Is the Global Economy Really Recovering?

Jim Brown
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That question seems to be appearing more often as we move farther into 2010. The Q4 earnings cycle produced higher earnings but most were due to further cost cutting and not an increase in sales. Analysts are starting to question the V bottom recovery scenario.

The elusive V bottom was claimed several months ago by investors eager to see their stock positions move higher. If everybody says it was a V bottom does it make it so? Unfortunately just hoping for a V bottom does not make it happen and the way global conditions are shaping up today there is a strong possibility we are looking at a VV instead.

Oil demand continues to decline everywhere except for China and India. Copper demand is slowing and global inventories are already higher than the 2009 peak. Copper is seen as the leading indicator of economic recovery. Economic rallies are said to have a copper roof and demand is slowing.

The latest fear is a widespread austerity program in the Eurozone. The focus is spreading from Greece to all the Eurozone partners. If Greece violated the rules so dramatically what is happening to the rest of the zone? Greece is going to be forced to implement a severe austerity program that will undoubtedly push them into a recession.

In the guilty by association group there will be new calls for spending cuts and lower deficits to avoid falling into the same trap as Greece. The ECB is reeling from comments that they failed to supervise Greece and force them to follow the rules. In response they will probably crack down on the rest of the Eurozone countries and force them to tighten their belts now rather than face censure later. This is going to slow the recovery in Europe.

China is growing but there continues to questions on whether they are growing as fast as they claim. I believe so but that is just my opinion. India claims they have a housing shortage of 25 million homes. That alone has to be producing a major boom.

Unfortunately China and India can't pull the world out of its economic funk by themselves. They depend on consumption by the developed nations and so far we are barely pulling our own weight. The Q4 GDP for the U.S. at +5.7% was bogus. Only about 2% was real activity with more than 3% an inventory adjustment. This is not an explosive rebound, it is a piece of accounting fiction.

The problem is that everyone wants a rebound but there is nobody to fund it with purchases. America has over 25 million people out of work. Five million are chronically unemployable but realistically there are 17-20 million people out of work and not consuming.

With an expected four million foreclosures in the U.S. in 2010 we have very stiff economic headwind. Add in the attacks on capitalism, banking and higher taxes ahead and we have an uphill battle.

The way commodities are imploding it suggests the demand curve around the world is slowing. Until the U.S. leads the way the global recovery will continue to be sluggish.

Pimco CIO Bill Gross said on Friday the weakness in jobs will make for a difficult transition to prosperity. "We think that it's substantially different this time, based upon the fact that instead of levering we're delevering and instead of deregulating we're regulating," Gross said. "Both of those conditions in combination produce a very weak economy, very slow growth and ultimately have effects on asset markets that depend on asset appreciation."

He also pointed out that government stimulus is fading, the Fed is backing off the liquidity programs such as mortgage purchases and a key engine driving economic growth will be taken away. He said, "The growth has been really based on a check not only by the US government but many sovereign governments. The minute that check disappears the private market is standing very lonesome and on its own legs."

Because of the unemployment crude demand is down 2.1 million barrels per day (-9.9%) lower than than it was in 2007. You have to go back 11 years to find consumption this low. Over that period of time the population grew by 12%. This is a serious contradiction in trends. You can't add 30 million people and consume 2.1 mbpd less oil. It is simply a factor of too many people out of work. 20 million people out of work counteracts that 30 million person increase in population.

Eventually, the trend will reverse again and everyone will go back to work but it could take a couple years for this to happen. This is the biggest risk to a double dip recession and actually is a real deflation risk.

It is too soon to tell if we are in a V or a VV but the next 90 days should be very telling. If commodity inventories continue to rise it will be a telling precursor to the second dip.

Jim Brown