TRADER ALERT: IMF Cuts Global Growth, Sees 2013 European Recession. Dollar Signals Market Topping Out. Firms Need $5 trln A Year To Meet Market Hopes. China Just Narrowly Averts Credit Bubble Pop. And Investor “Cash Allocations Fell To The Lowest Level Since February 2011
IMF Cuts Global Growth, Sees 2013 European Recession
As with every piece of potentially bad news in the here and now, the IMF provides some bone for bulls to gnaw on by offering hope that 2014 will be considerably better. What at first glance is a broad-based slashing of global growth outlooks for 2013 ends up being yet another hockey-stick expectation dangled out in front of the world’s investors. With Europe now downgraded to a recession in 2013 (GDP -0.2%), we should not fear though as Olivier Blanchard adds that “If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected,” and sure enough 2014 is expected to herald a new era of growthiness (GDP +1.0%) for the troubled region. He does offer one note of reality that is critical – “Financial market optimism should not lead to policy complacency” – alas we fear that time has long gone. World Trade Volume expectations have been ratcheted lower with Brazil and Newly Industrialized Asia seeing the biggest downgrades to growth.
Have no fear for what is weak in 2013 will come surging back in 2014…
Dollar Signals Market Topping Out
It’s unclear what’s causing the move, but the dollar just spiked, causing the euro, gold, and stocks, and oil to drop.
A trader told us that the dollar is just catching a bid, given the fact that it’s been getting beaten up a lot lately. Meanwhile, other markets (like stocks) are increasingly looking like they are topping out.
Below is the spike in the U.S. dollar index:
Firms Need $5 trln A Year To Meet Market Hopes
* Investors expecting improvement in corporate revenues
* Firms need $5 trln a year to meet market hopes: Accenture
* Mismatch between macro and micro-level growth forecasts
* Little appetite for M&A but smarter technology in focus
DAVOS, Switzerland, Jan 23 (Reuters) – Business leaders in Davos have plenty to worry about, from the euro zone to global geopolitical upheavals, but at heart their problem is simple: how to find new revenue in a low-growth world.
Half a decade on from the financial crisis, investors want to see earnings driven by more than just cost cutting. Their focus now is on a return to sales growth, which presents the world’s largest corporations with a $5 trillion challenge…
The Philadelphia Fed Survey and The Empire State Mfg Survey also both came in materially below expectations last week.
4. At the national level, activity remains subdued. The Chicago Fed National Activity Index today came in below analysts’ forecasts. U.S. economic growth is still fairly weak.
5. From a technical perspective, the world all of a sudden turned bullish. According to Merrill Lynch, investor “cash allocations fell to the lowest level since February 2011” and “allocation to bonds fell to lowest level since May 2011”. We may not yet be at a level professionals would view as a contrarian signal, but this should certainly signal a need for caution.
China Narrowly Averts Credit Bubble Pop With Latest Government Bailout Of First Domestic Bond Default
Of course, having a housing bubble does not mean China is immune from that other traditional corollary to excess spending: a credit bubble. In fact the two virtually always go hand in hand (see US 2003-2007). However, due to economic reporting standards out of China that are, how should we say this, lax, when it comes to getting a clear picture of state finances nobody really has any clue. As a result, due to sovereign debt being an arbitrary, and naturally low, number, few if any are concerned about the grievous credit bubble in the land of the dragon (although GMO’s Ed Chancellor and Mike Monnelly have a few very critical things to say about it – more on that later).
Yet one place where not even China can hide what is now a clear credit bubble is in its soaring corporate debt. As we showed in November, China’s Corporate debt as a % of GDP is now the highest in the world and closing in on 200%.
So what is any credit-funded empire which needs growth at all costs, irrelevant of how much bad debt is accumulated in the process, supposed to do? Why stick its head in the sand and deny everything of course. Just like the US did until it couldn’t do it any longer.
Sure enough, what may come as a surprise to some, is that despite having trillions in corporate loans, China has had precisely zero corporate defaults to date. That’s right: zero.
How is that possible?
Simple: just like the US Fed and global central banks are doing everything to mask the fact that the entire financial system is insolvent, that absent tens of trillions in new money created out of thin air (and collateralized by ever crappier assets) and used by dealer banks to buy up risk assets, there is no incremental demand for goods and service as the entire loan-deposit based fractional reserve banking system has imploded and has not even recovered the loan levels last seen in 2008, so China is proceeding with bail out after bail out of any company that threatens to expose the reality that Chinese corporations are massively undercapitalized, and that absent Chinese state support this particular 180% debt/GDP bubble would pop immediately and have dire consequences around the world.
Declining yields create the potential for a “bond bubble” in which rising interest rates may prompt losses, Fitch Ratings said in a Dec. 19 report.