Thursday, October 16, 2014

Bloomberg: World Economy Gives Investors Growth Scare

More of the same from this Bloomberg article. This article specifically mentions both the Eurozone and Japan as areas of economic weakness. It also notes a question we just recently asked here on this blog. Do Central Banks have any ammo left if the global economy starts rolling over again? Below some quotes from the article and a comment.


"The global economy faces its biggest test of confidence since the European sovereign debt crisis as investors fear it’s running out of engines."

"Japan and the euro area are throwing up fresh signs of weakness by the day and emerging markets such as China are dragging instead of driving growth. The sense of tumult is being exacerbated by war in the Middle East, the standoff in Ukraine, street protests in Hong Kong and the spread of Ebola to Dallas."

"The worry is that five years since the world limped out of recession, central banks have virtually exhausted their stimulus arsenals if activity keeps fading. That leaves the hopes of financial markets riding on the U.S. to resume its historical role as a locomotive robust enough to pull up demand elsewhere."

“Investors have huge questions about the world right now,” said David Kotok, chairman and chief investment officer at Sarasota, Florida-based Cumberland Advisors Inc."

'The latest catalyst for concern was the news that U.S. retail sales dropped 0.3 percent in September and wholesale prices unexpectedly fell for the first time in a year."

"That added to the drumbeat of disappointing data from elsewhere which this week alone included the weakest German investor confidence in two years and Chinese factory-gate prices dropping for a record-tying 31st month."

"Japanese industrial production tumbled 3.3 percent from a year ago and U.K. inflation unexpectedly plunged to its lowest in five years. Prices in Israel and Sweden are even falling in an indication of deflation."

"The epicenter of the economic worries is the euro area, where European Central Bank President Mario Draghi is trying to tackle the weakest inflation in almost five years as investors bet it will deteriorate further amid signs powerhouse Germany is now faltering."
My added comment: To paraphrase a line from Dorothy in the Wizard of Oz  --- My, how quickly recoveries come and go around here.  Not that long ago the IMF was forecasting strong global growth and the US financial media was touting a US recovery so strong that the question was how much sooner than expected would the US Fed be raising interest rates.

Clearly things have changed pretty rapidly. And right now those forecasting another downturn leading to looser monetary policies are gaining credibility heading into 2015. We pledged to follow it all here and see who does get it right. The next 6-8 months should bring a lot of clarity. They should tells us if the following forecasts we are following will be proven correct or not:

Jim Rickards - Economy will lapse back into recession leading to more QE from the US Fed. Rickards does not think the US ever had a real recovery from the 2008 financial crisis.

Bo Polny - Gold price will make new highs by the summer of 2015 at the latest (aggressive forecast is by the end of 2014). Polny then predicts a massive stock market dive by the end of 2015.

Mainstream Financial media - Strengthening US economy will allow the Fed to raise interest rates by next summer (2015) or perhaps even earlier.

IMF Global GDP growth forecast - this one has already been revised downward once since an earlier rosier forecast. And the IMF is issuing warnings quite often now about all kinds of risks to the financial system as a whole.

US Fed GDP forecast - So far the Fed seems to be sticking to 3% + growth expectations for the US for 2015. But lately, some Fed officials are pointing a finger at "global weakness" as a possible drag on the US. Specifically they are pointing the finger at Europe (which has been hit by the backlash from the sanctions against Russia that the US forced on the Eurozone). 

In addition to all the above, we have a number of other key events coming in 2015 including a deadline from the BRICS nations for passage of the 2010 IMF voting reforms, a review of the SDR in 2015 by the IMF to see if the Yuan should be included in the SDR basket, and a change in the makeup of the voting Board members at the US Fed which will be much more dovish. As Christine Lagarde said recently, 2015 is looking like a "make or break" year.

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