Recession Continues to Hover Over the World

Recession - the word itself is enough to create a panic in the stomachs of the whole world. If someone gets up and checks the empirical meaning of recession in the good lexicon, he or she will feel something bad; fear will dance in front of him or her. It looks like coming to hell just after knocking at the door of heaven.

At this juncture, the world is confronting the same fearful word Recession in an empirical way. The world had good news that the U.S. GDP (Gross Domestic Product) has grown 3.3% annually in the second quarter of 2008, but it was just like an oasis and faded away when jobless claims were reported at 444,000 last Thursday. Rising inflation, housing slowdown, a 16 year low in housing prices, diminishing industrial growth, and the Federal Reserve policy on interest rates all are rubbing salt on the wounds. Now the US government is pondering Fannie (FNM) and Freddie's (FRE) financials and is set to take over the housing mortgage giants.

It is not only the United States, but the whole world that is being affected. Markets from New Zealand to India suffered a sell-off on Friday, September 5, 2008, with as many as five benchmark indices setting 52-week lows, as investors dumped stocks on concerns about weakening growth prospects and uncertainty over the global economy.

Socio-political issues have created unusual troubles in South Africa, which is known as the most prosperous country in the African continent and the precious metal mining hub across the globe. It reeled on August 6, 2008, when the rand fell 1.90% against the USD due to a nationwide trade union strike to protest against food and electricity prices.

The state military of Nigeria said that a recent explosion at a refinery was not an accident but rather deliberate sabotage by a group protesting the alleged nonpayment of fees by the energy company to the local population. Nigeria's social turmoil is on edge and any time something might happen that could affect the subsidized crude oil prices. Zimbabwe's political instability continues to romp over the constructive activities in the region. The inflation in Zimbabwe jumped to over 11,250,000% in June. Rebels in Kenya are also contributing to the poor African economic condition.

Now look at Asian economies. Everyone was thinking that after the Olympics, China would resume the economic work on its growth agenda and the demand for the commodities like copper, aluminum and steel would rise, but it was a distant dream. All base metals are  setting new lows on commodity exchanges. China is also eying currency markets and is all set to devalue the Yuan against its rival currencies in order to enhance the export growth which has become less lucrative for the exporters. The World Bank has trimmed China`s growth rate to 9.60% from earlier 10.80% for the current fiscal. China needs to generate more than a million jobs every year and it is very difficult without double digit growth rate on the cards.

Japan, the land of rising sun, which was previously known for deflation, is also undergoing tremendous inflationary pressure. Prime Minister Yasuo Fukuda resigned after less than a year in office. His government failed to rein in inflation. The rise in inflation has been a trauma for a country that has spent the last decade grappling with deflation. Core consumer prices were up 2.4% in July 2008 from a year earlier, a panic bounce since 1997, and many Japanese have clamped down on spending. Japanese finance ministry has already given cowardice statement over the current year GDP growth rate. Experts say Japan has already slipped into a recession and no one is predicting growth above 1% this year.

HengSeng, the Hong Kong stock index, has broken the 20,000 level. South Korea is under the radar of the developed world, where nuclear energy matters continues to harass the top officials of the nation. The Korean Stock index is also not showing any glimpse of breaking upper records.

India's economy grew at its lowest rate in the last three years during the first quarter of financial year 2008-09. The Reserve Bank of India is all set to rein in record high inflation by applying a tight credit policy, which remained above the 12% level for the past few weeks. Annual growth slowed to 7.90% in the first quarter of 2008-09, which ended on June 30, significantly lower than the 8.80% rate reported for the January - March quarter.

All of Europe is combating rising inflation and fresh downward revisions in the growth rate.  European inflation accelerated to the fastest pace in almost 16 years, to a record high of 4% before settling at 3.8%. The consumer business confidence index also recorded a significant decline and economic confidence fell in August to 88.80.  Brussels has revised the Euro zone growth rate downwards to1.80% from earlier November estimate 2.20%. Economic experts offering a faded hope and a few of them declared that next revision would be 1.30%.

Now the world is witnessing a global slowdown, which can be called a recession but optimistic experts say it is temporary and can be worked out with revamped financial policies. But at this juncture, when the status quo is not allowing the central banks to act any way, on the one hand, inflation is rising which is not encouraging the central banks for rate cut, and on the other hand, slowing economic growth is not supporting the rate hike. Therefore, in the last week, the Bank of England and European Central Bank kept their interest rates undisturbed, at 5% and 4.25% respectively. The United States Federal Reserve also kept its rate unchanged in last meeting.

Then what can happen?

I think the US credit market turmoil and high inflation will not be helpful for world economies. The Russia-Georgia tension, the US-Iran-Israel issue and destructive events like terrorist attacks, natural calamities and political turmoil all over world does not bode good for the world.

The stock markets, commodity markets and financial instruments are heading south and have not left even an iota of positive events. The Dow Jones, Nasdaq, FTSE, BSE, CAC, KOSPI, HengSeng, Nikkei, Shanghai - all these stock exchanges shed their most of last year gains. Simultaneously, commodity markets also neared a nadir - gold, the safe haven commodity, has fallen more than $200 after reaching $988 earlier this year. Silver is already near a new low of the year. Likewise copper, platinum and aluminum have also fallen to new lows. The Euro, USD, GBP, and Japanese Yen are behaving strangely and are creating turmoil in the fundamentals of other financial instruments and markets. At present, market elements are fighting for the worst rank.

The raison d'etre behind whole scenario of financial instability is that fundamentals have not been respected during the last year across the world. Investors have lost confidence over the period of wrong decisions that led to an unsystematic investment in the financial markets. As far as the US, the world's largest economy, is concerned, until the election of a new president, hope is far away since it requires a major policy change. If same situation prevails, the world may shortly face its biggest drop.

The whole world needs to get together and must make necessary changes in the economical and political policies in order to overcome this current imbroglio. The fundamentals of the market, i.e. Supply and Demand, have to be restored.  G-7 meeting proposals have to be implemented in order to soothe the boiling intricacy of the world.

What can an investor do?

A good investor must work out different strategies for investment. Meanwhile, investors can stay away from the paper stocks and they can invest in real asset value market viz. real estate, and commodities viz. Gold, Silver and base metals. Those runs on fundamentals rather than speculations. This is the best time to invest in housing because the prices are at possible lowest end.  Markets with real assets value will perform better than paper assets in coming year.

Comments

[whidbey:]

You sold me. I just wonder if anyone doubted that inflation is absolutely the relevant environment for investment planning. I do think that after inflation we will see a serious deflation when housing may be an even better bargain. But, who knows?

2008 Sep 10 03:45 PM