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World Trade Is Falling Into An Abyss

By Andy Shaw | January 25, 2010

Originally posted 17th February 2009

Consumer spending is about 60% of world GDP and with assets falling or having fallen around the world and unemployment starting to rise, the consumers are in a state of shock and have stopped spending. Not a lot we didn’t know there but it is relevant to us as the central banks are not calculating this collective drop off properly. For example, they said exports would pick up because of the low exchange rate of the pound; well what if no economy is looking to buy?

China

China saw 20 million laid off in the last quarter. People returned to work in January simply to find the factories no longer there. Their GDP is going to fall off a cliff and I now think that China could go even deeper into recession this year than I predicted and that we could very well see China with negative growth. As you will know this is especially not nice when you consider that they need 8% growth a year just to create new jobs for the 20 million new workers who come of age each year.

Japan

Japan’s GDP was down 9% in the last quarter!!! For those who don’t know, that is awful! The companies are seeing 20 – 30% drops in sales and are currently laying off massive amounts of people.

Eurozone

This dropped by 6% in the last quarter, led by the financial powerhouse of Germany with an 8.2% drop! I’ll come back to Europe in a little while.

US

Their GDP drop for the last quarter will be revised down from the now positively respectable 3.8% drop to 5% when they have factored in the actual (not assumed) export figures and inventories. So do you think this year is going to be worse or better for the US? Anyone who is betting on a recovery this year is a fool and you should take their money.

Here’s a quick assessment of the world’s top economies:

No.1 US  - Economy in the toilet

No.2 Japan  - Economy in the toilet

No.3 China  - Economy in the toilet

No.4 Germany  - Economy in the toilet

No.5 UK  - Economy in the toilet

No.6 France  - Economy in the toilet

No.7 Italy  - Economy in the toilet

No.8 Russia  - Economy in the toilet

No.9 Spain   – Economy in the toilet

No.10 Brazil  - Economy in the toilet

I could go on and on. There are a few cash rich countries, like Saudi Arabia, who won’t struggle in the depression but I’m sure even they will experience a bad downturn.

European Bank Losses Could Dwarf The US

A Daily Telegraph reporter has said that he has seen an ‘eyes-only’ document, showing that bank losses in the European Banks could be as high as £16 Trillion ($25 Trillion, an unimaginable figure!). Now Europe is obviously much larger than the States but if they have to borrow that much to sort out the banks then this will kill the currencies. So the Euro is going to get a lot weaker if the bank troubles prove to be even half of this. Now this figure makes Roubini’s estimate of nearly $3.6 Trillion for the states look like a walk in the park by comparison.

This means sterling could be in for another fall in value too, dependant on what the damage really is in the UK. Now this is coming at a time when the people who buy bonds are getting very concerned about the capability of Spain, Greece, Portugal, Italy, now also Ireland and Britain to pay it back.

Apparently, some of our banks were even more lax in their capital ratios than the US banks and have lent on a 50:1 basis to places like Eastern Europe who are now struggling to repay and have the double whammy of their currency devaluing.

Now Europe, unlike the US and Britain, doesn’t have a Central Bank that can step in and buy up banks selectively. If it takes on one from one country then it has to take on others from all member states. Now I can’t see the ECB wanting to support Italian, Spanish or Irish banks.

Let’s Not Forget The US

Tim Geithner (US Treasury Secretary) released his bank bailout plan this week and it got a good slating for being short on details. The problem is that he knows it is desperately bad and he can’t tell the world the truth as the markets would go into freefall again. The US are going to be spending more like the figure of $10 Trillion that I mentioned last month, which at this time seems unimaginable as well.

Fortunately for the US, the consensus in the financial leadership is to fix the system no matter what so as not to have a repeat of the Great Depression. The trouble is that the Eurozone central Bank does not have the power of the Fed to act so swiftly and frankly, they do not have the inclination either. However, if this report is real then you can bet we won’t see next month being a stupid ‘wait and see policy’ so far as interest rates are concerned, they’ll cut them by 0.5%.

In the US there are going to be a lot of high profile bank bailouts to be done over the next few months. Several economists I read are now predicting a 20% drop in the stock markets by the autumn. If I was holding bank stocks right now and had been holding them since before the downturn started, then I would seriously consider selling them, taking the loss and perhaps buying them again in the autumn. Afterall, you could be looking at a wipe-out if the banks are in as bad a condition as this report suggests, so crystallising a loss now will seem like a prize should the bank fail.

And of course, if this report turns out to be real then you will definitely see a large drop in bank shares value even for unaffected banks.

If you view the world economy like a great boxing match, we are currently sitting in the corner after having the s**t kicked out of us in Round One. The referee nearly stopped the fight, but somehow we summoned up enough extra energy reserves to make it through. The only problem is that the bell is about to go for Round Two! And although this fight has no limit, it’s pretty certain that it won’t go past Round Three!!

Conclusions

Get out of bank shares; do not believe the downplaying of the world’s financial leaders; scrutinise every deal a little more harshly and do not try and fudge the maths on a deal. If the figures don’t work, walk away as there will be another opportunity along any minute.

A deal is a deal at anytime, regardless of the market!

Best wishes

Andy

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