The Dow went up a bit last night. Hooray!
But if you think this correction is over, think again. This is the correction we have to have.
Think about it. There are four big economies in the world: Japan, EU, China and the US. A dark cloud hangs over each.
Japan is far worse than markets or bullhawk economists predicted earlier this year. According to the NAB World In Two Pages report:
In Japan, the tsunami and power shortages associated with the nuclear emergency have had a far more severe impact on activity than initially indicated in the BOJ’s special Tankan survey. Real GDP fell by 0.9% in March quarter and the partial data available for the June quarter shows that activity levels are still low. Manufacturing output fell by 15% in March but recovered by only 1% in April. The monthly Shoko Chukin small business survey shows worsening falls in sales to June month. We have revised our 2011 forecasts down to flat output.
In the US, we’ve got a well publicised slowdown in industrial production. Last night the Philly Fed Index fell off a cliff, suggesting the big falls in the ISM last month are a harbinger of worse. Housing is going nowhere, the sharemarket is falling and very respectable commentators have declared the consumer dead and are forecasting recession in the near to medium term.
In the EU, it’s a debacle as usual. My guess is Greece will come through this latest round of crisis with a new bailout (that’s what the EU does best at the 11th hour) but so what? The new austerity package will only kick the can again and the periphery will remain in recession or at stall speed. The UK too is slowing again, with the retail rush stoked by the Royal wedding, hurriedly reversing.
In China, we still have good growth. But we also have the mother of all bailouts transpiring at local government level, a stubborn inflation problem, simmering unrest and the inevitability of more rate rises even as the housing market stalls. As an aside, India too has a big inflation problem and is now swiftly tightening.
And behind all of that, we have the withdrawal of QE2 stimulus hitting Wall St which drives the entire global reflation trade through emerging market equities, currencies and commodities. It is possible to climb the wall of worry when policy-makers are giving you the incentive to do so. When they’re not, in the face of all of the these threats to growth, just forget it.
Basically, to my mind, massive coordinated stimulus has engineered a kind of virtual recovery in global growth over the past two years. The removal of that stimulus, combined with some bad luck, means the underlying condition of the global economy is being re-exposed. That condition is fundamentally deflationary as historic debt weighs down private sector demand in the US, the public sector in Europe and plays a part in the ongoing decline of Japan. Emerging markets aren’t big enough to offset that burden and with the chickens coming home to roost from their last attempt at doing so, they’ve worries of their own.
Air is leaking from the reflation. More is needed. More will come. Then the pumps can begin anew.
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