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Thursday 08 March 2012
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Telegraph.co.uk Home News Sport Finance Comment Blogs Culture Travel Lifestyle Fashion Tech Dating Offers Jobs Companies Comment Personal Finance Economics Markets Your Business Olympics Business Business Club Money Deals Ambrose Evans-Pritchard Damian Reece Jeremy Warner Richard Fletcher Kamal Ahmed Alistair Osborne James Quinn Home» Finance» Comment» Ambrose Evans-Pritchard Triple trouble in Europe, US and China brings out the bears The blistering asset rally of 2012 has run ahead of economic realities in Europe, America and China. It is exhibiting symptoms of a schizophrenic market, with technical indicators flashing signs of exhaustion. Europe, China and the US are all facing significant troubles in 2012 Photo: AFP/EPA/Reuters10:00PM GMT 07 Mar 2012
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Graham Secker from Morgan Stanley said it is rare for global stocks, oil prices and government bonds to rise in lockstep, and such exuberance becomes a "very reliable sell signal for stocks" once speculators join the party.
Equity long positions on NASDAQ have reached 1.5 standard deviations and long bets on oil are at an extreme of 1.9, according to data from the Commodity Futures Exchange Commission. This is occurring at a time when yields on 10-year US Treasuries are still at 1.96pc, signalling depression, deflation, or both.
The historical relationship between bonds and equities has completely broken down over the past six months. "You can't have a sustained period where equities are going up, while bond yields are flat or trending down," said Mr Secker.
One or the other must give, and bears have no doubt which it will be. Fund manager John Hussman said the market is replicating the "extreme" conditions seen at danger moments in 1972-1973, 1987 and 2007-2008. His warning indicators include a rise in the S&P 500 index by more than 8pc above its 52-week moving average, a "Shiller price/earnings ratio" above 18, and bearish sentiment below 27pc.
America's Economic Cycle Research Institute (ECRI) said its black box shows "pronounced, persistent and pervasive" signs that the US economy is sliding back into recession.
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07 Mar 2012Fed chair Ben Bernanke warned last week that the US faces a "massive fiscal cliff" at the end of 2012 as tax cuts expire and the axe falls on $110bn of spending due to "sequestration". Medicare taxes also kick in. "All those things are hitting on the same day, basically. It's quite a big event," he said.
It is far from clear that the US economy is strong enough to withstand such fiscal drag. "Every time the US economy falls below the stall speed at 1.75pc it falls into recession: we have now been below that for the last three quarters," said Albert Edwards from Societe Generale.
"To me this feels no different from the start of 2011 but with one major difference. Profits are sliding instead of rising robustly," he said. The 12-month "forward earnings" data have peaked, replicating the pattern seen at the onset of the bear market in 2007.
Mr Edwards says the "Ice Age" cycle in America and Europe is still playing out much as it did in Japan after the Nikkei bubble, with each rally overpowered by the crushing force of debt deleveraging.
Whatever the outcome of bond talks in Greece, Europe is still in the grip of a credit crunch. The European Central Bank's three-year lending blitz under Mario Draghi has averted a Club Med banking collapse but it has not yet revived lending.
Mr Draghi has injected €530bn in fresh liquidity, less than the headline figure of €1 trillion once loan rollovers are excluded. Meanwhile, banks parked a record €827bn back at the ECB this week. They are hoarding funds in case the credit markets seize up again, or to meet debt repayments as their bonds fall due.
The "Draghi bazooka" cushions the blow as lenders slash balance sheets to meet a core Tier 1 capital ratio of 9pc by June. It does not halt the process. The Global Stability Board expects Europe's banks to "delever" by €2.5 trillion over coming months.
The hard data are not getting better. Real M1 deposits are collapsing at an accelerating rate across southern Europe, with falls of 12.9pc in Greece, 9.2pc in Ireland, 9pc in Portugal and 8pc in Italy over the past six months.
The eurozone is mired in recession, with even Germany recording a 2.7pc drop in factory orders in January. Its export orders fell 5pc. Spain's industrial production has fallen for the past five months, sliding 4.5pc in January.
The International Monetary Funding warned over the new year that the current mix of policies in Europe is "leading to a dangerous downward spiral". It said the eurozone would contract 0.6pc this year, with falls of 2.2pc in Italy and 1.7pc in Spain - with ugly effects on their debt trajectories.
Equity markets chose to ignore these warnings, pricing in the start of a fresh growth cycle. The sudden jitters on bourses across the world over recent days suggest that they may have jumped the gun.
In China, premier Wen Jiabao has downgraded growth forecasts to 7.5pc. It is far from clear whether the Politiburo can navigate a soft-landing after such a torrid property boom. R&F Properties said house sales in the first two months of this year were down 40pc from a year ago, and prices fell 22pc.
Nomura said China's electricity use fell 7.5pc in January from a year earlier, implying a sharp industrial slowdown. The bank said the country has already reached "peak steel", with its steel production index crashing to 39.4 in February.
Dong Tao at Credit Suisse said China's great industrialization boom is over, with nasty implications for the commodity supercycle. "We believe the golden age of infrastructure investment is behind us now. The golden age of the housing boom is behind us now. The golden age of export is behind us now. The golden age of policy stimulus is behind us now. Doing a head massage simply does not use as much steel as building an airport," it said.
The Shanghai stock market has been signalling trouble for a long time, falling more than 60pc from its peak in late 2007. What is odd is that the bourses of countries that feed on China's commodity boom have marched to their own tune.
At the end of the day, there is still a lack of demand in the global economy. The Asian "savings glut" is still with us. The East has not replaced the consumption lost as the debt-gorged West tightens it belt. Liquidity has masked the deeper crisis, and flattered asset prices. The cancer remains.
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