On Friday Nouriel Roubini said stock markets are at the “tipping point” of a correction as economic growth may begin to slow. He based this on signs that growth is slowing around the world. I don’t always put a lot of stock on everything Dr. Doom says, but in this case I think he is dead on. Here are ten global signs I saw this week that supports his thesis.
1. Consumer spending increased only .1 percent after taking in consideration inflation. In addition April personal incomes were completely stagnant after inflation. Consumer spending already contracted to 2.2% in the first quarter from 4% in the fourth quarter of 2010.
2. The housing market remains completely moribund. Contracts for previously owned homes dropped 11.6% in April and the Federal Housing Finance Agency just reported its national index of home prices dropped 2.5% for the first quarter which was the sharpest decline since 2008.
3. Consensus 2nd Quarter GDP estimates have come down 30 basis points to 2.7% over the last thirty days. Given the end of QE2 at end of June and the curtailment of federal stimulus as well as the payroll tax holiday by the end of the year; hard to see robust growth on the horizon.
4. Durable goods just dropped at fastest pace since October and the personal savings rate has decreased to just 4.9%.
5. Data this week showed Chinese manufacturing expanding at the slowest pace in 10 months and according to a NY Times article Tuesday several large cities are without power one day in three as Utilities cannot pass on fuel increases to their customers and up to 25% of the countries coal plants could go out of business in the next couple of years.
6. Stratfor came out this week with a report on China that stated there are "structural elements that render 8% annual growth impossible" and compares the current Chinese economy to a giant ponzi scheme.
7. Greek leaders failed to agree on a plan for further austerity measures. Without these additional measures, the latest tranche of IMF loans is imperiled. The ECB has already stated it will not step in if the IMF fails to provide these loans. Given escalating protests, it is hard to see the Greek ruling coalition agreeing to further pain. This has the potential for triggering cascading events that could throw the credit and currency markets into chaos
8. Greek bonds are already pricing in a huge default risk, Spain’s unemployment is at 21%, and protests are escalating across the indebted countries of Europe. The political will of the creditor countries, mainly Germany, make further largesse unlikely.
9. Japan remains a basket case. The capital stock taken out by the earthquake and tsunami was twice that of the 1995 Kobe disaster. This does not take into consideration the power outages caused by the nuclear crisis at several reactors. Given Japan is already over indebted, its policy choices are limited and it is hard to see it contributing to the world’s economy in any meaningful way in the near future.
10. Goldman Sachs reduced its forecasts for global economic growth to 4.3% from the 4.8% prediction it had in mid-April. In addition UBS has reduced its forecast from 3.9% to 3.6%.
These are worrying signs and I think we are due for a significant pullback over this summer. I would stick to stocks of multinationals that have pricing power and low valuations such as Johnson & Johnson (NYSE:JNJ), Abbott Labs (NYSE:ABT), and Merck (NYSE:MRK). Also blue chips with good dividend yields are decent bets. I would also have a good portion of funds in cash to take advantage of the coming selloff. Be careful out there.
Disclosure: I am long JNJ, ABT, MRK.