By Michael Baxter 2 Jul 2010 [3 Comments | 1,679 views]
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For months this column has warned you, and now the warning may be coming true.
The markets are in a right tizz. Economic indicators are looking decidedly peaky.
The FTSE 100 fell yet again yesterday, this time down to 4,805, the lowest closing prices since August last year. It is now 17 per cent down on the year high, which the index hit at the beginning of April. Of course, the summer is a notorious time for stock market volatility, hence the saying “Sell in May and go away.” But then again, the falls seems perfectly logical given recent economic data. The only real question mark relates to why markets rose so high in the first place.
Of course, some analysts will deny the need for this question and say the recent stock market boom was logical. They might point to the stunningly good corporate profits that have been revealed this year, and say there was a very good reason for buoyant markets. But as ever, they aren’t looking below the surface. To an extent, record corporate profits are a part of the problem. If profits were lower and wages higher across the globe, the economy would probably be more stable. For each single business, it is good to generate maximum possible profits whilst keeping wages as low as possible. But for the global economy this can be damaging. High corporate profits are a good thing if the profits are then invested. But in practice, companies are reluctant to invest when demand is so low.
Aside from the FTSE, the Dow fell to its lowest level since the autumn, but the Chinese Shanghai Composite Index, or SCI, still tops the list of crashing stock markets (actually, Greece is similarly cursed), and is now 25 per cent down on the early April price.
The problem is that the big fears some analysts have been expressing are beginning to come true.
Inventory cycle turnsFor the last few months, manufacturing across the world has been growing in leaps and bounds. But a niggling fear remained. Were we seeing a turn in the inventory cycle? Had manufacturers’ customers simply stopped the process of de-stocking, for the simple reason they had run their stock down to the bare minimum. In which case, went the fear, the recovery would be short-lived.
The last few days have seen the release of Purchasing Managers Indices (PMI) for manufacturing across the world. None of the scores that have been revealed are that bad. At the moment, if PMIs are falling, then they are falling like a feather from above, slowly. The problem relates to the fact that nearly all of these indices seem to be going in the wrong direction at the same time.
The PMI for the UK, from CIPS/Markit, for example is still only slightly below the highest score for the index since the mid 1990s. But the point is, it is down, falling from 58 to 57.3. Anything above 50 is supposed to indicate growth, so we are still well into positive territory. Taken in isolation, we might be saying something like “sure the index is down, but it remains at a level which is extremely high relative to average readings over the last 15 years.” But then, factor in that the index measuring new export orders fell very sharply, and then we have cause for concern.
Factor in that the US PMI from the Institute of Supply Management fell from 59.7 to 56.2, the lowest reading since January.
In Asia and Australia, PM indices all fell. More to the point, the PMI for China was down to just 52.1. The decline in China’s PMI is especially worrisome. If it falls much further the index will be consistent with contraction. Is it really possible for China to maintain anything like the heady growth rates it has become used to, when its manufacturing industry seems to be so close to recession? China desperately needs re-balancing. It needs its consumers to take up the slack. The fact that Chinese wages seem to be on the up is an encouraging sign. The question relates to whether this will be enough.
Finally, if you are still in doubt about the state of global manufacturing, consider JP Morgan/Markit’s global PMI for June. This fell to 55.0, from 57.0 in the previous month.
It’s good news for the price of oil
The falls in PMI indices are good news for the price of oil. And the chances that the price of the black stuff will fall sharply over the next few months, as predicted here some time ago, have risen.
US consumers tighten belts so hard it’s a wonder they can breathe
Across the pond, the US consumer is making a passable impersonation of someone who is being bowed down by the weight of the world. Earlier this week, we told how US incomes rose 0.4 per cent in May, but spending rose by just 0.2 per cent. In other words, Americans are saving a good deal of any extra income they earn.
For so long the US consumer seemed indomitable. Economists wrote this creature off at their peril, as US consumer spending confounded the sceptics for over a decade. But in June US consumer confidence, as measured by the Conference Board, fell like a giant rock from the sky, dropping from 62.7, to just 52.9.
Okay, it’s been lower. It was even lower than that as recently as March, but during the boom the index was consistently over 100.
The economic comet
But, if manufacturing is falling like a feather, and US consumer confidence like a giant rock from the sky, there is another indicator that is doing a passable impersonation of a comet hurling towards the world’s economy.
On several occasions we have warned how in the US, the broad money supply, also called dollar M3, has been contracting on an annual basis every month this year. In the Eurozone, euro M3 contracted last month, and in the UK sterling M4 is stuttering. Well, we have seen sight of a chart showing the global broad money supply. If the chart does not put hairs on your neck, then there’s something wrong with your hairs. Right now, the chart shows global broad money supply growth as flat. But, more to the point, it has gone from rapid growth to zero in just a few months. The steepness of the drop is like nothing the global economy has witnessed since the 1930s. This is a forward indicator. The economic implication of this contraction will not show up for several months, maybe longer.
If the contracting global money supply does not become the big economic story of the second half of this year, then there is something wrong with the reporting of economics.
What worries us is the current backlash we are seeing against debt, and the fiat money conspiracy, and all these fears you see circulating about impending inflation. It is all very dangerous.
If productivity is rising, and given the advances in technology and the greater specialisation that is coming with globalisation, it surely should be, then we need an expanding money supply. We need debt levels to rise, or else demand will lag further and further behind potential.
Where this column differs from others is that we have an underlying optimism born out of our belief in technology. Moore’s Law is still working, computers still double in speed every 18 months, the functions they perform continue to multiply. The field of genetics is changing at a stunning rate. Craig Venter created synthetic life this year. Imagine that. The rapid advances in genetic science mean we could be just a few years away from a cure for cancer, heart disease, cheap renewable fuel, and the end of food shortages. But we seem hell bent on stopping this. We fret over the dangers of genetic science, and ignore the fact that without its advances starvation across the globe on a scale never before witnessed will result. But above all, we talk about austerity, and paying back debt.
Why do students take out a loan? Because they believe the extra income they earn as a result of their superior education will make this worthwhile. Okay, it does not always work like that and these days there seem to be too many kids going to university. But the theory is about right. Students are effectively borrowing from their future income to pay for their education.
It is like that for the economy too. Borrowing to fund innovation, even borrowing to create consumer demand, making innovation more profitable, is probably essential, given how the world’s population is likely to rise over the next few decades.
Saving is fine, if the money saved funds the right type of investment. It is when saving pumps up house prices as it did, or government bonds as it is now doing, or gold as it threatens to do, that we have a problem.
In reacting against the practices of the last decade, we are in real danger of overreacting, castigating all debt as bad, and sending the global economy into deep, deep recession, as a result.
The author should consider an alternative possibility to his optimistic view of cheap energy and plenty – i.e. the issue of environmental debt. It has been noted that by september we use up the planet’s resources for one year, and in the remaining three months we are useing up more than the planet can replace.
Far from having not enough money to represent our wealth, we are in danger of not having enough wealth to represent our money!
We are overcrowded and in short supply of the things we really need – have been for years – and yet we have economic “booms” that allow us to lie to ourselves about how rich we are. What can you really spend all this extra money on? Not houses, certainly, because they are ridiculously costly.
We don’t need more money – we need something to spend it on.
Mick B,
Interesting article,cogent observations regarding money supply and the direction of the global economy.
However, the interpretation of this data in the latter half of the blog almost needs a firm belief in the ‘Tooth Fairy’ to cobble together any credibility.
Firstly, debt has been expanding exponentially for a decade or more.Therefore, each year ,in order to service the debt, more debt/money must be created, ad-infinitum.
Secondly, for every $/£ of dept created in the 60′s 6 to 10 $/£ of wealth were created. Today for every $/£ of dept created we are getting less than a 1 $/£ of wealth created.
Thirdly, most of the debt of the western economies has been debt for comsumption , not debt for wealth generation. We are told 70% of America’s GDP is consumer spending.Real aggregate inflation adjusdted wages have barely increased in America since the 1970′s.
The idea that we should increase our debt , based on this thesis is utter madness.
As somebody noted in the letter section of the Economist magazine a year or so ago – ” When I was growing up , scientists used to discuss the number of stars in the heavens as billions and the potential number of solar systems in distant galaxies as being beyond our comprehension. These numbers were so big ,they were described as ‘Astronomical’.
Apparently, astronomical debt is the new normal.
Assume the crash position.
MickB.
“If productivity is rising, and given the advances in technology and the greater specialisation that is coming with globalisation, it surely should be, then we need an expanding money supply. We need debt levels to rise, or else demand will lag further and further behind potential.”
But why should an expanding money supply equal more debt? This only remains true as long as we are stupid enough to allow private, profit-making businesses called banks to issue all non-cash money (now 97% of the total money stock) in the form of compound interest-bearing loans to their customers. The banks are, in fact, the sole “industry” to be heavily subsidised by the population – not merely on pretext of averting the “credit crunch”, but at all times.
In the UK The Bank of England (Creation of Currency) Bill 2010 proposes a simple reform which would correct this systemic bias of the economy away from wealth-creating enterprises in favour of those specialising in the multiplication and manipulation of financial units.
The Bill establishes as its Universal Principle that: “Throughout the entire banking and deposit taking system … every credit to an account must be matched by an equal debit from a different account.” Only the Bank of England will be exempt from this requirement, thereby enjoying sole right to create all of the UK’s new non-cash money – as is already the case with notes and coins.
Enactment of the Bill will nationalise the money supply without nationalising the banks, which will continue to compete for their profits in the open market – with the difference that they will now confine themselves to borrowing and lending money which already exists.
The Bank of England (Creation of Currency) Bill 2010 is online, with detailed explanations and FAQs, at http://www.bankofenglandact.co.uk/.