October 22, 2008

Global Market Comments for October 22, 2008

1) Today global deflation trumped the continuing decline in LIBOR, knocking the Dow down 700 at one point. There was a five cent move in the euro today down to $1.27 as global funds poured into Treasuries. It turns out that a global recession is great for the dollar because it dramatically shrinks the trade and current account surplus. The drop in crude alone since July has cut our payments abroad from $700 billion to $400 billion/year, and that swing immediately hits the foreign currency market. The Euro is now gunning for the $1.22 level, where it will have given up exactly half of its appreciation from 2001-2008. All this in only four months! In an extreme, overshooting move we could see parity against the dollar of $1:€1, and we live in an age of extremes. The next big down leg in the long term dollar bear megatrend will start next year at first hint of a recovery in the US economy. Then we could go to $2.00/euro.

2) Global lending capacity is shrinking at a tremendous rate. Banks are deleveraging as quickly as they can, while others are going under. Healthy banks are using the Federal bail out money not to lend, but to deleverage, as they normally would at this point in the economic cycle. Big money center banks are going to take over weak regional banks and use the new deposit bases to deleverage further, leaving the government to pick up the tab in the form of loss carry forwards from write downs on newly acquired bad loan and securities portfolios. The number of banks in the US is about to take a quantum leap down. The global asset base is going to have to shrink to meet the new smaller loan capacity. Although virtually all commodities and emerging stock and bond markets have halved in the past three months, and industrialized stock markets have been cut in half in the past year, the loan capacity to asset gap is still probably in the $5-$10 trillion range. Where is most of the remaining fat? In real estate, which still has further to fall.

3) Asian markets got slammed last night as fears of a hard landing in China accelerate. Stock indexes were down 3-7%. China could slow from a 12% to a 5% growth rate as their foreign markets dry up. If growth falls under 5% you will have another revolution in the Middle Kingdom. Copper, an important leading economic indicator, crashed 9% today down to $1.83. The Baltic Dry Index ($BDI) hit a new low of 1,292, down 89% from its 12,000 high.

4) Dr. Allen Sinai of Decision Economics says that 20 of the world's top 47 economies accounting for 75% of world GDP are now at or in recession. This is the most coordinated, simultaneous global postwar recession in history, and it will be the longest, stretching well into 2010.