Globalization: Is the Global Economy Solidifying or Evaporating?

Should cute odd cat me, disappear from the stock market for now?

Blog Note: This blog has ben yelling and screaming that in-tra emerging trade does not produce great “Comparative Advantage.” And that the intra-advance industrialized trade, also does not produce great “Comparative Advantage.” That only leave emerging and advance trade, with significant “Comparative Advantage.” Unfortunately, the current state of major emerging and advance economies, does not support “Maximization of Trade.”

The following is from Seeking Alpha-a website that conglomerates investment ideas.

By Brian Kelly

The trillion dollar question for the financial markets is whether or not the global economy is strong enough to accept the hand-off from central bank and government stimulus. After 15+ years trading the financial markets we have found only one statement of truth…things change.

To that end we thought it would be not only instructive, but also financially necessary, to look at some of the drivers of the global bull run…away we go….

Chinese Growth is Boosting Global Trade

Market orthodoxy is that Chinese GDP at 10.7% is enough to keep global trade afloat. We concede that an inventory restocking cycle has occurred which can be seen in the rising Baltic Dry Index [BDI] during October and November. However, if the the restocking cycle is supposed to hand-off to normalized trade, then why has the BDI dropped almost 1500 points since November?

Click to enlarge:

bdi 1 21 10

Yes, BDI is a volatile index which may or may not reflect the actual prices paid to charter a ship, but for our purposes it is the direction that counts. If global trade is picking up, the direction of the BDI should be up, not down.

Something must be askew, are there other market based indicators that might support or debunk the message of the BDI? Glad you asked…

Click to enlarge:

usdsgd 1 25 10

With one of the largest and busiest ports in the world, Singapore is a hub of global trade. It is for this reason that we use the Singapore dollar as a proxy for market sentiment on trade. During October-November 2009, the USD was weaker against the Singapore dollar suggesting demand for the SGD. However, over the last few days the Singapore dollar has been significantly weaker v. the dollar implying investors are betting against global growth.

Ah, you say, but the Chinese stimulus package is aimed at the domestic economy. Quite true, and we would add the consensus view is a housing bubble is developing in China …maybe…

The last time we checked the primary characteristic of a bubble was prices at record highs. If the Chinese real estate market is acting like Mark Cuban circa 1999, why does the Shanghai property index look like it is about to breakdown?

Additionally, construction and overbuilding deplete inventories of raw materials – that would mean LME warehouse stocks of copper and aluminum should be at historic lows.

Click to enlarge:

lme-warehouse-copper-5y

Hmmm…Copper stocks approaching 5 year highs!!!

These are not the pictures of a healthy Chinese or global economy. Once upon a time, a popular economic catch phrase was “if the US economy sneezes, the world economy catches a cold.” These pictures leave us wondering what happens if China gets the sniffles?

Germany Has Weathered the Economic Storm and Will Carry European Growth

It was only a few days ago that we suggested economic growth in Germany was probably one of the biggest threats to the Eurozone. Our hypothesis was that economic growth in Germany would lead to inflationary pressures and cause the ECB to tighten policy – at the same time – periphery Europe would still be struggling and need loose monetary policy.

Our assumption of German growth was based on the idea that as one of the largest exporting countries in the world Germany has been and would continue to be a prime beneficiary of global growth.

Indeed, German PMI – Manufacturing has recovered robustly. If Keynesian theory is correct then the service sector should begin running with the ball. Unfortunately, German PMI -Services has continued to decline from its September peak.

Click to enlarge:

german_pmi_services

Furthermore, the economic weakness is not limited to Germany, it appears to be spreading to the Eurozone as a whole.

Eurozone PMI -Services has also begun to decline. To be sure, one data point does not make a trend, but when coupled with tighter Chinese lending, a falling BDI and rising dollar it does not flatter the global economic picture.

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