The gold price
The (Not Global) Double-Dip Recession - 14 July 2010
And the double-dip recession nominees are...
LAST WEEK INVESTOR fears of a global double dip recession created a meltdown in the stock-market, says Martin Hutchinson of moneymorning.com.
However, the chance that recession may return is only high in several countries: those who have serious inflation and those who have experienced massive monetary and fiscal stimulus.
The rest of the world is recovering just fine.
One country where the chances of future recession are substantial (though its economy never had much of a first dip) is India. Indian consumer price inflation was 13.9% in the year to May, while its three-month interest rate is only around 5.6%. That's a recipe for bubble creation every time. Add in a public-sector deficit totalling around 10% of gross-domestic product (GDP) – when state budgets are included – and you see a system clearly headed for a sharp slowdown in the future, as the authorities battle monetary and fiscal chaos.
Closer to home, the US economy looks likely to suffer a "double-dip" recession, or at least a very severe growth slowdown. The excessive fiscal "stimulus" injected into the economy since 2009 has failed to produce much job growth, while private-sector lending, particularly to small business, is being crowded out of the market: Bank lending to companies is down fully 25% since that particular market peaked in September 2008, according to US Federal Reserve statistics.
The current position is unsustainable. After all, the US savings rate has fallen back down near its 2007 level, the payments deficit is once again widening, and the US budget deficit is at record levels and showing no signs of being brought down. Either the current levels of debt will be artificially shrunk by a burst of inflation (very possible, given the inflation in India and China), or the US economy will experience a second, severe "dip".
Or perhaps both will occur.
It is this wobbly US position that is most familiar to traders, which is why it exerts the most influence over global stock markets.
The European Union (EU) is fashionably derided in the United States. That's partly because – in the eyes of most US investors – "Greece" has become synonymous with "Europe".
To be sure, Greece's level of public debt is also so high that it is doubtful whether the country can escape without a partial or total debt default. And some other countries inside and outside the Eurozone – including Bulgaria and Romania – have allowed their cost bases and public sectors to get out of line with economic reality.
Some other European Union countries are in great shape. Germany, derided by Keynesians because of its cautious budget policies and by Wall Street because of its lack of a hedge-fund culture, is once again demonstrating what can be achieved through a commitment to cost-cutting and a devotion to quality.
Thanks to the weak euro, Germany's current account surplus has swelled to 5.5% of GDP, while industrial production in the first half of 2010 was up 13%. The Germans are referring to this as the "blitzschnell" (lightening-quick) recovery. Readers suffering through the current US recession can be forgiven for thinking that we could do with a bit of blitzschnell here, too.
In Asia, blitzschnell recoveries are a way of life, as their economies catch up with Western living standards. Commentators are worrying that China may overheat, but I don't see it.
Modest monetary tightening by the People's Bank of China has caused property prices to drop 20% in the last few weeks, taking much of the air out of what had undoubtedly become a bubble. Meanwhile, wages in the fast-growing Southeastern portions of China are growing rapidly, with the giant electronics manufacturer Foxconn International Holdings Ltd. (PINK ADR: FXCNY) raising its entry-level wages by as much as 60%.
These cost increases will cause inflation in Western economies, as the now-cheap Chinese goods become less so. And these increases will also reduce China's payments surplus, as well as the pressure on its currency.
At the same time, however, the higher wages will also inject a massive amount of purchasing power into the domestic Chinese economy. That will finally rebalance it by allowing consumption to rise from its current, abnormally low level (of less than 40% of GDP) to a level that is representative of a normal, middle-income economy. This, in turn, will stimulate demand for Chinese domestic manufacturers, igniting continued expansion of the economy.
China may be in for a burst of inflation. But with a growth rate that's unlikely to drop much below 8%, China is a long way away from a double-dip recession.
In the remainder of East Asia, the growth prospects for Korea, Taiwan and Singapore also appear excellent. Only Japan remains sluggish; there its outlook depends on the success of the new government of new Prime Minister Naoto Kan in finally reining in public spending and the budget deficit.
Finally, the prospects for the better-run parts of Latin America appear excellent, as high commodity prices continue to improve those countries' terms of trade. I wouldn't touch Venezuela or Argentina. And in Brazil I'd wait until after the October election. But the prospects for Chile and Colombia – and maybe even Peru – look excellent.
Overall, therefore, last week's downdraft appears overdone. In most global markets, a double-dip recession appears very unlikely, and future growth will probably be vigorous as the recession is left behind.
Given that reality, investors should look for buying opportunities in East Asia (outside Japan), in Germany, and in the small Latin American markets of Colombia and Chile.
To Buy Gold today, avoiding wide spreads and storage costs – but still owning your physical Gold Bullion Investment outright with full legal title – be sure to visit BullionVault and claim a free gram of gold now...
LAST WEEK INVESTOR fears of a global double dip recession created a meltdown in the stock-market, says Martin Hutchinson of moneymorning.com.
However, the chance that recession may return is only high in several countries: those who have serious inflation and those who have experienced massive monetary and fiscal stimulus.
The rest of the world is recovering just fine.
One country where the chances of future recession are substantial (though its economy never had much of a first dip) is India. Indian consumer price inflation was 13.9% in the year to May, while its three-month interest rate is only around 5.6%. That's a recipe for bubble creation every time. Add in a public-sector deficit totalling around 10% of gross-domestic product (GDP) – when state budgets are included – and you see a system clearly headed for a sharp slowdown in the future, as the authorities battle monetary and fiscal chaos.
Closer to home, the US economy looks likely to suffer a "double-dip" recession, or at least a very severe growth slowdown. The excessive fiscal "stimulus" injected into the economy since 2009 has failed to produce much job growth, while private-sector lending, particularly to small business, is being crowded out of the market: Bank lending to companies is down fully 25% since that particular market peaked in September 2008, according to US Federal Reserve statistics.
The current position is unsustainable. After all, the US savings rate has fallen back down near its 2007 level, the payments deficit is once again widening, and the US budget deficit is at record levels and showing no signs of being brought down. Either the current levels of debt will be artificially shrunk by a burst of inflation (very possible, given the inflation in India and China), or the US economy will experience a second, severe "dip".
Or perhaps both will occur.
It is this wobbly US position that is most familiar to traders, which is why it exerts the most influence over global stock markets.
The European Union (EU) is fashionably derided in the United States. That's partly because – in the eyes of most US investors – "Greece" has become synonymous with "Europe".
To be sure, Greece's level of public debt is also so high that it is doubtful whether the country can escape without a partial or total debt default. And some other countries inside and outside the Eurozone – including Bulgaria and Romania – have allowed their cost bases and public sectors to get out of line with economic reality.
Some other European Union countries are in great shape. Germany, derided by Keynesians because of its cautious budget policies and by Wall Street because of its lack of a hedge-fund culture, is once again demonstrating what can be achieved through a commitment to cost-cutting and a devotion to quality.
Thanks to the weak euro, Germany's current account surplus has swelled to 5.5% of GDP, while industrial production in the first half of 2010 was up 13%. The Germans are referring to this as the "blitzschnell" (lightening-quick) recovery. Readers suffering through the current US recession can be forgiven for thinking that we could do with a bit of blitzschnell here, too.
In Asia, blitzschnell recoveries are a way of life, as their economies catch up with Western living standards. Commentators are worrying that China may overheat, but I don't see it.
Modest monetary tightening by the People's Bank of China has caused property prices to drop 20% in the last few weeks, taking much of the air out of what had undoubtedly become a bubble. Meanwhile, wages in the fast-growing Southeastern portions of China are growing rapidly, with the giant electronics manufacturer Foxconn International Holdings Ltd. (PINK ADR: FXCNY) raising its entry-level wages by as much as 60%.
These cost increases will cause inflation in Western economies, as the now-cheap Chinese goods become less so. And these increases will also reduce China's payments surplus, as well as the pressure on its currency.
At the same time, however, the higher wages will also inject a massive amount of purchasing power into the domestic Chinese economy. That will finally rebalance it by allowing consumption to rise from its current, abnormally low level (of less than 40% of GDP) to a level that is representative of a normal, middle-income economy. This, in turn, will stimulate demand for Chinese domestic manufacturers, igniting continued expansion of the economy.
China may be in for a burst of inflation. But with a growth rate that's unlikely to drop much below 8%, China is a long way away from a double-dip recession.
In the remainder of East Asia, the growth prospects for Korea, Taiwan and Singapore also appear excellent. Only Japan remains sluggish; there its outlook depends on the success of the new government of new Prime Minister Naoto Kan in finally reining in public spending and the budget deficit.
Finally, the prospects for the better-run parts of Latin America appear excellent, as high commodity prices continue to improve those countries' terms of trade. I wouldn't touch Venezuela or Argentina. And in Brazil I'd wait until after the October election. But the prospects for Chile and Colombia – and maybe even Peru – look excellent.
Overall, therefore, last week's downdraft appears overdone. In most global markets, a double-dip recession appears very unlikely, and future growth will probably be vigorous as the recession is left behind.
Given that reality, investors should look for buying opportunities in East Asia (outside Japan), in Germany, and in the small Latin American markets of Colombia and Chile.
To Buy Gold today, avoiding wide spreads and storage costs – but still owning your physical Gold Bullion Investment outright with full legal title – be sure to visit BullionVault and claim a free gram of gold now...
Martin Hutchinson, 14 Jul '10
Now a contributing editor to both the Money Map Report and Money Morning, the much-respected free daily advisory service, Martin Hutchinson is an investment banker with more than 25 years’ experience. A graduate of Cambridge and Harvard universities, he moved from working on Wall Street and in the City, as well as in Spain and South Korea, to helping the governments of Bulgaria, Croatia and Macedonia establish their Treasury bond markets in the late '90s. Business and Economics Editor at United Press International from 2000-4, and a BreakingViews editor since 2006, Hutchinson is also author of the closely-followed Bear's Lair column at the Prudent Bear website.
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