Around the Economic Globe in 5 Minutes

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The financial panic that began in early September has been a body blow to global business confidence and the global economy which, according to the Survey of Business Confidence of the World conducted by Moody’s Economy.com, is now in recession.

How bad is the shape of the US and global economy? As part of my ongoing research, I study a large array of economic statistics – usually in graphic form. Below are a number of charts, together with cryptic comments, that I have just compiled in order to cast some light on the economic outlook. As the saying goes, a picture tells a thousand words …

The recession in global manufacturing is intensifying.

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Latest reports have it that China has joined the manufacturing recession.

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The global non-manufacturing (services) sector has also caved in, especially in the light of what is happening in the global banking sector.

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Even before the collapse of the global banking system a global recession was on the cards.

The US economy probably grew by 1.5% in the third quarter on a year ago basis, registering the first negative quarter-on-quarter growth. The liquidity crisis and the resulting stalling of global trade must have impacted severely on the purchasing managers’ indices in October (to be published in November) and could be suggesting that the contraction of the US real GDP has gathered momentum.

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The same applies to Japan.

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The UK economy is also heading for zero growth compared to a year ago.

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Economic growth in Europe has stalled.

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China is not providing any relief either as growth is losing momentum rather rapidly.

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The poor global economic environment is reflected in lower commodity prices.

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As far as the current state of the US economy is concerned, the US 10-year government bond yield is an excellent indicator of the current state of the MZM money-supply velocity and is indicating that the velocity has stabilized at the lower levels.

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Given a constant velocity of 1.64, the current MZM money supply (mid-October) and a 4% inflation rate, it means the US economy has contracted by approximately 2% in the current quarter (the largest decline since 1980) or more than 7% quarter on quarter annualized, or -3% year on year (largest since 1982).

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Is there any light at the end of the tunnel? Desperate times call for desperate measures.

The Fed’s bail-out of the banks and significant injection of funds have only addressed the solvency of banks and nothing has followed through to the economy. Not only is growth in money in circulation declining,

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but the actual money supply is also shrinking.

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To ensure that the money supply does not fall back to the trend line the Fed needs to pump $700 billion into the economy – incidentally the same as the recently enacted $700 billion bail-out law to inject money into banks.

Therefore, expect the same trend in the Fed funds rate as in previous recessions.

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Consumer confidence is the backbone of the US economy due to its relationship with the velocity of money supply in the economy.

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The Fed needs to restore consumer confidence urgently to get the economy out of its current malaise. One major factor could be to relieve the interest burden on households. In fact, the Fed needs to cut the Fed funds rate aggressively and significantly in the near future. Failing to do so will effectively mean that the Fed is tightening its monetary policy,

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as the significant drop in commodity prices and especially the oil price will result in the US CPI inflation rate falling to approximately 1% in the next three months.

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In short, expect the FOMC to cut the Fed funds rate by at least 50 basis points on Wednesday, to be followed by a further rate cut probably by December or January next year. The European Central Bank and a number of other central banks will have to ease in a coordinated fashion.

Failure by the central banks to ease decisively will endanger the US and global economy even more as deflation looms around the corner.

Note:
All the graphs used in this post are based on data from I-Net Bridge.

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4 comments to Around the Economic Globe in 5 Minutes

  • Max Sarte

    I think you are missing the pink elephant in the room. If all go “as planned” the EMU will find itself in a dire situation. Can you spell “Deflation” in EU? See the following for a summary:

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3260052/Europe-on-the-brink-of-currency-crisis-meltdown.html

    This will be the second shoe to fall. What are going to be the consequences for US? Probably positive, in a weird way. We will be forced to select between the horror we know and the horror we don’t yet know. The *classic* devil’s choice. Not good for investors.

  • The Panic of 2008 is over, from here we begin one of the fastest and strongest rallies in history. With the Fed cutting rates tomorrow and the presidential election a week away, hope and optimism will return to the market. Like a pendulum at its extreme, nothing is more certain than a reversal of sentiment and a Rally of Mammoth proportions, lasting until the 4thQ 2009. With everything oversold and selling at bargain prices, there is no better time to invest. To see the candle Elliott Charts.

    http://www.exceptional-bear-market-letter.com/2.html

    Eduardo Mirahyes
    Exceptional-Bear.com

  • Frank Wordick

    All too often the light at the end of the tunnel is an oncoming train. After what Edwards and Monteir told us months ago, I have developed a certain respect for their prognostications. Edwards thinks we are headed for 500 on the S&P 500 and a P/E ratio of 8. It is hard to see what lower interest rates are going to do for us. For one thing, the typical US mortgage is FIXED for a 30-year period. Banks are currently cutting credit card limits. They are also rejecting loan applications and requiring large deposits on housing mortgages like 30%. Finally, I would expect a 0.5% drop in the Fed Funds rate to widen the TED spread with respect to LIBOR. Is this good?

  • Hi Prieur,

    Great presentation of info, I only wish I was smart enough to understand most of these charts :).

    Like Frank above, I wonder what positive outcomes, if any, there will be from all these coordinated rate cuts and central bank/government interventions.

    Personally, I think the likely outcome of all this “liquidity” pumping will be an ever-increasing global inflation. The MZM money supply chart in your post shows the money stock growing from about 4.2 trillion in 1999 to over 8.5 trillion today.

    Inflation has continually eroded our purchasing power over this short time frame, while artificially cheap money and credit has fostered our transition to a “bubble economy”. Rather than let the system correct itself and purge the excesses in our economies, we (or actually, our “leaders”) seem to be forcing a continuation of this trend.

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