Wednesday February 10, 2010 - 14:30:51 GMT
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Black Swan Capital - www.blackswantrading.com
Why double-dip recession prospects seem to be rising: Danger!
Output in Germany's engineering sector fell by nearly a quarter last year, worse than the industry's most pessimistic forecast, and is not expected to rebound in 2010, the VDMA industry association said. (Reuters)
â€śWhenever a theory appears to you as the only possible one, take this as a sign that you have neither understood the theory nor the problem which it was intended to solveâ€ť
FX Trading â€“ Why double-dip recession prospects seem to be rising: Danger!
1. Because people like me are deleveraging. I sold my car because it was just sitting in the driveway; I donâ€™t go out much given how much time I spend on the screens. I likely would still have the car in a world where credit was plentiful. I am sure millions of people all over are doing the same type of thing and spending less. That type of action is a major drag on GDPs and demand for Chinese exports.
2. Just go to the grocery store if you want to see deflation. I shop at the local Publix, itâ€™s the one thing that gets me out of the house; my wife hates grocery shopping besides. I have never seen so many buy-one-get-one-free dealsâ€”ever. This isnâ€™t a recipe for rising corporate profits. It is a recipe for falling stock prices as earnings will likely come in below expectations.
3. Falling stock prices are the key transmission mechanism to the real economy. If stocks do fall on earnings disappointment, it self-feeds into collateral values. The same collateral values used to support outstanding loans and the chance for some to get future credit. This could trigger more and faster deleveraging at both the retail and institutional level.
4. China cannot pull the global wagon itself. Despite the seemingly strong growth in China, and the corresponding growth in some emerging markets, itâ€™s still not enough of an engine to pull the global economy given that the US, Europe, and Japan are stuck in neutral, at best.
5. Protectionism is rising because demand from the big three (US, Europe, and Japan) is still not there. A true story despite all the public debt governments are throwing into the market (this gets into the â€ślet the market clear itselfâ€ť argument, one which will never be tested in a world of the nanny/welfare state where politicians are our saviors; sad and sickening it is). Rising protectionism will only exacerbate the slowdown and at worst could be a catalyst for a major asset market meltdown. Yesterday there was a headline suggesting Chinaâ€™s military wanted to sell US bonds to punish the US for its arms deal to Taiwan. Relations between China and the West seem to be worsening across a whole host of issues thanks to economic pressures. And itâ€™s not just the West. The WSJ carried a story recently talking about how Asian countries are angry with Chinaâ€™s beggar thy neighbor trade policies. We always believed when push came to shove, China would try to force its domestic adjustment onto its trading partners. That is happening in a big way and pressure is building.
Danger Wil Robinsonâ€¦Danger! Danger! Back to the ship!
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