Japan's industrial production surged 14% in the three months ending May 2009. That's one more green shoot that demonstrates the global economy is not in free-fall and in fact is rebounding from the sharp decline of late last year. The down-sequence goes something like this: global demand collapsed as fear of widespread bank failures swept the markets; counterparty risk blew sky-high, with the result that banks stopped writing letters of credit; without letters of credit, global trade ground to a halt; as inventories built up, production was slashed. The up-sequence began early this year: Financial markets began to recover, as swap and credit spreads declined and liquidity returned; with counterparty risk rapidly declining, banks began writing letters of credit again; with letters of credit, global trade resumed; with confidence returning, demand started picking up; inventories began declining; and finally, with inventories declining, manufacturers are once again ramping up production. Evidence of this process can also be found in the rise this year of the prices of commodities, energy, and equities.
Monday, June 29, 2009
Japanese industrial production bounces (2)
Japan's industrial production surged 14% in the three months ending May 2009. That's one more green shoot that demonstrates the global economy is not in free-fall and in fact is rebounding from the sharp decline of late last year. The down-sequence goes something like this: global demand collapsed as fear of widespread bank failures swept the markets; counterparty risk blew sky-high, with the result that banks stopped writing letters of credit; without letters of credit, global trade ground to a halt; as inventories built up, production was slashed. The up-sequence began early this year: Financial markets began to recover, as swap and credit spreads declined and liquidity returned; with counterparty risk rapidly declining, banks began writing letters of credit again; with letters of credit, global trade resumed; with confidence returning, demand started picking up; inventories began declining; and finally, with inventories declining, manufacturers are once again ramping up production. Evidence of this process can also be found in the rise this year of the prices of commodities, energy, and equities.
We have stock, bond, and commodities rallying. Someone has to be wrong.
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ReplyDeleteNot necessarily. There is nothing written in stone that these three can't correlate for a time. Each is totally consistent with a normal emergence out of recession - better outlook for profitability helps stocks, insolvency risk diminishing helps bonds, basic demand picking up helps commodities. Financial market 'tribal knowledge' can sometimes get trumped by economic fundamentals. I won't expect relationship to hold forever, but it makes total sense to me, and I've been riding each class up (while shorting treasuries).
I get that much DB but I am not in the "all is well" "back to the status quo" camp. I was not in the “world is collapsing” camp either.
ReplyDeleteThe reasons we ended up here have not changed, cheap money and toxic mispriced assets. Until you can tell me confidently that those have been remedied, I would expect that with $13T (in the US alone) of cash, guarantees, and get out of jailed cards free, we would stabilize the rocky ship, but our long term prospects are now worse than ever.
Monetary and fiscal policy is a complete disaster and our governmental plans for the future are grander than ever. We are a rinse and repeat society but there arises a tipping point within everything. Nothing last forever, invest accordingly.
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ReplyDeleteI agree 100%, or maybe 99%. Policy is terrible but with the click of a mouse I can move money to Canada or Cameroon or anywhere on the globe that I think will offer me a return. The goons that run our gov't haven't figured that out yet. The rest of the world can't afford to indulge in the wealth sapping, growth killing policies that we have embarked on, so I am betting that the rest of the world will move ahead with the US barely eking out real growth.