There’s no reason to pretend any more. The economic news that poured out during October suggests that the US economy is indeed in a recession and Europe is likely to follow. The upcoming news that refer to job losses clearly indicate what follows… A DEEP decline in corporate profits and possible losses; We should stop hiding and finally admit that losses will reach almost all types of companies and not only the automobile sector. It is funny that we need to start reading our university books again in order to find out which goods are determined as “Giffen Goods”... A good investment idea would be stocks of companies whose production is based on such goods. One should keep in mind that “Giffen Goods” have changed since the theory was established BUT the idea remains the same. On macro grounds now, the unemployment rate shot up to 6.5% and 8% in the US and EU respectively. Unfortunately this is a lagging indicator, so we should expect that it will increase in the near future. Emerged economies had not witnessed such unemployment figures since the early 1980s. The situation is worse for the emerging economies. As our demand dwindles for products, those jobs that were created in Asia and Eastern Europe over the last ten years, will be just that amount of foreign jobs that will be terminated. The US and the EU exported jobs and credit and now they will be exporting unemployment and financial instability.
Retail stores in London and New York bombard potential consumers with “40 – 60% OFF” sale signs, and it is not even Christmas. Even if people increase their consumption during these days, there won’t be much profit associated with these sales. Companies just need cash and they are willing to pay a lot for acquiring it. In Europe, many car manufacturers promise that in two years they will buy back - at the same price - the car that they will sell during November. Obviously, under these conditions, they do not bet on inflation. They need CASH NOW!
It would be unfair not to blame governments at this point, especially the European ones. Cutting taxes is a measure, but you need to cut taxes at the right point in time. Last month, most of the governments reduced taxes. I would not expect that they will gain a lot out of that. Households have already reduced their spending on house-cleaners, their hairdresser’s appointments, their lawn services, their manicures and even how often they use their cars. It is not likely that they will start financing these activities soon. It is also very sad to mention that some countries, like Greece, have not even considered cutting taxes yet. They keep imposing new taxes which will –mathematically – lead to credit crunch and economic slowdown! How short sighted.
It is impossible for me, and whoever does not believe in miracles, to find a way for this recession to be anything but long and deep. We expect a major stimulus package from almost every government in Europe but this will not make the recession disappear – or the up coming depression. It will ease the consequences but the duration will be longer.
Year 2009 will be a miserable year for the economy and for corporate profits. It is likely though for the stock market to react or at least keep the current levels. During the next 12 months it is likely that we will see the stock markets trying to gain their lost “prestige”. But before that we should not be surprised if we see increased volatility and even lower prices. After all, past experience dictates that stock markets lead the way and the real economy follows.
Retail stores in London and New York bombard potential consumers with “40 – 60% OFF” sale signs, and it is not even Christmas. Even if people increase their consumption during these days, there won’t be much profit associated with these sales. Companies just need cash and they are willing to pay a lot for acquiring it. In Europe, many car manufacturers promise that in two years they will buy back - at the same price - the car that they will sell during November. Obviously, under these conditions, they do not bet on inflation. They need CASH NOW!
It would be unfair not to blame governments at this point, especially the European ones. Cutting taxes is a measure, but you need to cut taxes at the right point in time. Last month, most of the governments reduced taxes. I would not expect that they will gain a lot out of that. Households have already reduced their spending on house-cleaners, their hairdresser’s appointments, their lawn services, their manicures and even how often they use their cars. It is not likely that they will start financing these activities soon. It is also very sad to mention that some countries, like Greece, have not even considered cutting taxes yet. They keep imposing new taxes which will –mathematically – lead to credit crunch and economic slowdown! How short sighted.
It is impossible for me, and whoever does not believe in miracles, to find a way for this recession to be anything but long and deep. We expect a major stimulus package from almost every government in Europe but this will not make the recession disappear – or the up coming depression. It will ease the consequences but the duration will be longer.
Year 2009 will be a miserable year for the economy and for corporate profits. It is likely though for the stock market to react or at least keep the current levels. During the next 12 months it is likely that we will see the stock markets trying to gain their lost “prestige”. But before that we should not be surprised if we see increased volatility and even lower prices. After all, past experience dictates that stock markets lead the way and the real economy follows.
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