Five Ways the Global Economy Is Rebounding

By Jim Wiandt

Despite the latest plunge, the market feels like it may be finding its legs now. Here are the early signs.

The last month to me feels like the way you feel when you are just knocked out by a flu or with a debilitatingly sore back. You realize how fragile everything is and how mortal we are. And then when you come through to the other side, you get a renewed perspective. The colors seem a little brighter, you savor your morning coffee a bit more, maybe take a few days off with the family.

That is how I feel about the market. Essentially we've gotten quite a crisp view of the market's mortality and have been able to understand, in a very visceral way, how the global economy could fall to pieces, practically overnight. And looking at continuing market action, we're certainly not out of the woods yet, and all signs point to a protracted economic slump. But it's not going to be the Second World Depression (a la the Great War being renamed the First World War). Here's why:

1. Credit spreads are coming in. As Matt Hougan details in his blog (which rehashed my blog of the day before which apparently Mr. Hougan hadn't read), LIBOR rates are coming down quickly and the TED spread is beginning to seriously come in. This is the fundamental constipation in our financial system that must heal before the economy recovers. And it is. Billions of dollars of government intervention appears to be doing the trick. Look at that TED Spread chart from today—it's dropped off a cliff.
2. The dollar is seriously on the rebound. The U.S. dollar has been stuck in prolonged doldrums as the current account and trade deficits for the U.S. soared. It's clear that the U.S. must lead the fight out of the recession, and the dollar's surge indicates that the market thinks it will, as it continues to see the U.S. as a safe haven.
3. Commodities continue to stall. While you can argue that the falling of commodity prices are a reflection of the coming recession (and probably be right), lower energy and commodity prices ultimately will also lead to a recovery and some balance on supply and demand, which felt badly out of whack. Gold's stalling despite the economic downturn is odd, and feels like it indicates that the world does not believe we're heading for depression, but is in value-seeking mode for equities and other hard-hit asset classes.
4. Real estate is finding reality, while other asset classes are catching up with the bottom real estate has set. A dynamic of hard falling prices is necessary and healthy to get the economy back in line with its actual productivity. Prices coming down on real estate, and credit becoming first impossible to receive and then more realistically tied to the prospects of payback, are good trends for economic stability.
5. There is a ton of money looking for a place to go. Ultimately, the overall financial system is juiced to the gills with potential as money is looking for a place to find bargains, and it will pour into the system once it's clear that a bottom has been established.

I think that even while the wild volatility continues, the market is gradually moving from panic to resignation that we're entering a time more based in the reality of our actual economic productivity than a giddy fantasy greedfest, where it feels like money is growing on trees. Ultimately this is healthy for our economic stability and for the prospects of grounded future growth.

Comments

[Lok Sang Ho:]

The strength of the US dollar is bad for American exports. Last year, the weak US dollar helped make exports the bright spot of the economy. The new-found strength, in part reflecting flight to the most liquid and accepted international means of settlement, and in part reflecting the unwinding of positions taken by hedge funds, actually hurts American exports when the wealth effect is undercutting American consumption. The Fed should quickly reduce interest rates and attempt to soften the appreciation of the US dollar. In any case, today the world needs lower lending rates, the sooner the better. Too much is at stake.

2008 Oct 23 08:24 AM

[Pauly B:]

The 800 pound gorilla in the room yet is home prices. There are there are still huge pockets of real-estate in distress with increasing foreclosures. Second, in 2009 jobless numbers will increase even more.

Even with what you lay out it is going to take along time before anything positive happens.

2008 Oct 23 08:36 AM

[User 143167:]

You are DEADLY WRONG about the dollar and commodity. The surge of dollar(together with Yen) and plunge of commodity prices stand for more credit wipeouts and deleverage going on due to the carry trade unwinding. This is VERY BAD to the US credit and stock market!
We need another quick drop in the dollar and rebound in the commodity prices to let the global equity market move upwards. If the oil goes down below $50 and dollar index up to 100, I assure this will be a depression for sure!

2008 Oct 23 08:37 AM

[anarchist:]

ohmygod, not another "it's the bottom" article-pleeeeeeeeeeea...
You can do the shell game all you want with the various indicators but this crash will not be over until there is confidence in the market and the financial system-until then it's "look out below".

2008 Oct 23 08:45 AM

[It Figures:]

I'd quibble a bit with some of your wording, but you make legitimate points. "Rebounding" in the headline is a stretch, and "could be" in the first sentence fits the picture better, in my opinion, than "feels like it may be". The stabilization and rebound you are suggesting is probably just around the corner, based on history, but certainly not yet in view.

But seeing around corners is what this is all about, isn't it? Good observations.

2008 Oct 23 08:50 AM

[CLH:]

Well stated optimism. We all need it. The money will now be made on the upside.

2008 Oct 23 09:25 AM

[Insiderman:]

I'm not at all surprised that we're seeing lower oil prices. One of the reasons asset prices have been falling rather than rising relates to DEflation (lower demand being one of the factors leading to this). Gold is a store of value as well as a safe haven.

2008 Oct 23 09:35 AM

[sieraromero:]

The reason the $ is rising, is because of all of the forced liquidations and margin calls. Also, keep an eye on the yen-$ spread! We are approaching the end of the beginning and not the beginning of the end. This is not going to end until the markets can't be manipulated anymore!

2008 Oct 23 09:41 AM

[sieraromero:]

If McCain gets elected then who knows how low this thing could go, but it won't be anywhere near these levels!

2008 Oct 23 09:43 AM

[Randy_H:]

Oh no! It's the bottom again already? I just got over the daily bottom called yesterday.

2008 Oct 23 10:14 AM

[Fozzie:]

I agree with the statement that this is the end of the beginning. Its as if the government packed our parachute and when we pulled the cord, out popped an umbrella. Yes, it will slow us down, but we still have some falling to do.

but what really gets me are the people who are screaming "socialist!" about the Dems and yet supporting everything the government is doing. We are all the in same boat here, and finger pointing isn't going to help anything.

2008 Oct 23 10:47 AM

[axelrod608:]

When you close a bank account, you walk out of the bank with the cash. When you take money out of a hedge fund, you wait the contract provision - 4, 6 or more weeks - for the check. The redemptions ordered in the last two weeks will be funded by sales by the hedge funds in November and December. And people are talking about a bottom ??

Check your seatbelt AND your airbags. Happy Holidays !!

2008 Oct 23 10:57 AM

[hoover:]

Your optimism is refreshing, but there are always occasional bursts of positive sentiment on the way down as a major bear maket unwinds. There is an incredible amount of leverage out there it isn't just going to go away. Company earnings are just beginning to fall, and unemployment is just beginning to rise in earnest. Farmers are going to get a lot less for their crops this year than they anticipated. And home prices are still dropping. I could mention twenty more things that are negative. But, I hope you are right.

2008 Oct 23 11:11 AM

[TRUSSO:]

Its a global economy.

Thomas
realtyexecutivescentra...

2008 Oct 23 11:51 AM

[CUDDLE:]

Bought a town house near Tampa last year. The town house two doors North just sold a month ago for full asking price. The price was slightly higher per square foot then we paid. Buyers are from England. Just read that certain California real estate markets were up quite strong on resales last month. I own a manufacturing company with 120 employees. Orders dipped nine months ago but are now back where they were a year ago. Raw material costs have declined so positive cash flow is up.Still have one big challange though, we cannot find good people to hire. There has been zero interuption in our credit line in fact our bank has money to lend. Our reality seems to support the authors position.

2008 Oct 23 12:18 PM

[frankinstein:]

I think that there are a lot of people waiting to see who will win the election B/4 investing. I am for one and may Friends as well.

2008 Oct 23 01:13 PM

[NOWHEREMAN:]

Change, Change, Change. Give, Give, Give to those that don't pay taxes.

The Marxist way, Obama's way "what's mine is yours" lets redistribute the wealth. I predict he will get the greatest African American vote in history on this platform.

Welfare on a really massive scale. It will benefit me, no doubt about it. I would think it will also increase the number of people trying to get into the country trying to cash in on the forthcoming Gravy Train.

2008 Oct 23 02:13 PM

[swaps:]

Good comments, both pro and con, regarding this post.
With oil prices plunging it is hard for me to point out that I just got through re-watching Running on Empty. If we are at peak oil, with production soon to decline while world demand rises, the price of oil will soar once again.

But the thoughtful scholars in this documentary point out that long term the loss of cheap fossil fuel will reverse globalization as we are forced to look for closer sources for our food and products. This will be inevitable. As one put it, the 2,000 mile Caesar salad from California to Toronto (or was it Quebec) will be over.

They rightly point out the whole American mantra of ever expanding growth was an illusion totally fostered by cheap fossil energy. It is impossible to have an ever expanding economy within a finite system, which the earth truly is.

We will all be led to this final reality, kicking and screaming - me included - but the global economy will disintegrate into local and some regional economies, not unlike a few centuries ago.

Sure, there will always be some long- range trade or "globalization", as evidenced in the ancient spice trading routes that cut through northern Africa.

But really, as energy becomes more precious how much longer can we fly in apples from New Zealand and truck potatoes from Idaho to Maine? Wal-Mart - which the documentary notes along with Costco and other big chains - totally destroyed local and regional transportation networks, which will have to be rebuilt.

But this will play out over decades so for now I guess you can make your global investment plays. It took a few hundred years before Rome totally realized it no longer really existed.

Dan

2008 Oct 23 10:39 PM

[bbowen7:]

Axelrod 608 makes a good point on hedge funds - as it relates to the delayed timing of their withdrawals and the impact on stock market selling.
On the related subject of regulation, much of the regulation in the financial sector deals with the safety of the investor. We definitely need regulations for hedge funds which protect the financial sector from them.

2008 Oct 24 12:44 PM

[applesauce:]

Looks like the carry trade combined with the fear of the deadly trifecta of democrats running government has the martket by the throat. If Obama gets elected he will rubber stamp Nancy and Harrys resistribution bills and tax the econimic drivers offshore. We need an energy plan along with government restraint on spending to aviod a long term bear. Job creation is the only way out of the housing and economic downward spirial we are on.

2008 Oct 27 08:52 AM