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New orders and commodity price falls point to a renewed downturn in the global business cycle

Posted on 11 March 2013 with 1 comment from readers

Have we just witnessed a modest bounce off the bottom in some major economies like the US, Germany and Japan that will now return to a downtrend? That’s a completely contrarian view not shared by the bulls driving world stock markets to all-time highs at the moment. But then there are the facts to support it.

Japan’s machinery orders plunged 13 per cent in January, the biggest decline in eight months. Last month total US industrial orders dropped five per cent due to a slump in defense orders, and German factory orders unexpectedly fell in January with an annualized 2.5 per cent fall as the sovereign debt crisis curbed demand in the euro area.

Falling commodity prices

Economists have viewed recent falls in industrial commodities as something of a mystery and put it down to increasing supply. Perhaps companies that are not winning new orders are simply not buying industrial commodities. Hedge funds have not missed this.

Speculators are the most bearish on copper in four years, and are also betting on declines for coffee, hogs, sugar, soybean oil, wheat and natural gas. ‘Commodities have retreated 4.8 per cent since reaching a four-month high on February 13th, even as optimism about the global economy drove the MSCI All-Country World Index of equities to a 56-month peak,’ noted Bloomberg.

The experts in the business cycle business have also reached the conclusion that a new downtrend is starting. The Economic Cycles Research Institute reckons a fresh recession has already started (click here) and Charles Nenner also says his cycles have turned down (click here).

The bulls have accumulated one strong recruit this week in the shape of Bill Gross of Pimco who has doubled his forecast for US growth this year to three per cent, partly because of advancing house and stock prices. Mr. Gross coined the term ‘new normal’ to correctly anticipate the low growth and high unemployment of the past four years.

What’s normal

Whether he is now mistaking a recovery in asset values due to money printing on a heroic scale for a sustainable recovery is a matter of conjecture. Asset bubbles take years to form but can collapse pretty quickly as the subprime crisis showed in 2007-8.

As the ‘bond king’ Mr. Gross has himself warned on many occasions of the danger that the ultra-low bond yields pose to such asset values. Bonds would rally for a while longer if the stock market tops out and falls. But they would crash if the stock market really took off and send interest rates sharply upwards.

Are interest rates really sustainable at current levels? Have new orders and commodity prices not already fallen? We think the US pre-election economic recovery is behind us now. This is the year of tax rises and huge public spending cuts, or have we missed something?

Posted on 11 March 2013 Categories: Banking & Finance, Bond Markets, Global Economics, Hedge Funds, US Dollar, US Stocks

1 Comment posted by readers:

Comment by obewon - 11 March 2013

Well done, Peter!

Good food for thought herein. For example, you say “What’s Normal” . . . to which I’d have to add “nothing’s normal any more”

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