Tuesday, March 22, 2011

Correction over?

The US market was down just 7% at the lowest point in this recent correction.   Momentum (right hand chart) is now fairly oversold, not as oversold as it was during the European debt crisis of June/July last year, so it (and the market could go lower).  But I suspect not:  the economic recovery is just too strong.  Earnings are up over 40% year on year, and much of that is coming from top-line growth, i.e., sales, not margin expansion.  I'd be a buyer.  For now.  For the next six months, but perhaps not after, the risk of being out of the market is still higher than of being in it.

Friday, March 18, 2011

World Growth on Track

I've just updated my data for world industrial production (IP).

Normally, in the kind of downturn which occurred during the GFC (Global Financial Crisis) the year-on-year change plunges as output collapses, but then zooms as output recovers, simply because the year-ago data were so low: with a low base big positives are generated even if in absolute terms you're not yet back at previous highs.  It's what happens after that that is interesting.  Do the year-on-year changes continue to track back towards zero, implying underlying growth is weak?  Or, after the inevitable mathematically induced "slowdown" (because the base data are so low a big year-on-year change is inevitable) does the rate of change stop falling at a reasonably high level?

It's a mixed picture.  Core Europe (Germany/France), in particular, Germany is sizzling.  IP growth in Germany is 12 percent-ish and has been for several months.  Ditto in Denmark and Sweden (not core but tied into Germany's manufacturing boom.) France is sharing (at a lower rate) Germany's boom.  Spain, Italy and the UK aren't quite so hot, but they're still growing faster than they were before the crisis. Singapore, HK, Taiwan, Korea are simply racing along, and whereas growth in China slowed abruptly as the authorities tightened (don't look at interest rates for evidence -- these guys tighten the old-fashioned way, with liquid asset requirements), it now appears to have bottomed.  And as I said a coupla days ago, US stats are strong.

World growth is fine.  The current correction in the markets is just that:  a correction.  At some point, though, as spare capacity is used up outside the BRIC countries, the powerful policy stimuli introduced to combat the GFC will have to be withdrawn.  It'll get interesting, then.




All data seasonally and extreme adjusted using NBER methodology

Wednesday, March 16, 2011

US Indicators Surprisingly Strong

In particular, the ISM indices.  These are now the highest they've been for two decades and are still in an uptrend. 


The change in the unemployment rate (inverted, naturally, since unemployment goes up in recessions and down in recoveries) is also the highest for decades.


Employment growth is sluggish, if you believe the official data.  Which I don't -- the payrolls survey always underestimates employment growth in the first year of recovery, because new firms are not picked up by the Dept of Labor.  It's only later that the undercounting is corrected by the statisticians.  Right now the change in unemployment is in my opinion the better indicator.  And it says the strongest growth in over 2 decades -- scarcely surprising when you consider QE2.

Housing starts remain very very sluggish, however.  A sign of major structural problems (too much debt, a too low savings ratio) but those haven't been enough to counteract the influence of massive liquidity injections.  These underlying problems will reemerge when the stimulus starts being withdrawn -- in my judgement that's still many months away.  And though share markets do look ahead, I don't think their present travails reflect a sober assessment of 2012 tightening.  Which means this is most probably just a correction not the beginning of a new big one.

Watch this space.

[As usual, if you click on the charts, you'll be able to see bigger, crisper, more readable versions]