Why This All-Important Chart Says We Are Back in Recession

Central banks around the world are busy printing paper money in an effort to devalue their currencies and keep up with their government obligations. But the fact of the matter is that there is weakening demand in the global economy; paper money printing will not grow an economy if consumer and business demand is falling!

Let’s look at the chart for the Baltic Dry Index (BDI) below.

This chart is flashing a warning sign. But analysts and economists are paying little attention to it. This chart is a picture of demand for goods in the global economy—bleak at the very best.

Today, the BDI is close to the level it was at when the global economy was hit by the financial crisis of 2008!

Chart courtesy of www.StockCharts.com

But this isn’t the only signal that we are back in a recessionary period; major economic hubs in the global economy are in serious trouble. Take Germany, for instance. It was considered the strongest nation in the troubled eurozone. According to Germany’s Federal Statistics Office, exports from the country plummeted two percent in the last quarter of 2012 after nine consecutive months of expansion. (Source: Deutsche Welle, February 22, 2013.)

Canada is facing challenges with exports in the global economy as well. The Governor of the Bank of Canada, Mark Carney, said this week, “We’ve dampened our forecast of exports because we’re seeing a competitiveness challenge—a productivity issue. Even with that, the export performance has been lower on average than we have expected.” (Source: “Growth in fourth quarter may be softer than expected; exports weak: Carney,” Global News, February 26, 2013.)

China, the manufacturing powerhouse of the global economy, is also witnessing an economic slowdown. China exports a significant portion of its products to the global economy. According to the HSBC Flash China Purchasing Managers’ Index (PMI), Chinese factory growth just declined to its lowest level in four months. The PMI had a reading of 52.3 in January, and by February, the PMI reading fell to 50.4. (Source: Reuters, February 25, 2013.) Any PMI reading below 50 indicates a contraction in manufacturing.

Other exports-focused countries in the global economy, such as India, Russia, and Brazil, are showing warnings signs of economic contraction. The key stock indices in those countries have declined since the beginning of the year.

Dear reader, central banks in the global economy have been printing paper money in order to boost their countries’ exports. I believe these central banks are missing the most important part of the economic growth equation—demand. Devaluing currencies to spur economic growth will not help if demand is slowing. The eurozone crisis hasn’t taken a rest, and consumers in the U.S. economy continue to pull back on spending, as evidenced by the U.S economy contracting in the final quarter of 2012.

If a global recession comes into play—and I believe it will—it will have a major impact on U.S. multinational corporations. Combine weaker profits at U.S. companies (because of the soft global economy) with weak consumer demand and an already contracting U.S. economy—and it’s all bad news from there, no matter how much money the central banks print.

Michael’s Personal Notes

Stock markets in the U.S. economy have developed a bad habit—going up on quantitative easing and falling when it stops.

Look at the chart below:

Chart courtesy of www.StockCharts.com

In 2008, when the Federal Reserve announced its first round of quantitative easing, stock market investors loved it, as key stock indices, including the S&P 500 and the Dow Jones Industrial Average, rallied. The returns were phenomenal for a very short period of time; but in early 2010, when quantitative easing ended, the stock market declined.

From there, the vicious cycle continued—a stock market rally on quantitative easing news and a sell-off at its end.

As I have been harping on about in these pages, this is not a sustainable policy. A stock market being propped up by quantitative easing does not equal economic growth in the U.S. economy. First, businesses in the economy must grow; second, individuals in the U.S. economy must be confident with their income; only then does an increase in consumer spending and jobs follow.

Unfortunately, quantitative easing didn’t do what it was supposed to do—spur real economic growth in the U.S. economy. Rather, it pushed up the stock market and sent bond prices plummeting.

I’m convinced the stock market is not rising because of the lack of corporate earnings growth or better future expectations. As a matter of fact, those who are closest to public companies—corporate insiders—are selling stocks at near-record levels, while corporate earnings growth for the first quarter of 2013 may now be negative.

For the week ended Wednesday, February 13, 2013, the Investment Company Institute reported that long-term equity mutual funds saw inflows of $5.72 billion. In the previous week, mutual funds saw $6.0 billion in new money come in. (Source: Investment Company Institute, February 30, 2013.) Investors are running toward the stock market, and as history has proven time and time again, the individual investor is often wrong.

Mark my words: any minor pullback will lead to an extensive sell-off in the stock market. Remember 2008? Stock market investors sold in a panic, because their losses were growing.

Now consider this; there is already some disagreement between the members of the Federal Reserve about keeping quantitative easing going at its current pace, as there will be serious risks if paper money printing continues—inflation, asset bubbles, and the declining value of the dollar are just the beginning.

If the past is any indicator, as soon as the Federal Reserve reduces its quantitative easing program, the stock market decline could be significant. As their losses accumulate, stock market investors will sell, and the sell-off will take flight. Capital preservation seems to be the best strategy in the current market…a stock market filled with optimism and artificial quantitative easing.

What He Said:

“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure—these are the bank stocks I wouldn’t own.” Michael Lombardi in PROFIT CONFIDENTIAL, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.