Global Influences

From Mark Grant, author of Out Of The Box


While we all nod our heads and bob up and down about Asia it is important to keep them in one corner of our collective radar screen. Asia represents a good portion of the world’s economy and any slow down should register on us as eventually causing a slowdown in the United States and Europe. Their economies are an indicative sign of what may be forthcoming for us and they also represent an indication of how Europe’s recession is affecting the rest of the world.

In Japan machinery orders declined -14.8% in May which is the largest decrease since 2001. Japan’s account surplus declined -63% in May and it was their smallest surplus since 1985 and June may actually be the first time in decades when there is no surplus at all but a number than falls in the red. Japan, I think it can be said with accuracy, is having some rather serious difficulties and with their projected borrowing of $560 billion this year this may be the beginning of a long cycle where Japan can no longer fund herself internally.

In China they announced a CPI of 2.2% which is a twenty-nine month low as there PPI number was -2.1% indicating a further slowdown in their economy. The Chinese Premier warned of “relatively large” downward pressures on the Chinese economy so that the growth engine of the last several years seems to be faltering by the wayside. China will no longer be able to pick up the slack for Europe which is one major reason why I see the global recession, including America, by the fourth quarter of this year or the first quarter of next year.

The global economy is an entangled affair, make no mistake in your calculation here, and the numbers from around the globe are telling and will affect both the U.S. bond and equity markets. Much of the financing for the Emerging Markets was provided by the European banks and as they pull back and reorganize based not just on Basel III but based upon problems of the sovereign where they are domiciled the situation exacerbates. Two of the world’s financial axises are slowing and troubled and to not think that this will not affect America will lead you to conclusions causing you to play the Great Game badly.

What did the meeting of the European Finance Ministers accomplish; not much. They nodded to the Spanish banks and agreed to inject $30 billion by the way of the sovereign, increasing the debt of Spain, with veiled promises of a new ESM fund which would lend money directly to the banks at some point in the future and this point is highly subjective depending upon to whom you listen. The Spanish claim within days or weeks while the Germans indicate it may be sometime next year. There is now a “maybe-maybe” timeline in Europe for almost anything as the weaker nations prod the stronger nations for more money.


There is a reason that the ratings agencies occupy such a position of power in the world and this is not often discussed. I spoke about it several years ago in my commentary and I circle back to it today. The reason for their power is relatively simple and that is a matter of liability. Money managers shift their liability to the ratings agencies as many mandates are based upon bonds being “A” rated or investment grade rated by one or more agencies and so liability is shifted off the money manager’s back. The business model of the three big ratings agencies has often been called into question and with good reason as the rated entities pick up the bill so that undue influence is always in question. To be forthcoming I know Sean Egan and like him and respect his intelligence and I must say that I prefer his business model to the rest as it allows him to be totally free of any charges of influence.

I think that Europe is putting such pressure on Moodys, S&P and Fitch that they have effectively backed up and are either very slow in changing their ratings to suit the recession in Europe or so frightened of losing their franchise that I am suspect of their conclusions. Personally I find the ratings of Egan-Jones to be much more in alignment with the actual financials for the European countries than the “official” numbers which seem to be used by the big three ratings agencies. I took some time this morning to go through the recent downgrades by Egan-Jones of Austria and the Netherlands and I found them generally consistent with the declining financial condition in both of those nations. If nothing else, the fact that Egan-Jones uses a subscriber based business model gives me some comfort that theirs is an independent view. Consequently I toss a well deserved nod in their direction.

As the World Turns

I think I have heard every major TV anchor and reporter ask the question if we are ever going to not pay so much attention to Europe again? I think the answer here is, “No.” America, right or wrong, has ceded both power and dominance in the world as others, notably the European Union has gained power. We still have the largest economy but we are no longer in the dominant position once guaranteed by our money and military power and that is just the way of it. Further our political leadership has not been at the top of performance so that the markets in Europe and Asia will continue to exercise a larger and larger influence upon how our bond and equity markets operate. The world has turned and recognition of this is our new way of life that is not likely to evaporate anytime soon. I take no moral, ethical or political position here but I do recognize the shift and bring it to your attention.

“You do not have the power to change the winds but you do have the ability to set the direction of your sails.”

                                              -The Wizard


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