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I've showed these charts many times over the past year. Early in 2009 I thought the bounce in the Baltic Dry Index (a measure of shipping costs for bulk commodities in the Pacific region) was a good sign that the global economy was coming out of its 2008 slump. The Harpex Index (a measure of shipping costs for containers in the Atlantic) was a laggard, however, until just a few months ago, but it is now surging. With both indicators up significantly on the margin, it would appear that global economic activity is broadening and strengthening, and this provides a welcome counterpoint to the financial panic that is gripping Europe. Strong growth fundamentals provide an excellent source of fundamental support for European debt restructuring should it occur.
And while on the subject of European debt, here are some facts to help keep things in perspective. As my friend Mike Churchill notes, the combined GDPs of Greece, Ireland and Portugal total about 1% of global GDP, which is roughly $60 trillion. I note that Greece's sovereign debt of roughly $400 billion is about 1% of the global bond market, which is approaching $40 trillion. We're not talking about a lot of money here, even if Greek debt suffers a significant haircut in a restructuring. The main issue is whether debt-related losses are too much for the balance sheets of Europe's major banks to absorb. The rise in euro swap spreads that I highlighted yesterday confirms that this is the market's major source of concern; 2-year euro swap spreads closed at just under 80 bps today, and that is a sign of significant—but not yet fatal—concern over the counterparty risk inherent in the European banking system.
9 comments:
Netapp (NTAP) released earnings tonight and the hit the ball out of the park. Margins were high and sales were strong. Future earnings will be revised upward.
Mark Mobius, manager of several billion dollars of international equity capital says we are in a correction in a bull market. He is buying beaten down stocks all over the world. A man with skin in the game who pays when he is wrong. I do not invest with him but I would listen to him before I would the tenured professors who never managed money or made a payroll.
The global economy continues to expand. The panic in the markets are a buying opportunity for rational long term investors who can stomach the volatility caused by the short term worst case worriers. The returns will be above average...perhaps considerably so.
Scott: I have seen improvements in my business and am also optimistic as to our economic future. I must say however that this article gave me pause:
"The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.
The stock of money in the US fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc Photo: AFP
The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.
"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said."
http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html
Any thoughts on this?
Bill,
Scott addressed this recently. Check the menu to the left. The post is titled, "the M2 myth".
Bill: First, I suggest you read my post from last week on the issue of growth in the money supply:
http://scottgrannis.blogspot.com/2010/05/m2-myth-money-is-not-in-scarce-supply.html
Bottom line: slow or negative growth in money today is "payback" for very rapid growth in money leading up to last year. There is no reason at all to think that there is a shortage of money in the U.S.
I would also note that M3 is no longer calculated by the Fed, but is cobbled together by various private sources. The Fed stopped publishing the M3 numbers long ago because they (correctly in my belief) concluded that M3 provided no useful information that was not contained in M1 and M2.
I have always followed M2, and I honestly do not see any cause for concern here.
I would also note that if there were a shortage of money, as the M3 alarmists are trying to argue, then how do they explain the ongoing rise in gold and commodity prices? or the abundant evidence of expanding global economic activity?
That makes sense. Thanks for explaining it again. I had also forgotten about the earlier post. Thanks for allaying my fears.
Mr. Grannis:
“…..counterparty risk inherent in the European banking system.”
Excellent point.!
Have a question for you: is it the medium and long term aggregate EU banking system counterparty risk that is really the issue that needs examined?
I do not think it's the $400 billion in your statement that has people worried. It's the $40 trillion you mention that we all no will never get paid back.
Therein lies the problem...
There is another roadblock out there to consider, which is FASB’s intention to expand mark-to-market accounting for the loan books of the banks (where commercial real estate prices are currently running about 40% below book) which would surely put the whole financial system into insolvency (and as a result, unlikely to occur). It's not only the European banks that are in trouble, home grown issues still remain in ours.
See page B3 of the NYT for more
Mark-to-market requirements could certainly cause problems for banks with lots of real estate exposure. Brian Wesbury was one of the first to argue that MTM was one of the chief causes of the 2008-9 financial crisis.
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