With any and every asset-gatherer capable of forming a sentence being trotted out on business media to proclaim victory and elucidate on why "there is no where else to invest but stocks" and "the US is the cleanest dirty shirt," we thought it might be useful to reflect on just how clean that shirt can remain as the rest of the world's growth slows down significantly [10]. In the last decade, there has been particular growth in inter-regional trade, with a dramatic expansion in trade vis-à-vis Asia, reflecting globalization. At the same time, the deepening in global trade relationships means that the potential for a sudden shift in demand in one region can have a more significant impact on the rest of the world. This has been seen particularly in recent years, with the sharp retrenchment in domestic demand in southern Europe affecting the economy of Asia, particularly Japan. Looking at the rate of increase in regional imports (which we assume is what the 'heads' believe will power the US 'clean' shirt) and the picture is ugly. And while copper is enough of a tell for most, even the IMF (usually extraordinarily optimistic) sees World Trade slowing dramatically [11] - and given these interconnections, perhaps being the cleanest shirt merely shows the stains even more clearly when they finally hit.
2002 Global Trade Flows...
[12]
2012 Global Trade Flows...
[13]
The world is far more interconnected - and thus prone to regional problems rippling through the supply chain.
And as Import Volumes for every region are slowing dramatically...
[14]
It is impacting the US macro-economic data very significantly - and as we have seen in the past few years, US equities can only withstand reality for so long... (red is Bloomberg Economic Surprise Index)
[15]
And while IMF projections of collapsing global trade [11] and global growth [10] may be shrugged off by hopers as pessimistic, SocGen's Albert Edwards reminds us that (just as in 2007) liquidity expectations (and we note the leverage extremes [16]) and Dr.Copper suggest the party is over...
Back in 2007 investors were convinced that markets would remain buoyant because there was ample liquidity. In a note back then we said that this was a false crutch for investors and that the liquidity would vanish from the markets if price momentum took a turn for the worse. I have exactly the same view now. In the same way that QE seems, in large part, to be bypassing the real economy, liquidity will evaporate from equities if we dive into a deflationary recession. Where will all the liquidity then go as QE is ramped up still further? It will go into ridiculously expensive bonds.
[17]
Copper is acting exactly as it did when I wrote about the impotence of liquidity in the face of the (then imminent) 2007 recession. Once again it is giving us an early warning that liquidity will not save risk assets: time to get out of equities.
Source: Bloomberg, Barclays, and SocGen