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Fear of Slowing Economic Growth is Spooking Investors
By Louis Navellier
The S&P is down 8.3% year-to-date and 16% since the April 23 peak. The reason for this latest slide is fear that economic growth is slowing in previously fast-growing Australia, China, India, South Korea and Taiwan. The same is true in the U.S., where the Institute for Supply Management (ISM) index fell to 56.2 in June, down from 59.7 in May. Any reading over 50 signals expansion - and the ISM index has been above 50 for 11 straight months - but fear of slowing global demand is spooking many investors. As you will see in this week's Market Mail, I don't share that fear. The world is growing fast enough...
The "Deficits vs. Austerity" Debate Continues
Last week, I told you about the war of words between pro-austerity forces in Europe, led by Germany's Chancellor Angela Merkel, vs. the "deficits don't matter" philosophy, led by the Obama Administration. Since then, leaders at the G-20 meeting in Toronto set goals for reducing their respective budget deficits by 50%, even though Japan, India and the U.S. dragged their feet. But as the G-20 meetings adjourned, the Obama team said that it would work to reduce the U.S. fiscal deficits to 3% of GDP by 2015. The Obama team also agreed to a 50% deficit reduction (to $778 billion) within three years, by Fiscal 2013.
In the aftermath of the G-20 meeting and these ambitious budget goals, Paul Krugman and The New York Times have gone ballistic, trying to scare the world by saying that austerity cuts and reduced government spending are destructive. For instance, Times columnist Krugman panned the austerity path, saying that we are now in the early stages of the Third Depression, in which some workers "will never work again."
This is ridiculous, defeatist thinking. The fact that the "socialists" in Europe are able to pass austerity cuts proves that it can be done. But on Thursday, Krugman wrote another opinion piece about the "Myths of Austerity," citing how Ireland is suffering from its austerity cuts. It looks like the mainstream media, led by the New York Times, is now manically depressed that the U.S. economic stimulus has largely failed.
Frankly, I am amazed at the lack of any serious objections to the austerity cuts being implemented all over Europe, as euro-zone governments seem deadly serious about getting their fiscal houses in order. As a result, Europe is increasingly looking at the U.S. with disdain, since we have not even discussed making any austerity cuts to deal with our own ballooning budget deficits - as Britain, France and Germany have.
In fact, the Royal Bank of Scotland (RBS) recently told its clients to prepare for "monster" increases in printing-press money by the Fed. RBS chief credit analyst Andrew Roberts said that "a cliff-edge may be around the corner for the global banking system…." This European view of the U.S. may explain why the euro rallied strongly against the U.S. dollar last Thursday and Friday, surpassing $1.25 per dollar.
Meanwhile, U.S. businesses have been practicing financial austerity for over two years now, setting an example for our government. On Thursday, the Financial Times featured an interview with a "friend of the Obama Administration," General Electric CEO Jeff Immelt, who implied that U.S. business "did not like the U.S. president, and the president did not like business." He also made a point of praising Germany's Angela Merkel for her defense of German industry. Immelt said the U.S. has to become an industrial powerhouse, "but you don't do this when government and entrepreneurs are not in synch." Bottom line, business leaders, consumers, the media and investors all seem to be in a truly horrible mood.
Stat of the Week: 83,000 New Jobs Created in June
Friday's payroll report was depressing but not all bad, since new private payroll jobs rose from just 33,000 in May to 83,000 in June, a significant improvement and much more than Wednesday's ADP report, which said that only 13,000 private sector jobs were created in June. President Obama did not help things when he told a Wisconsin audience on Wednesday that "Unemployment is at 9.6%. At least it's not 12%, 13% or 15%." (But his team had predicted that the 2009 stimulus package would keep the jobless rate under 8%.) Actually, the June jobless rate fell a notch to 9.5%, but that was primarily due to a sharp deduction (-652,000) in the labor force, due to discouraged workers giving up their job search.
The sour mood among job-seekers now seems to be spreading to consumers, since on Tuesday, the Conference Board announced that its index of consumer confidence for June plunged to 52.9 vs. a revised 62.7 in May. This extreme drop in consumer confidence was truly a shocker, since it was far below economists' consensus expectation of 62.5. Additionally, the Conference Board also announced that consumer expectations for the state of economic activity over the next six months plunged to 71.2 in June, down from 84.6 in May. As a result, it appears that U.S. consumers are in an increasingly sour mood.
On Thursday, former Fed Chairman Alan Greenspan explained on CNBC that we are not in a normal economic recovery, since small businesses are taking the brunt of the downturn. Typically, an economic rebound starts with small businesses expanding and hiring more workers, but Greenspan said that the U.S. economy is now leaning more heavily on large banks and wealthy individuals to drive the recovery.
I might add that Mr. Greenspan seems to be a much better communicator now than when he was Fed Chairman. For example, he frankly said that "People don't want to hire because they're concerned that they may have to let them go." He also bluntly said that "small business is in real, serious trouble."
The Rest of the World is Doing Much Better
Looking outside our borders, there was lots of good news from around the world last week. Despite increasing pessimism in the U.S., 2010 is still shaping up to be a stunning year for worldwide GDP growth, due to a growing middle class in Asia, India and Latin America. A powerful demographic trend (due to a younger population in Brazil, India and other countries) is causing the formation of millions of new households, which also helps to boost consumption, which in turn fuels growth in global trade.
In Japan, the Bank of Japan's quarterly survey of business sentiment showed that large manufacturers' sentiment turned positive for the first time in two years, buoyed by strong exports. And on Friday, General Motors announced that China topped GM's U.S. sales for the first time in the first six months of 2010. GM's China sales rose 48.5% to 1.21 million vehicles, while its U.S. sales were only 1.08 million.
Meanwhile, in Europe, the European Central Bank (ECB) foiled all the doubters when it rolled over approximately $541 billion of one-year ECB funds that were set to expire on Thursday, demonstrating that the ECB remains accommodative. On Wednesday, Moody's threatened to downgrade Spain's AAA rating, but that did not prohibit Spain from successfully selling 5-year government bonds on Thursday.
In this holiday-shortened week, there's not much economic news expected to roil the markets, but Europe will likely take some time off to watch three of their teams play in World Cup semi-final games today and tomorrow: Spain plays Germany and Holland plays Uruguay, the sole survivor from the rest of the world.