Yesterday I wrote about my view of GDP growth debate when the premise of growth is predicated on our exports (here).
So in both years we have BDI scissoring away from the S&P500 – right before the main wave hits the shores on Wall Street. The real economy took hold with a delay back in 2008 due to the short-covering rallies triggered by regulatory moves. Ditto this year. And trade flows fundamentals are not alone in showing no support for a sustained rally in the stock markets. Here are some other signs:
Short run dynamics in the stock markets are now firmly showing increasing volatility: VIX has declined from July 2008 through August before taking off up the cliff in September 2008. So far, the same dynamics are present in terms of decline and increasing volatility of VIX itself.
The US consumer sentiment index fell unexpectedly in early August to 63.2 from 66.0 in July - the lowest reading since March, according to the Reuters/University of Michigan index. Now, as the chart illustrates, UofM survey index also peaked in August 2008 before heading rapidly South.
Although the seasonally adjusted output of the US factories, mines and utilities increased 0.5% last month (for the first time since December 2007), reversing course after a 0.4% decline in June, annual output is still down 13.1% in the past year. But the current bounce is fictitious, as capacity utilization increase from 68.1% to 68.5% was minor and on top of the record low of June – so no restart of an investment cycle any time soon. Worse than that – all gains in industrial output in July were due to teh US car makers deciding to re-supply stocks. Motor vehicle production jumped 20.1% on a back of a planned increase following earlier severe production cutbacks as General Motors and Chrysler went through bankruptcy. So ex autos, industrial output for July was off 0.1% while manufacturing output rose just 0.2%. Output of high-tech industries rose 0.4% in July (still down 20% in the past year).
Finally, unemployment – I wrote about this ‘surprise dip’ in last month’s unemployment figures before (all based on an actual fall in the labour force participation rates, not on a slowdown of jobs destruction. But while ordinary unemployment rate is scarry, the duration of an average unemployment spell (the second chart below) is frightening. Since the Department of Labor started collecting data in the late 1940’s, there hasn’t been unemployment spell that lasted this long: July 2009 at 25.1 weeks. The previous highest peak in the average duration of unemployment: July 1983 = 21.2 weeks.
So nothing, short of something strange brewing in Wall Street’s Caffeteria, underpins the last rally. And this means a nasty September/October market is a distinct possibility.
And what does this mean for Ireland? Ok, there is an interesting analysis to be had on the spillover from the potential correction in the US to that in here. In particular, we should look at the fundamentals behind the financial sector risk exposures to any additional shocks. Remember - in 2008 the meltdown of financials was much deeper in Ireland than it was in the rest of the Euroze. And of course in the rest of the Eurozone it was much deeper than in the US.
Why? Risk exposures differentials due to leverage. Americans had a subprime crisis. True. Eurozone had an over-borrowing crisis. Prior to the onset of the financial crisis, US financial sector leveraging was around 40% of GDP, Eurozone stood at 70% of GDP, in Ireland - at well over 350% of GDP. Hmmm... smelling the rat yet?
Well, take a look at the two charts below (courtesy of R&S - Mediobanca):The first chart shows leverage as % of GDP in the financial sector, the second one - risk exposures measured as total securities relative to net tangible equity. Now, for Ireland, the comparable figures are: leverage at 425% (Q1 2009), risk exposure is simply indetrminable as our banks have been engaged in a wholesale re-shifting of liabilities and rewriting of assets, but it is hard to imagine our risk ratios to be less than 15% (given some of our banks are facing 30-39% stress on their loan books).
So if the US were to catch a cold in October, while Europe is to get another bout of flu, Ireland might come down with something so nasty, we wish we had an H1N1 'swine' flu hitting our financial markets...
What's that stock market equivalent of Tamiflu, then?