Despite extensive monetary and fiscal stimulus measures, the global economy continues to move forward slowly, resembling a tired pack mule. Most European nations are experiencing recessions, the United States is growing at a mere 1.9 percent, and signs indicate that China’s remarkable two-decade boom is losing momentum. Where might we be headed next?
Today, we’ll turn to Dr. Copper for some insights…
Dr. Copper – often referred to as the metal with a PhD in economics – is typically one of the first indicators of economic trends. Its widespread application across various industries, from infrastructure to housing and consumer electronics, makes it a reliable barometer of economic activity.
When copper prices rise, economic activity typically follows suit; conversely, when copper prices decline, economic stagnation often ensues. Over the past year, copper prices have dropped by 20 percent.
Clearly, copper is in a downward trend, and it seems that the global economy is following suit…
Surprised by a Recessionary Wave
“The global economic outlook for the latter half of the year faces the possibility of a significant downward revision this week when China, a key driver of global growth, releases quarterly data that analysts anticipate will be the worst in at least three years,” states Reuters.
“In summary, the global economy suddenly appears to be in a precarious state. Instead of proactively addressing a downturn, central bankers may have been caught off guard by a recessionary wave, or worse – by deleveraging and deflation,” commented Geoffrey Yu, a foreign exchange strategist at UBS in London.
In Spain, bulls charged down the streets of Pamplona, injuring three participants during the annual running event. Similarly, in Madrid, bond investors pushed yields on the 10-year government bond above 7 percent, a level that makes it unfeasible to issue new bonds to cover existing debt. Nevertheless, Eurozone leaders are working to gather 30 billion euros by the end of July to support Spain’s struggling banks.
In the United States, the economy is stuck in neutral and shows no signs of gaining momentum. For instance, last Friday, the Bureau of Labor Statistics reported that only 80,000 jobs were created in June. Surprisingly, the unemployment rate held steady at 8.2 percent, despite the fact that around 125,000 new jobs are needed monthly to keep pace with population growth.
Moreover, the Social Security Administration reports that 85,000 American workers enrolled in the Social Security Disability Insurance program in June. In other words, the number of Americans registering for disability benefits exceeded the number of new jobs created.
This trend has persisted since the recession officially ended in June 2009. To be precise, since then, the economy has generated 2.6 million jobs, while 3.1 million workers have signed up for disability benefits. Clearly, this has not been a robust recovery, and the modest recovery policymakers championed appears to be fading.
Investment Strategies During Economic Decline
This week, as quarterly corporate earnings reports begin to emerge, we’ll gain insights into how the economic slowdown is affecting businesses. Earnings have increased every quarter since the fourth quarter of 2009, totaling ten consecutive quarters.
However, all good things must end eventually. It’s possible that we may discover that second-quarter earnings did not improve, or perhaps even fell.
In late May, economist Marc Faber, author of the Boom, Gloom & Doom newsletter, predicted a 100 percent chance of a recession occurring either in late 2012 or early 2013. Just yesterday, Dr. Nouriel Roubini reaffirmed his “perfect storm” scenario, which includes stagnating growth in the U.S., debt crises in Europe, a slowdown in China, and potential military conflict in Iran – warning that this scenario is already unfolding. Roubini believes this perfect storm will significantly impact the global economy in 2013. Irrespective of when it occurs, one thing is undeniable: the stock market is facing significant challenges ahead.
Recessions are seldom favorable for retirement investors. ROTH IRA and 401K accounts invested in index mutual funds usually suffer greatly. Additionally, the S&P 500 index has historically struggled to maintain levels above 1,400. It briefly surpassed 1,400 in early 2000 and again in mid-2007, only to swiftly crash thereafter. Earlier this year, the S&P 500 briefly climbed above 1,400 before declining again.
Here at the Economic Prism, we always anticipate the unexpected, but we avoid betting our retirement on it. While it may seem improbable, the stock market could rise even as the economy slows. Perhaps the Fed will announce QE3 to give the market a boost. Still, we prefer to position ourselves near the exit, as we have found it is the safest place to be during an economic decline.
From this vantage point, with popcorn in hand, we can savor the upcoming spectacle, ready to make a quick escape when things start to go awry.
Sincerely,
MN Gordon
for Economic Prism
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