It looks like trust in the still-ongoing rise of market indexes and their related investment vehicles seems at best doubtful, especially among retail investors who seem to have not forgotten what happened to their trust in the markets in 2007 and 2000.
At the same time, the much-commented “great rotation” of money out of bonds into equities has apparently not started, yet. We cannot overlook the fact there is still massive insider selling taking place, which never has been a good sign for what’s to come.
Last week, global Purchasing Managers' Indexes came in at four-month lows. Meanwhile, China exposed at its annual gathering of the National People’s Congress its new “un-ambitious” growth plans that include property curbs, with the central bank’s possible leaning toward tightening liquidity and increased alertness on inflation.
No, global growth is not accelerating.
On Monday, the Organization for Economic Co-operation and Development released its composite leading economic indicators, which are designed to anticipate turning points in economic activity relative to trend. Overall, we see diverging growth patterns among the most important economies in the world, with only growth strengthening and remaining above trend in the United States and Japan. All other nations, with the exception of the United Kingdom, remain below growth trend, including China.
In the United States, the country remains on its still-too-slow-growth (recovery) path. Maybe it’s not such a bad idea to remember the country still counts 12.3 million unemployed, compared with 7.2 million in 2007. It also has now $16.7 trillion in debt versus $9 trillion in 2007, as well as a budget deficit of $1.09 trillion versus $162 billion in 2007.
As far as spending cuts are concerned, we still remain far from a workable consensus among policymakers, and a “grand bargain” still remains a far dream.
Yesterday, we saw two budget proposals being put before Congress: the Republican proposal intends to balance the budget without raising taxes in 10 years, while making large cuts in spending, particularly in safety-net programs such as Medicare and Medicaid. The Democratic budget proposal would shrink budget deficits by $1.85 trillion over 10 years, but would not balance the budget and would rely on an equal mix of spending cuts and tax hikes on the wealthy.
In Europe, political tail risks remain alive because of the ongoing political gridlock in Italy; Portugal, which will elect a new government in the second quarter; and Germany, which will hold national elections in September.
In the meantime in Italy, President Giorgio Napolitano is trying to put in place a new technocrat government that would assure some kind of a “EU-pleasing status quo,” but that would be devoid of the absolutely needed support in the Senate. How he is going to achieve his goal remains, for now at least, an unanswered question.
Of course, there still exists the possibility that Italy could ask the European Union for a loosening of the rules the European Central Bank considers as the conditio-sine-qua-non prerequisite for its policy of its Outright Monetary Transactions, which is the backstop for stability in the eurozone. That said, I still think Germany wouldn’t like at all such a loosening of the rules as they remember very well how Italy has behaved in the past.
Nevertheless, if that could result in a redundant European Union “no” to Italy’s request is not for sure. For now, uncertainty seems coming back and already Italy faces again rising yields and lower prices of its 10-year government bonds. Anyway, only time will tell how this all plays out.
I’m still concerned that the whole situation could end up in a scenario similar or even worse to what happened in the 2008 correction when $29 trillion were stripped from the global markets values.
In all places where unsustainable spending continues, it will cost us in the end dearly. No, this time won’t be different, and we will have to pay the piper one day. Huge amounts, in my opinion at least, could be lost and that, by itself, would create once-in-a-lifetime investment opportunities.
Please take care that the correction will probably move in steps. For now, technically speaking, the wave counts as well, as the sentiment indexes continue to indicate we remain in a topping phase.
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