Around the Economic Globe in 5 Minutes

By: Prieur du Plessis | Tue, Oct 28, 2008
Print Email

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.

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

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

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.

The same applies to Japan.

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

Economic growth in Europe has stalled.

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

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

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.

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).

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,

but the actual money supply is also shrinking.

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.

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

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,

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.

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.

Did you enjoy this posting? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

 


 

Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis
investmentpostcards.com

Dr Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

Copyright © 2008-2012 Dr Prieur du Plessis

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com