|»5 Minute Wrap Up by Equitymaster|
On This Day - 23 AUGUST 2011
All these point to a new global recession
In this issue:
-------------------------------- Urgent Update On The Global Crisis --------------------------------
Is the current Global crisis really an opportunity you can profit from?
To get an answer to this question and more, join us for the latest edition of the Equitymaster WebSummit!
Our guest will be Ajit Dayal, Director, Quantum Asset Management Company.
So which are these indicators that firmly point to another recession in the making? Take shipping to begin with, which is a critical indicator of global financial health because so many of the world's goods travel by sea. The latest data about dry bulk commodities-shipping costs, as tracked by the Baltic Dry Index, reveals that rates have fallen by a third so far this year. Further, the industry has not been able to impose normal surcharge which is typically a feature of peak demand periods.
Other indicators are the revision of various estimates as far as GDP growth and oil demand is concerned. Most global organisations have cut down GDP forecasts taking into account the failure of the developed nations to recover. But these downgrades are not just applicable to developed nations but to emerging countries as well. The latter especially are expected to witness a slowdown in growth as inflation and interest rates rise. On the oil front, OPEC expects demand to drop. China, which is one of the biggest guzzlers of oil, is likely to consume less oil as its economy slows and demand slackens. Government spending has also come under severe strain in the developed world due to massive debt thereby restricting any headroom to spend on activities that will contribute to GDP growth.
It doesn't end here. Unemployment has become a cause for worry in the developed world as it has remained persistently high in the region for quite some time now. Indeed even in China, although the CIA Factbook has recorded the unemployment there at 4%, it comes with a caveat; this figure takes into account the urban areas only. On considering migrants, the rate may very well jump to 9%. Poverty is another indicator. The number of people who live below the poverty line and have poor access to food has risen sharply this year hurt further by drought, flood and higher food prices. Not to mention the telling effect that all these factors have had on the global financial markets, which have once again seen a sell-off in recent times. Indeed, even if the staunchest optimists are not ready to believe that the global economy is heading into a new recession, they will have to concede that recovery is certainly not expected to happen for some time to come.
Data Source: The Economist
A group where member countries have common currencies and nearly the same interest rates but no common deficit limits is indeed skating on thin ice. Thus, taking advantage of lower interest rates, peripheral countries like Greece and Ireland borrowed enormously. And when the crisis struck, they became unable to repay their debts as not only did economic growth suffer but investors started demand higher interest rates from them.
Therefore, the only option before these troubled countries is to either default or go back to having their own currency so that they can devalue the same and kick start economic growth by boosting exports. However, political leaders in the Euro zone are not ready for anything like this yet. They believe that the cost of disintegration will be too much to bear. But sooner or later, the bullet will have to be bitten we believe.
Despite the high volatility in the markets (an ideal time for hedge funds to make money), most of the hedge funds continue to deliver negative returns. Some of the reputed names have given losses of nearly 30% in the month of August alone. The result being that most investors are now growing exceedingly wary of them. In fact, most of the smaller hedge funds may end up closing shop unless they can improve their returns. The larger ones may survive the battle but if they don't turn things around, this survival too maybe short lived.
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