With regards to the Dow's 17% drop versus other Asian bourses one could argue that the slide in the USD$ adds a further negative contribution to the drop in the Index levels.
However the claims about Disney's theme park sales and Berkshire Hathaway's Nebraska furniture store sales lends more weight to the author's view.
Personally I think the current drop in the markets we are seeing is due to the high oil prices rather than recession fears and credit crunch fears which have been waning.
I also agree that the oil prices will be retreating later on. The oil price surge has all the hallmarks of a 5th Elliot wave impulse, where there is excessive exuberance building.
But do note that I do not see oil prices retreating within the next week, it's not going to be so soon. Perhaps around the end of June . The key dates would be 25 June 2008 when the FOMC announcement is made as well as the New Home Sales figures and EIA Petroleum Inventory levels are released. 25 June 2008 is going to be a HUGE day. Also 26 June 2008 when the 2Q US GDP numbers are released. Hence we will see a huge move (whether up or down) on 25 June 2008 and 26 June will be the follow up continuation of that move.
If the numbers show that the US had escaped a recession and the Fed is holding or even comfortable enough to raise rates, this would send oil prices tumbling. We probably won't see oil prices tumble by US$100 as the demand for oil will still be high in a growing global economy, but there will certainly be a correction from whatever record price it goes up to.
As I write this, I also understand that the stock market is a forward looking indicator for all of these things. And at present it does look like the equities are falling after hitting resistance levels. However the reason seems to be the rising energy costs that businesses are fearing going into the 2nd half of 2008.
This as we know can and will be tackled by governments and politicians. OPEC can do something about it. Will they and why would they? I will talk about this later.
Last year I noticed that whenever oil fears struck the markets would retreat. However it tends to be temporary. Oil prices just like stocks cannot go up in a straight line forever. Also people forget about oil prices when other good news about the economy and business growth comes in.
Hence the eye is now all on oil because it is about the only "new" bad news coming out. AIG's losses were expected. Citigroup's plan to sell US$400B in non core assets is actually a positive show of strength.
The market will be falling next week. How far and how steep it falls would be a good indicator of things to come in June.
If the market drops steeply and tests the lows in March, that would be a bad signal to me and I would expect the GDP numbers to be bad and markets will probably go lower than March's lows. However if we see the Dow hold above 12200 that may bode well for the June numbers.
Also I would be looking to see how Asian markets perform in the next 2 months or so. Do we see decoupling?
Notice that the latest report last night showed that the US trade deficit narrowed more than expected.
Why did the trade deficit narrow? Here are several quotes from that article above with comments from myself in bold:
"Imports dropped the most in six years as purchases of furniture, cars and telecommunications gear fell, reflecting the weakest growth since 2001 and a falling dollar that makes overseas goods more costly."
"Total exports fell 1.7 percent to $148.5 billion, driven by a decline in sales of commercial aircraft, autos and petroleum products. Even with the drop, the first since February 2007, exports were still the second-highest on record."
Imports to the US dropped and US exports also fell. Yet the trade deficit narrowed. This means that the drop in exports was much less than the drop in imports. As we can see from the above, the imports dropped the most in 6 years while the exports were the 2nd highest on record! What does that tell you? The global economic world order might be starting to change. The world's obsession with the US domestic consumption being the most important factor for economic growth might be changing. The US imports less now but is starting to export more. No doubt the US will remain a huge consumer market relative to the rest of the world. But if the US had been exporting more lately, who have they been exporting to? Which market is consuming more such that the US can export more? The answer lies below :
"Receding demand for goods from China helped narrow the trade gap with that nation to $16.1 billion, the smallest in two years. At the same time, exports to China were the second-highest ever."
It would be interesting to see when was the highest ever exports from the US. But it certainly looks like China's rise in the global economic world has contributed to the possible changes we are seeing today. Previously I had written that we needed to see the 1Q 2008 results for China companies to determine if China's consumption was one of true domestic consumption or was it "repackaged" for export to USA. Most Chinese companies reported good earnings. And on top of that US companies with businesses in China reported fairly good results despite the US economic slowdown. And now we have these trade deficit, export, import figures that confirm the theory that China's domestic consumption growth is indeed real enough to make an impact on the global stage.
Decoupling? Personally I'm betting on it now. But there are the usual problems of inflation which I mentioned before. While I may have been wrong thinking that the USA would have to rely on cheap Chinese goods to keep local inflation figures down as an incentive to help tackle inflation, it appears the US might have their own incentives to do so now; US inflation might really be a result of record oil prices. There's so much talk about consumers in US tightening their belts because of inflation. I bet it's the same everywhere. Slowly we are seeing less talk about consumers tightening because of credit crunches and job losses. That's a good sign. Tackle inflation (namely get those oil prices down and we will be on our way)
"Demand for American goods from the European Union and from South and Central America set records in March."
Again it's not only China but the EU and South and Central America are also buying more from the USA. Is this good for the US economy? You tell me.
"Cisco Systems Inc., the world's biggest maker of networking equipment, is among the companies benefiting from gains abroad. The San Jose, California-based company posted sales growth of 10 percent in the third quarter, even as U.S. sales grew only 5 percent.
``Asia-Pacific was very strong,'' Cisco's Chief Executive Officer John Chambers said in a Bloomberg Television interview May 7. ``China and India are on fire.''
Amazing figures from CISCO! The rest of the world contributed almost as much sales growth as the USA itself. And John Chambers mentioned Asia. Asia's rise is real and sustained despite the USA economic slowdown. We always thought that Asian economies were dependent on US demand and consumption. We produce they consume. They slow consumption we lose out. But despite the US slowdown, Asia's consumption actually helped US companies!
Still, record exports alone won't prevent the economy from shrinking. Harvard University economist Martin Feldstein, a member of the committee that determines when contractions begin and end, said May 6 in an interview with Bloomberg Television that the U.S. economy is ``sliding into a recession.''
The USA has big problems domestically. Falling housing prices being a major problem. Are consumers in USA tightening their belts? Very likely. But what are the reasons? Rising oil prices would be one of them.But you see, these are the problems the US has. But what about Asia? Asia has only one problem. Inflation. Oil and food prices. And this is common to the USA. What should the US do to tackle inflation? Slow the economy? Well it's already in recession according to most people! Yet oil prices are at a record! Where's the demand? Answer Asia.
So either the USA sabotages the rest of the world and causes a massive global economic slowdown by deciding to let the US go into a long and severe recession thus causing a massive crash in oil prices or OPEC gives in and do their part to keep inflation under control thus allowing everyone to prosper together.
If you were Saudi Arabia and you were faced with these two options which would you choose?
I believe the world is more linked these days and willing to work in concert to solve problems.
Barring any unforeseen problems eg a war or a terrorist attack, or a global viral pandemic I am bullish for the global economy in particular Asia going into 2009.
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