Europe and Japan are in recession

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It’s official, for what it’s worth. Both Europe and Japan are in recession. The Eurozone contracted by 0.2% for the second straight quarter. Germany (the largest economy in Europe) and Italy (fourth largest) both shrank in the third quarter. Japan’s economy-the world’s second largest-shrank by almost half a percentage point in the third quarter.

The world’s largest economy, as you already know, is in recession too. In the U.S., financial capitalism is imploding. Citigroup’s CEO Vikram Pandit told analysts the company would lay off over 50,000 workers. He cited rising loan losses and an economy slowing much faster than the company previously expected.

Gulp.

As over-sold as we believe Australian stocks are at the moment, we’d be foolish to ignore the warning signs flashed yesterday all over the globe. Bill had better take down the crash alert flag and run up the depression alert flat.

World GDP is around $54 trillion. The U.S., Japan, and Europe combined have a GDP of $33 trillion (according to 2007 IMF figures). When 60% of the world’s economy is in recession (and the majority of the developed world) it cannot be a good sign for anyone…including manufactures of finished goods and producers of raw materials (China and Australia).

If you operate on the premise that share markets lead stock markets, then there’s the chance that this synchronised global recession is already factored into share prices. We know the small Aussie juniors are down 50%, 60%, or more from their highs. And as the chart below shows, the All Ordinaries has matched the S&P 500’s historic decline from the October 2007 highs.

If there’s any good news, it’s that Aussie stocks have underperformed the S&P for most of the third quarter. The S&P has lately caught up. But now we must seriously reckon with the possibility that the current world recession could turn into the first word depression. If that is indeed the case, then the argument for buying any shares at all gets that much harder to make.

Enter stage right Jim Lennon, resource analyst at Macquarie Group. Lennon published a research note last night in which he and his team forecast a 60% decline in 2009 coal prices, a 20% decline in iron ore prices, and a 40% decline across the board in base metals. It wasn’t quite metals Armageddon, but you could hear some of the seals popping with each forecast.

Keep in mind coal and iron ore are coming off big years in 2008, where thermal and coking coal were up triple digits and iron ore an average of 85%. In other words, the declines are coming off a big increase. But let’s not sugar coat it. These are sobering forecasts for resource demand and for resource producers.

Comm Sec analyst Savanth Sebastian says, “If it [Lennon’s forecast] was the case, you’d see a lot of marginal mining projects go under and as a result you’d see a lot of processing plants close up shop,” he said. Unemployment will rise – maybe as high as 10 per cent – spending will be cut back, property prices will fall, wealth levels will fall. It suggests that overall things will be very grim and very dire.”

We wish we could tell you with conviction whether the worst of a global recession is already priced into shares are not. But no one can know. All we can say for sure is that if we are on the edge of Japan-like 15-year global debt/deflation recession/depression, then stocks will be a horrible place to be.

If you’re going to be in the market though, then you want to want to keep looking for those businesses and sectors that throw off cash, don’t have a lot of debt, don’t require huge infusions of capital to generate new income, and are located in the few industries in the global economy where good things are still happening.

Speaking of which, Diggers and Drillers editor Al Robinson just published his newest research today for paid up readers. As we’ve said, we realise a lot of readers are looking at the market and deciding to forgo it altogether. But our analyst team is still on the case, looking for the best ideas. You’d be surprised what you can buy on the cheap these days. This month, Al took a close look at the uranium industry in Australia…and found something he really liked.

It may be good timing. Western Australia’s Liberal government has fulfilled its campaign promise and officially lifted its ban on new uranium mines. The action affects some 1,475 mining leases in WA.

Premier Colin Barnett told the press that WA, “Is now open to the mining industry in this state, if they so wish, to proceed with plans to develop the uranium industry…We are the world’s leading mining economy and it’s always struck me as odd that we would have a ban on uranium mining when that is one of the areas of growth into the future,” he’s quoted as saying in today’s Australian.

What’s do you get when you mix recession and depression? Repression.

“So did you guys hear we put a colony on Mars? The Lochness Monster did an interview on Oprah. It speaks.”

Thus writes one of your editor’s older brothers from Colorado. He read about Australia’s plans for internet censorship and wanted to catch us up with what was really going on the world, in case the big news had somehow already been blocked. We’re pretty sure he was joking. But in a world where the government has total control of the information you see (or don’t see), would you really be able to tell?

And more reader mail on the armed defence of constitutional liberties.

Dear Sir,

I contest to you that most other countries get on fine without a Bill of Rights. I would contest that what the United States could have used, during the rolling decades of crowing about freedom and equality, might have been a Bill of Rights to reduce the roll of business and money in the process of government. Essentially to implement, as other countries have, essential checks and balances to curtail excessive influence by well organised, well funded lobby groups.

Then again perhaps you’re right. Perhaps the solution is for the entire citizenry to be armed. After all, when you’re looking for some basic health care or adequate emergency response in the United States, it strikes me that for many wielding the gun is more productive than wielding the vote.

Regulations on the role of business and money in politics don’t have any place in a Bill of Rights. A Bill of Rights exists to strictly define the limits of government power, as we said last week, and to protect minority rights from even duly elected popular majorities. If you want to regulate the role of corporate money in politics, you have to do it in the legislature. Good luck with that, though. Most politicians are bought and paid for by someone…the unions…the lobbyists…the corporations…or the special interest groups.

We certainly have no problem with the entire citizenry being armed. Most citizens in Israel and Switzerland keep (or are required to keep) arms in their homes. It hasn’t destroyed the social fabric in those places. It’s probably knitted in more strongly together.

Better universal gun ownership than universal suffrage, we say. Giving everybody the vote is more dangerous than giving everybody a gun (and teaching them how to use it). A vote allows you to directly and indirectly exercise power over other people’s lives without their consent and with the full protection of the law. And you can do it without making any sacrifice of your own on behalf of the society of which you’re a member. Voting is a real weapon of mob destruction.

Bring back the poll tax! Or making voting a privilege, not a right. To earn the right to vote, you should have to serve the public in some form for two years, either in the armed services, or in the public service, or in some other capacity. Not that we’re a fan of compulsory anything.

But if you grant “rights” to people who have no sense of civic responsibility, you get the mess we currently have. If you’re going to have a government with elected officials, they should be elected by people who know have demonstrated a willingness to put the nation’s needs ahead of their own. This was Robert Heinlein’s idea in Starship Troopers. If you didn’t want to serve, that was fine. You just didn’t get to vote. Seems fair. You might even get better government.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. I can’t understand the logic for an argument that the world will experience a “Japan-like 15-year global debt/deflation recession/depression”.

    Japan was fortunate, if you can call it that, that there were “bubbles” in two of her main trading partners – China (infrastructure, housing and export bubbles) and America (dot.com and housing bubbles); and she ran up the government debt, now over $7trn.

    Who is going to provide such a benign background for the world over the next fifteen years?

    Japan’s post-bubble years were in the upwave of the global economic/financial cycle; we are in, or close to a downwave like post-1929, 1873 and 1825.

    Reply
  2. Two Grand Hurrah Parties and a Chinese Chu-Chu goes Chechen.
    The first grand hurrah party is for the Western consumer over Christmas/New Year 2008. In 2009 the consumer will go window shopping in front of the t.v. When your’e broke you watch others spend.

    The second grand hurrah party is for the Eastern consumer over Chinese New Year in Febuary 2009. Same couch potatos, different location.

    The skills sets required to expand development Westward in China is concentrated on the Eastern seaboard. Millions of these skilled workers will go home for Chinese New Year. Will they be brought back East if jobs are not available? Or will it be like Stalins trains out of Chechnya-one way, to work in the factories beyond the Urals? Will the command economy leaders direct vast labour pools with skills to Western Provincial development? When and what rate will the expansion be?

    Australia is an island nation. I think 2009 may be the year we tread water-for our economic lives. I see the doldrums dead ahead not trade winds. The downturn finishes in 2010, when Captain Watermelon (Rudd, green on the outside, red on the inside) delivers us from all evil with a CARBON TAX, and a global war on unemployment. Rudd declares public jobs safe.

    Politicians superannuation is 50% above the 9% compulsory in private employment.

    657 senior public servants spent over one year at home on full pay in NSW, as there was no designated department to shunt them into.
    Morris Iemma, gave the NSW public service a pay increase equal to that of miners(10%) in private industry to buy votes.
    Coal companies received a tax increase of 42% for coal over $100 per tonne in QLD due to gross government incompetence. Exploration permits in QLD can take from 3 to 9 months out to 5 years to be granted. We all know the situation in WA.

    Well, it isn’t hard to see where the most lucrative jobs are from above, and it isn’t mining.

    Mining is based on risk vs reward. The public service is based on NO RISK, ALL REWARD.
    With the amount of direct & indirect taxation in private employment, there is only two bon mots left for the workers– if in the public sector–they pay us and we pretend to work. The private sector will eventually go Soviet–They pretend to pay us and we pretend to work. (due to taxation, inflation, currency devaluation etc.).

    Brownshirts, blackshirts and now greenshirts. Join Rudd’s Rentier Class, become an economic cannibal and feast on the free marketeers, aka private enterprise. Limited qualifications required-greenshirt (idealogy), brown tongue(remember you are joining a conga line of suckholes)and OPM (other peoples money). Almost the same qualifications as an investment banker and the same bon mot–all reward , no risk (remember derivatives?).

    Australia, 2009, drowning, not waving. Australia, 2010, the watermelon messiah declares that the road to hell is paved with good intentions BUT THE ROAD TO HEAVEN IS PAVED WITH RED TAPE. Watermelon whine anyone?

    Reply
  3. Is it not obvious, that as the world becomes more and more productive and efficient, that everything gets cheaper?

    Surely deflation is a good thing, as it shows a higher quality of life? The logical result of a super-efficent society is that everything is so easy to produce, (its all automated), that nothing should really cost anything anymore.

    Welcome to the new world order. What motivates you to do what you do? The numbers game? Or a perfect world where nothing is beyond your reach? Just do not forget what it took to get us here.

    Reply

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