By John Richardson
AS USUAL, everyone will take what they want and need to take, in order to protect their own interests, out of Monday – the worst day for the Dow Jones Industrial Average in seven months. This was followed by severe declines in several emerging market indices.
Like everyone else in the somewhat unreal world of observing and/or playing financial markets we at times like this can be pretty much addicted to cable TV news the wire services:
And so we have also heard the pundits tell us that:
- This is just an inevitable “recalibration” as investors take their profits.
- It’s a cold winter in certain parts of the US (admittedly, a severe winter but go figure, snow in New York City at this time of year? Who would’ve guessed it?).
- The US “energy revolution” will underpin a strong economic recovery in the US.
- The emerging market contagion (or was it partially also the other way round, as emerging markets had already fallen ahead of the Dow Jones rout?) should be put into the context of this being much better than 1997. Ahead of the Asian Financial Crisis, which began in June of that year, emerging markets were far weaker. For example, they had lower foreign-currency reserves to protect themselves from investment outflows.
- The corrections in emerging markets are thus really firstly about the Fed’s drawdown of quantitative easing and secondly, a temporary slowdown in manufacturing and services growth in China caused by the Lunar New Year Holidays. As the fundamentals of most emerging markets, including China, are sound, we should be back to normal very soon.
But, remember, just a few weeks ago just about everyone was entirely convinced of the sustainability of the US economic rebound.
And yet here we are, just a few weeks later, mulling over disappointing US manufacturing, construction and auto sales numbers, which means we have to ask: Is this really about the cold weather or something more significant?
If you dig deeper into data on auto and housing markets in the US – two key end-use markets for chemicals and polymers – the weaknesses in the recovery theory have been there for a long time.
And then on Tuesday, as the blog broke away from cable TV for a bit more perspective – and therefore, hopefully, some sanity – we read this article in the New York Times.
In summary, it says that:
- The top 5% of earners accounted for almost 40% of personal consumption expenditures in 2012, up from 27% in 1992. Largely driven by this increase, consumption among the top 20% grew to more than 60% over the same period.
- Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17%, compared with just 1% among the bottom 95%.
- The problem is that 50% of Americans have no participation in stock markets, even counting retirement incomes. And so they will not have taken profits off the table over the last few days – and thus will not have gained from last year’s Dow rally.
- The main point of the article is that this is reflected in the fortunes of restaurants and department stores, which is the main point of the article. Whilst those businesses that serve the super wealthy are doing really well, those that cater for America’s struggling middle classes are floundering.
We have been arguing for approaching two years that there is a “squeezed middle ground” in Western consumer market in general because of the retirement of the Babyboomers. The NYT article adds further statistical weight to our case.
Crucially, also, what if most people have got the Fed and China the wrong way round?
Is it China that is the real problem as it rebalances its economy- and what are the implications for the global economy?
Stock markets might bounce back, of course, but is there something more fundamental here that we need to prepare for?