World-Wide Recession?
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8/13/12

Japanese GDP growth slowed to 1.4% last quarter, down from 5.5% growth in the first quarter.  This follows the slowdown in China’s exports reported last week.  From China to Europe and the U.S., the world economy is slowing.

Are we looking at a world-wide recession?

The market has rallied for the last two weeks, since Europeans went on “holiday.”  The headline blackout ends this week.  Angela Merkel, Chancellor of Germany, returns for a cabinet meeting on Wednesday then travels to Canada for meetings.

Luc Coene, a member of the ECB governing council, said “It makes no sense for the ECB to start financing…”  He was directing his comments to Spain and Italy as they look to the ECB to support their sovereign debt and lower interest rates.

The German Constitutional Court is scheduled to rule on the European Fiscal pact on September 12, until then we are in a holding pattern.  Spanish and Italian interest rates rose last week.  Greece is on the verge of running out of cash to pay bills.  The next three weeks could see more volatility than many are anticipating.  The VIX “fear gauge” indicates investors are oblivious to any danger.

Luc Coene is Brussels’s Central Bank representative on the ECB board.  He told Reuters “We haven’t forgotten what happened in August of last year.  We bought Italian bonds and right after that the Italian government reneged on its pledges.  The conclusion is clear.  When you take away the market pressure, you take away the pressure on politicians to act.”

This cuts to the problem in the eurozone.  We go from crisis to crisis, because governments have to reach the edge of the precipice to make cuts in government budgets.

German Vice-Chancellor Phillip Roesler told Focus magazine “Hardly any of our offers have been taken up by the Greeks.”

This is not a “chicken or egg” question.  The eurozone is willing to help countries that are in a credit crunch, but they have to agree to austerity measures. This is a bitter pill to swallow and takes a kick in the gut from credit markets to help the politicians swallow the medicine.  We have to run up to the abyss before they will act to relieve the pressure.

The market looks negative this morning, something we think could easily continue this week.

We have abbreviated observations on the market today, as I am delivering our youngest daughter to college today.  There are tearful goodbyes to say this afternoon.

Mailbag:
Again you're right. At dinner I mentioned to my wife that the big money isn't in this market. They can say what they want about the one-percenters. Without them even the best ideas go nowhere. This includes the market.

John’s reply: One thing that makes me suspicious though is what the Fed is doing.  I wonder if they are buying some equities to "turn" the market at key times.  Some of the volume spurts look like the “Plunge Protection” team is at work.  They keep the market alluring to suck in retail investors.

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