It's all over the news—the global economy is unraveling. Here's the Reuters' spin on what's going on.
NEW YORK (Reuters) - Gripped by fears that Europe's debt crisis is driving the world economy into a ditch, companies are delaying plans to raise capital and canceling deals, while investors are taking refuge in cash or any other place they think their money will be safe.
The retreat has been so acute that yields on German two-year bonds have gone negative, meaning investors have become so wary of losses elsewhere that they are willing to pay for the privilege of lending money to the German government. Stocks and commodities have been hammered.
And with the economic picture dimming in the United States and major developing economies, including Brazil, India and China, brave is the major corporation willing to take on new workers. The pace of hiring in the United States in May was the slowest in a year.
"What we're seeing is a sharp deterioration in economies worldwide. It's a very unstable situation. Markets are being driven by fear, and they're tougher to call than ever," sa id Gregory Whiteley, who helps manage $35 billion at DoubleLine Capital in Los Angeles.
The scariest part is this: the tighter people batten down the hatches, the worse things can get. Slower growth will worsen government budget deficits as tax revenue dries up in the United States and Japan, while making it all but impossible for indebted European countries such as Spain, Ireland or Italy to grow their way back to health.
If activity slows enough, large swathes of the world could tumble back into recession less than four years after the collapse of Lehman Brothers triggered the global financial crisis and brought many nations to edge of a precipice.
This Reuters report tells the story of the global economic downturn from the point of view of Big Corporations and Wall Street investors. The former are not hiring and the latter are not investing.
Perhaps the best indication of how worried people are rests with veteran investors like Donald Gimbel, a senior managing director at New York-based Carret Asset Management.
Concern about Europe has prompted him to spend the first five months of the year increasing the cash position of the firm's $1.6 billion under management, taking it from 2 percent to about 15 percent by May - the highest since 2008.
In the past, Gimbel, 70, said that he would have started using all that cash to scoop up potential bargains in equity markets. But this time, he said he was prepared to wait for solid evidence of progress in Europe before coming off the sidelines.
It has become fashionable again—of course!—to blame China and now Europe for the woeful state of the U.S. economy, as if "scooping up potential bargains" in equity markets has a material effect on the daily lives of American and European citizens.
There is only one rescue plan. There is always only one rescue plan for Capitalists in contemporary times.
Investors are starting to expect the U.S. Federal Reserve, which has already pumped more than $2 trillion into the financial system through purchases of government and mortgage bonds, to do more when it meets later in June.
But not everyone thinks throwing more money at the problem will do much good.
"The Fed is always saying it has a range of tools at its disposal, but the fact is, they don't have too many," said DoubleLine Capital's Whiteley. "It can buy bonds, but that's about it. And it's not clear to me that's going to have much impact on the economy."
That has left some investors hoping China can save the day with a repeat of 2009's 4 trillion yuan stimulus package.
They may be in for a surprise.
With the Chinese economy slowing, some economists fear Beijing can ill afford to run up more debt.
If throwing more money (aka. debt, capital, liquidity, moolah) at these growth problems could have saved the world economy, it already would have. The Fed is helpless, although they might be able to create some incentive for investors like Donald Gimbel to scoop up bargains in the equity (stock) markets.
The notion that the global economy could ride to its salvation on the backs of China, India and Brazil was always ridiculous. These so-called BRIC economies have been growing, which has helped drive up commodity prices, but they are still relatively small compared to the combined economies of the United States and Europe. China was "growing" mostly due to the massive stimulus which was applied in the aftermath of the 2008 crash, which created a massive property bubble and lots of pointless infrastructure. But as we've just read, that's pretty much all over now. And now commodity prices are plunging.
From the copper mines in Chile to the corn farms of North Dakota to the oil fields of the Middle East, commodity prices have started to crumble.
The prices of metals, energy and agricultural goods have dropped as anxiety has ratcheted up over Europe’s currency crisis, China’s slowing growth and the stalling U.S. economy...
On Friday, copper futures fell to their lowest level of 2012. On Monday, cotton fell to a 31-month low. Sugar hit a 21-month low. Last week, the price of OPEC’s basket of crude oil grades slipped below $100 a barrel for the first time in nearly eight months.
“We’ve seen a decline in corn prices over past few months,” said Barton Schott, a third generation farmer in Kulm, N.D., who is chairman of the National Corn Growers Association. “I think it’s all related to the world economy and price of the dollar,” he said, adding that “outside investors” and investment funds that had been big buyers earlier in the year had reversed course and started selling corn a month and a half ago.
OK, are you ready? Because here it comes!
The recent drop in commodity prices could open up more room for fiscal or monetary stimulus without worries about igniting inflation.
“I think it remains the case that deflation should be more the concern of public officials than inflation,” said Edward Morse, head of global commodities research at Citigroup.
“This provides a green light for more stimulus, particularly monetary stimulus,” said Mark Zandi, chief economist of Moody’s Economy.com.
More stimulus! Particularly monetary stimulus! Yeah, sure, that's the ticket, that will do the trick. Turn the tables. Make things right. Extricate us out of this deep hole. Create some buying opportunites for bargain equities. Make those Capitalists happy again, at least until the next time we need some more stimulus to make things right.
The Rolling Stones had this one pegged in 1965. For Capitalists, here it comes, here it comes, here it comes, here it comes...
Oh, who's to blame, that girl's just insane.
Well nothing I do don't seem to work,
It only seems to make matters worse. Oh please...
You better stop
Look around
Here it comes, here it comes, here it comes, here it comes
Here comes your nineteenth nervous breakdown.
Americans need to realize individuals such as Edward Morse and Mark Zandi have limited to no social value, contribute to the excessive integration of firms and markets (enterprise corruption, collusion, insider trading, market manipulation), and should not be taken seriously.
Posted by: Ben | 06/05/2012 at 11:08 AM