Recession Signs Are Real And 'New Economic Order' Still A Myth

by: Carlos X. Alexandre

Regarding the hopeful feeling that recovery is still on tap and that future recessionary times are not in the cards, the odds are tilted toward disappointment. Some have bet heavily on a turnaround which has proven to be a slippery slope, while taking a toll on some well known investors, as reported by Reuters.

Hedge fund manager John Paulson lost more money in September thanks to ill-timed bets on an elusive economic recovery that left one of his biggest funds off 47%, two people who saw the numbers said on Saturday.

In addition, people are becoming impatient with the strategies and forecasts, and the article delivered a sample.

But several people who have money with him scoffed at the idea that a manager who seemingly could do no wrong for years will now try to explain away his career's biggest loss. "I don't think I need to listen to his excuses, it would be like rubbing salt in the wounds," said one disgruntled client, who asked not to be named because he is not permitted to discuss the private fund's returns in public.

I am a bit puzzled by the belief that the global economy is on its way to being mended, when the data and political will to do the right thing is simply not there to support such views. Yet, a difference of opinion a market makes, and I never lose sight of that fact. On October 3rd, Reuters published an article about global manufacturing, and it started as follows.

Global manufacturing shrank for the first time in over two years in September, reinforcing fears of another recession despite a modest bounce in U.S. factory activity.

One can go through the PMI numbers at Markit Economics and get a quick sense of what is happening on a global scale. One report (pdf), “Markit Eurozone Composite PMI,” gives investors a taste of European activity in major economies, and even with some positive readings, the overall direction is south, although some may perceive the current condition as the bottom.

Country PMI Trend
Ireland 50.8 9 month low
Germany 50.5 26 month low
France 50.2 26 month low
Italy 47.7 25 month low
Spain 43.9 26 month low

The average reading for the third quarter as a whole was just 50.3 – signaling a stagnation of activity – down from 55.6 in Q2 and 57.6 in Q1.

The summary is not encouraging and “at 49.1, down from 50.7 in August, the final Eurozone PMI Composite Output Index for September signaled the first drop in private sector activity since July 2009.” Brazil’s composite output is just as bad, as shown by a separate report.

Business activity in Brazil’s private sector deteriorated for the second consecutive month in September. At 48.5, down from 49.6 in August, the HSBC Brazil Composite Output Index remained below the 50.0 no-change mark that separates growth from contraction, and signaled the fastest decline in output since May 2009.

With regard to the report on India, “The HSBC India Composite Index – which covers both the manufacturing and service sectors – posted 50.2, only fractionally above the 50.0 no-change threshold. Furthermore, down from August’s 54.5, the headline index decreased to the greatest extent since November 2008.” Russia’s state of affairs was summarized in a report as follows.

The Services Business Activity Index was little-changed in September at 53.3, failing to recover from August’s slide from 56.9 to 53.2. The latest figure was well below the survey’s long-run average of 56.7, and indicated only a moderate rise in activity in the services economy. Manufacturing output rose only marginally (50.5), while a Composite Output Index for both sectors eased to a 12-month low of 52.3.

Although the Chinese PMI stands at 49.4, Hong Kong is also a proxy for China’s activity, and the highlights of the report are as follows.

The headline HSBC Hong Kong Purchasing Managers’ Index (PMI) – a composite index designed to provide timely indications of changes in prevailing business conditions in Hong Kong’s private sector economy – registered 45.9 in September, down from 47.8 in August. The latest figure signaled the worst deterioration in overall operating conditions for companies in Hong Kong in 28 months.

In addition, “new order growth from Mainland China was insufficient to overcome declines in domestic and foreign demand for Hong Kong’s goods and services. New business from the Mainland grew at the slowest rate for a year.”

Then there’s the endless “BRICs will lead the world” nonsense which is in large part based on wishful thinking, not unbiased thinking. Reuters’ article “U.S. affluent classes dwarf China and India” centers on a study by TNS, a British research firm. The article starts by stating that “the United States has 10 times more affluent households than China or India, research shows, undermining arguments the global economy can be sustained by consumption in emerging markets.”

The incidence of affluence in the U.S. is 27%, the study shows, 20% in Canada and 11% in the U.K., while the proportion in China is 0.75%. India's affluent make up 1.25% of the country's population.

It’s not as if the above hasn’t been pointed out numerous times with different words, while relying on pure common sense. But the weight of an “official” appraisal may now lead those who truly believed their misplaced predictions to reconsider the logic.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.