of 2.4pc since 1999.
He proposes nothing credible to restore France’s viability within EMU, or to stop public debt spiralling beyond 90pc of GDP. Instead he has served up the most drastic retrenchment in forty years, at the worst possible time, and in the worst possible way. And markets are supposed to applaud?…
The French economy has already been in quasi-slump for five quarters. Dominique Barbet from BNP Paribas says the latest crash in the manufacturing PMI index to 42.6 — the lowest since April 2009, and lower that at any time in the dotcom bust — is “potentially alarming”.
Indeed it is. Data collected by Simon Ward at Henderson Global Investors shows that a key leading indicator of the money supply –`six-month real M1 money’ — is now contracting even faster in France than in Spain. The shock will hit over the winter. “The budget looks increasingly misguided and self-defeating,” he said…
For some time I have been analogizing 2012 to 2008, with the disaster this time emanating from Europe rather than the U.S. This news from France comes this past week’s economic news from the U.S., South Korea, Japan, China (including over the weekend) continues to signal global economic deceleration. In fact, ECRI’s call that a U.S. recession began in May or June continues to be their judgment, even though their widely-followed Weekly Leading Index has been rising lately. Part of their case is that recessions typically begin with non-recessionary data, which later gets revised downward. Thus, the revision of Q2 GDP from 1.7% to 1.3% growth (annualized) is consistent with their call, as was most of the other data including the Chicago PMI, the Chicago Fed National Activity Index, and the BEA’s report that real disposable personal income declined in August. Furthermore, FedEx had bad things to say about the U.S. economy, reporting in its August earnings report (Q1) two weeks ago that U.S. average daily package volume declined 5% in that quarter, and lowered its earnings guidance for this fiscal year.
In addition to deteriorating macroeconomic data around the world, including “growth” areas such as Brazil, there are headwinds in sentiment and valuation. For a review of data points suggesting overly optimistic sentiment in the U.S. stock market as of the beginning of the last week, you may wish to view Acting Man’s post from several days ago.
For value, I would refer you to Jeremy Grantham’s monthly updates, to which I cannot link (gmo.com lets you sign up for their free material). This investment icon, famed for his accurate multi-year sector calls, judges that the U.S. stock markets as a whole are poised to have a total return annually for the next seven years only equal to inflation, albeit with a large standard deviation. I would also mention that since World War II, recessions are on average associated with a peak-trough stock market drawdown of about 30%.
The major theme of the aftermath of the ‘Great Recession’ is some combination of central bank action and, initially, fiscal stimulus. We all know the situation with the “PIIGS” of Europe.
Japan’s economy is weakening, and the official September PMI for China has just been released, and is poor per this analyst.
If now, despite the best efforts of the Federal Reserve and the elected officials to steer a growth path for the U.S., another recession is here, just think what will happen globally to economies that are clearly already in recession or are near it, and as in France and much of Europe, raising taxes to sustain the welfare state.
There is the saying that things that one fears seem far away, they never appear, and then they happen in a rush.
Every investor and businessperson is playing a somewhat different “game”. Mine is primarily wealth preservation. Given what looks to be an important policy error in France on top of all the other problems in Europe, and an increased likelihood that ECRI’s recession view could actually be correct, I now see more downside risk in the months ahead from even high-quality equities than I did recently.
Those who count on the Fed to keep asset prices up may wish to recall what happened to stocks after it instituted QE in the fall of 2008. They also may wish to remember that the Fed must support the Treasury’s sale of government debt and help keep the banking system liquid, and, it hopes (we all hope) solvent. When Chairman Bernanke initiated QE 2 in fall 2010, he initially justified it by stating that he wanted to bring interest rates down. It was only when they began to rise rapidly that he reversed rhetorical course and published an op-ed in the WaPo talking about the wealth effect from rising stocks. (If you read Zero Hedge, please take their comments about the Fed’s only mandate being to ramp the stock market upward with a very large grain of salt.)
The “Bernanke put” has been helping to keep stock markets elevated. We shall see if the U.S. is in a recession and if so, whether the Bernanke put stays operative in investors’ and traders’ minds.