Global Growth Likely to Stagnate Through Summer

Markets have reached a significant milestone, one reached nearly as rarely as a full planetary syzygy (there's your word of the week, boys and girls). Yes, for the first time in quite a while, the ambient temperature in SE England is higher, in degrees Celsius, than the VIX.

Yes, boys and girls, summertime is well and truly here, bringing with it lacklustre price action and abject liquidity, which can produce the occasional step-jump in market pricing, usually accompanied by hysterical rumour-mongering. Temperatures in excess of 30 deg. C may tempt all but the most driven of market punters to head for the exits, if not the beach, but Macro Man's English and Celtic readers should take particular care. He snapped the photo to the left at a Sussex beach over the weekend, with beach-goers showing the characteristic "English tan." Ouch!

Perhaps some of the sell-side analysts would do well to hit the beach and work on their tans, too.

Macro Man's inbox was full of more "green shoots" research this morning, as well as Goldman pushing some UK banks on its "conviction buy" list. As you can see from the photo on the left, these researchers are looking a little peaked, so it would be good for them to avail themselves of the good weather and get a bit of sunshine before the rain sets in.

Is Macro Man too cynical? Perhaps, though experience has shown that to be a substantially less costly error than being too naive. Regardless, headlines out of the independent Chinese business journal Caijing appear to confirm Macro Man's thesis that the recent commodity price "boom" was orchestrated by the Chinese and is now coming to an end. Unfortunately, the English translation is not yet available online, so we're forced to rely on Reuters headlines:

11:22 29Jun09 RTRS-CHINA WILL NOT CONTINUE BUYING METALS FOR RESERVES IN CURRENT MKT CONDITIONS -CAIJING QUOTING NDRC OFFICIAL

11:24 29Jun09 RTRS-CHINA HAS BOUGHT 235,000 T COPPER, 30 T INDIUM, 5,000 T TITANIUM, 590,000 T ALUMINIUM AND 159,000 T OF ZINC -CAIJING

11:32 29Jun09 RTRS-CHINA NDRC WANTED ENTERPRISES TO BENEFIT FROM STATE STOCKPILING, DID NOT EXPECT MIDDLEMEN WOULD BE BIGGEST BENEFICIARY -CAIJING

Perhaps Nemo or any other readers located in situ can tell us why a net commodity importer would use a stimulus package to support the prices of the very items that they import, because Macro Man is forced to admit that he's at a loss to explain this.

Anyhow, Macro Man's rather jaundiced view of the global growth outlook received a bit of support on Friday with the latest US personal income/consumption data. Once again, income rose substantially more than expected (don't economists realize that there was a stimulus package?!?!), yet spending was in line, yielding yet abnother sharp rise in the savings rate to a fifteen year high of 6.9%.

For years, JP Morgan's Bruce Kasman ran with the maxim that "if you give them income, they will spend." It seems quite clear that that chain has been broken, and US consumers remain firmly in savings mode to rebuild household balance sheets. Macro Man has long had a target of 10% for the household savings rate, and he's seen nothing to change that.

How the rest of the world, which has been as hooked on the US consumer as he has been on cheap credit, copes with a buyer's strike remains to be seen, but Macro Man is not particularly optimistic. Moreover, readers can judge for themselves what consumer spending is likely to do once stimulus checks quite arriving in the mailbox, and what this means for all the inventories that are currently being rebuilt.

Needless to say, Macro Man is not optimistic. But perhaps that's a story for later in the summer or even the autumn. For now, the sun is shining and prices are drifting. Summertime markets, indeed.

Comments

[odin:]

My take is that the its a subsidy that has gone horribly wrong. I'm not sure that driving up commodity prices was the intention. The party wants high employment (to prevent unrest and threaten their own existence). Their solution has been to support the export industry. In characteristic fashion, they pushed for increased lending. However, if the SOE managers do not see the demand to support worthwhile projects, they are doing the only thing that makes sense when money is cheap: speculate for quick returns. Caijing recently claimed that these firms are directly or indirectly (by lending at higher rates to smaller businesses who dont have direct access to these funds) played the commodities markets by buying up inputs (thus easier to disguise this speculation). While initially it may have been a smart bet on a narrowing contango, it has rapidly turned into a long commodities play.

I have my ears perks for news of unemployment, unrest, bad loans (though it will be many quarters before the last piece is clear) in China, which would validate this theory. This is a key black swan event in my book (as much as the student unrest failed 10 years ago, a workers unrest has great potential to destabilize this extremely relevant country and thus impact the rest of the world).

Jun 29 01:22 PM

[Gem Hudson:]

Wealth building is going from your rags to your riches. Building up wealth is working out the business until your business work out for you and the wealth of the dollar is then to sell the very best that their money can buy and let your customers buy into their money worth.

You have sold what you have produced and you are making the money in your business but spending more than what could be made in the money isn't prosperity but deficit spending. The blind fools have fallen into their own pit.

Jun 29 01:22 PM

[jrhc:]

The economical crisis is real guys. So you, former Bush supporters shut a little your mouths because you voted twice for the guy that encouraged most the deregulation which created all this mess (deregulation, I should say : Wall Street madness).

Jun 29 10:21 PM