Japan's latest third quarter 2014 data provides no comfort either, the world's third largest economy continues to contract. Gross domestic product (GDP) shrank an annualized 1.9% in the third quarter from the previous three-month period. Even US GDP isn't that hot when you strip out a sharp upturn in military expenditure.
If an independent level headed economist were to examine the latest raft of economic data, they would probably arrive at the sobering conclusion that the system is now eating itself. We are in a downward spiral of stagnating/shrinking economic growth, deflation, rising unemployment, pending massive debt defaults, political instability and civil unrest. It's one big mess! The greatest experiment in the history of finance has failed. The trillions of US dollars squandered on QE have not saved the real economy on Main Street from the edge of the abyss (I explain this in my article entitled, “Fire Backstage” where I attempted to explain the looming liquidity crisis). The opportunity to put the problem (from the last 2008 Financial Crisis) right was wasted by policy makers and we are now probably at the point of no return.
If that’s the picture, you are probably wandering how to survive and even prosper from the pending carnage. To survive a lion attack you don't have to run faster than the lion, you just have to run faster than the herd.
Surviving and prospering is the name of the game and being ahead of the curve is the way to do it in the financial markets.
But that’s easier said than done, especially when nature hasn't handed us the longest legs.
Nevertheless, let's look at some of the early getaway trends.
The global economy is slowing, that is becoming more evident with every bit of data being released and it is likely to accelerate next year. Foreign currencies with large commodity based economies are depreciating. As I mentioned in one of my articles a few weeks ago, as more evidence of a slowing world economy surfaces this trend will accelerate. If you call up a chart of the US dollar, that is pretty much what has happened over the last quarter with respect to the AUS dollar.
The sharp decline in world commodity prices, triggered by a slow-down in the world economy, has reduced the demand for commodities and is depressing prices. Already, this trend is starting to have a detrimental impact on commodity based economies.
“Sharp falls in prices of commodities from iron ore to crude oil are shrinking the windfall that Australia's government hoped would support spending on new infrastructure and some of the most generous social welfare plans in the world,” reports market watch.
About a third of Australian exports goes to China, so when China wobbles and demand for Aussie commodities falls, its price tumbles and the Australia economy gets whacked.
For decades Australian economists have been talking about moving away from an economy heavily reliant on commodities and developing other areas of the economy, such as manufacturing or services. A commodity based economy is too vulnerable to volatile commodity prices, therefore is prone to steep economic cycles.
But regretfully, for the lucky country blessed with natural resources, its fortune has also been its misfortune. China's, up until recently, unquenched demand for commodities has propelled the Aussie dollar to highs for a period long enough to choke-off its manufacturing industry.
The appreciated Aussie dollar, has made it very difficult for Australia's manufacturing to compete with their extremely low labour cost neighbours in Asia.
So the invisible hand of the market has channelled capital and resources into mining activity.
But the market has a time lag, while higher prices acted as a signal for mining companies to increase their output at the peak of the commodity boom, a few years ago, that output is probably now ready to come on the market, at the worse time.
Already exports to China are down by more than 40%, which is causing a slump in commodity prices. The end result of that is a rapidly deteriorating economic panorama.
Instead of reaping a revenue boost from an investment-driven export boom as expected, the conservative government now faces a tax write-down of about 8 billion Australian dollars (US$6.7 billion), or 0.5% of gross domestic product in the fiscal year starting July 1, according to Morgan Stanley.
Australia's economy grew by much less than expected in the third quarter as commodity prices tumbled and mining investment slumped, driving calls for interest-rate cuts next year.
Unemployment is rising for the first time in years, reaching a 12-year high of 6.2%.
Morgan Stanley recently said that without more stimulus measures to boost growth, Australia may struggle to avoid its first recession in more than two decades.
The bank last month trimmed its growth forecasts for 2015 to 1.9% from 2.5%. That compares with the current Reserve Bank forecast of around 3%.
Morgan Stanley, Deutsche Bank, Goldman Sachs and Credit Suisse have all turned bearish on the Australian economy in recent weeks. Deutsche Bank on Dec. 2 abandoned its forecast of an interest-rate rise in 2016, and now forecasts two cuts of 0.25 percentage points each in 2015.
Indeed, slow global economy and a heavily reliant economy on commodities means that there may be trouble down under, particularly if the global economy deteriorates further. With a drop in interest rates now likely to be on the cards, the sliding Aussie dollar may have just begun making it a shorter's delight.
Paradoxically, the inter-connectivity of economies, the comparative trade advantages, the free movement of capital and trade that aided economic growth and prosperity for decades in developed economies, in bizarre twist, can sometimes work in reverse, destroying the very prosperity and economic growth that it helped create.
A good analysis....
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