After the sharp drop off in the latter part of 2008 and the first quarter of 2009, economies around the world saw a recovery predicated largely on massive government stimulus. The question now been asked is “the liquidity led liftoff running out of steam?” Given the release of the worse than expected US unemployment figures this may well be the case.
The US unemployment rate jumped to an unexpected 10,2% in October as jobs continues to be cut. The last time the official level of unemployment hit this peak was in 1983.
Source : dshort.com
Independent Canadian research house BCA , who have been operating for 60 years have the following views.
• With liquidity running out of steam, lower corporate sales growth in 2010 may hold markets back.
• Data seems to indicate that the recovery so far has been led by government stimulus and not underlying private sector demand.
• Bank lending is still declining in all major categories in the US and this ongoing credit crunch or reversal of leverage will put a strain on and remain a headwind for economic recovery.
• Their view is that the stockmarket “… is increasingly at risk of a more meaningful pullback. Indeed, a larger correction would be healthy, as it would allow overbought conditions to unwind and help to ensure that Fed policy does not turn prematurely less simulative.”
UK based Sarasin and Partners have been noting the same theme of the liquidity pullback saying:
• After unprecedented moves by central banks to flood the world economy with global liquidity, the first, albeit tentative, signs of a reversal of policy are starting to be felt.
• But interestingly it has not been the US Fed or the Euro zone that is leading the process, but the Australia and Norwegian central banks that have starting increasing interest rates.
Let’s look at recent Central Bank action
So far central banks have come out with announcements generally as expected.
The US Federal Reserve continued to promise to hold rates close to zero percent for “an extended period of time.” While there is no exact definition of a foreseeable time, at this stage it looks like they may only start to raise rates from late 2010.
Government finances in the US and indeed across most countries are not in a pretty shape and providing the required liquidity is costly. The US government’s fiscal year ended on 30 September 2009 with a deficit of $1,417 trillion. The sheer scale of this one year negative puts a question mark as to possible damages.
Source: Wells Fargo Securities
The European central bank left rates unchanged at 1% but is slowly looking to exit providing this liquidity, saying this week that the offer of unlimited emergency one-year liquidity planned for December would be the last.
The UK’s Bank of England will also start to slow its provision of liquidity by buying another GBP25 billion of gilts over the next 3 months. It left the key interest rate at 0,5%
While it can be debated, Central banks have generally done what has been expected of them post the liquidity crunch of 2008. Now they are trying to ease back ever so gently without upsetting the asset markets in a world that is still looking for genuine demand.
The high level of unemployment is a concern but this is very much a lagging indicator.
Nevertheless after a strong rally on Thursday global markets pulled back on Friday. Gold continued to push up and is trading just shy of the $1100/oz level on late Friday, which helped push the gold shares up.
Have a fantastic weekend
Kind regards
Ian de Lange
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966