Something’s in the air…news of recession everywhere. Or so it seems this evening.
First, readers Michael and Scott sent us Jeremy Grantham’s latest newsletter. Grantham is known as a perma-bear, and his call that a major bank would fail in the next five years (this about two years ago) was seen as a symptom that he had a few screws loose. No more.
Several changes in this update. First, Grantham now thinks we will have a global recession (before, he thought emerging markets would escape):
Economically, most emerging countries really looked to have decoupled for 18 months as we slowed and they did not. But in a global recession no one decouples. As German, French, and British growth slowed rapidly in the last 6 weeks, a global slowdown looks more likely and more painful. To this end, we have done an about face and lowered our weightings in emerging equities to
neutral or just below. To critics of this change, I would cite the quote attributed to Keynes, caught in the same predicament: “When the facts change, I change my mind – what do you do, sir?”
Nouriel Roubini, by contrast, never bought the decoupling thesis, as he reminds us in his latest post:
As already analyzed and discussed in detail in this blog there is now fresh evidence that at least a dozen major economies and some emerging markets are at risk of a recessionary hard landing. The list includes:
Some other South-Europe emerging markets
Moreover, even in the rest of the Eurozone (Germany, France, etc,) there is now evidence of a sharp growth deceleration as industrial production is falling in all of the Eurozone, business confidence is down, consumer confidence is down and retail sales are flat or falling….
So while we will not experience a global recession we will get close to one as the US will have a severe recession, Japan is entering one, a third of Europe will go into a recession, the rest of Europe will have a severe growth slowdown, the rest of the G-10 advanced countries is sharply slowing down and a few emerging market economies are entering a recession. And if the advanced economies are sharply slowing down or entering a recession the idea that China, India, the other BRICs and emerging markets can happily decouple from these recession or sharply slowing economies is far fetched.
Back to Grantham. Second change: he has not modified his “fair value” of a 10% to 15% fall in the S&P (1100ish) and a further 10% fall in housing prices. but he thinks the odds of overshoot on the downside have increased:
So, in general, the unexpectedly bad fundamentals have not dramatically changed our asset class forecasts. Yes, there has been an unexpectedly large bite taken out of the net worth of financial companies. But other than that, it is more that the probability has increased for longer and deeper overruns below fair value and the chance of a “meltdown” substantially more rapid than my long-held suggestion of a leisurely move to a low in 2010 or later.
Michael also pointed out that the Baltic Dry Index has fallen, as this Bloomberg chart confirms, but that sighting needs to be taken with a grain of salt. The Baltic Dry Index, which is a measure of shipping rates and hence international trade activity, is prone, like the negative yield curve, to send false signals. Still, the trend is clearly not positive:
Finally, Mish has a very good post, “Credit Crunch Reaches Critical Mass.” with a series of examples of money scarcity and resulting damage. Not conclusive, but not encouraging either.