Always Darkest Just Before The Dawn

The euro zone crisis is now much more profound and more fundamental than at the time of Lehman," ECB Executive Board member Peter Praet told a conference in Lisbon.

Well, that may be true, Mr. Praet, but the world has learned how to deal with an overleveraged banking system, and the first step in that process is not to let the banks go under. The political power structure is putting together a plan that will keep the banks from failing. People may not like the idea of a Eurozone-wide buffer, a unified acceptance of debt, and a joint effort to pay it off, but it is the only way out of this mess for the Europeans. Of course, the wealthier nations will suffer the most if the banking system fails, so, in the end, they will sign onto the plan, or suffer the consequences of a failed Eurozone. They had better quit crying, though, as the problems are only becoming more acute as the politicians fiddle away their precious time.

Spanish and Italian borrowing costs continued to rise on Monday, with Spain's 10-year bond topping the critical 7 percent level, and world shares fell with a darkening global growth outlook and little prospect of early process on the euro zone's debt crisis ...

Okay, so I will be the first to admit the global economic environment is not good. I will also be the first to argue that things can and will change, and they will do so sooner rather than later. Think back to last year and the year before. The US experienced similar soft patches in the economic momentum. Did we or did we not come out of those to experience strong growth in the fall and winter? Well?

And how did the market fare last fall and winter, and the fall and winter before? Didn't the market climb up, up, and away? "Things are different this year," you say. Yes, you are surely correct. One big difference is energy and food prices around the globe are dropping. I know that many economists and pundits see this as deflationary, and "deflation is far worse than inflation," they say, but are they right? Will increasing consumer purchasing power make a difference?

In response to this sharp boost to purchasing power, global consumer spending should accelerate in the second half of 2012. Based on its historical relationship with oil prices, global consumer goods spending looks set to accelerate to one of the strongest gains in over a decade.

I am in the camp above. I see a global consumer filled with pent up spending energy. So much bad news has hammered the poor consumer into thinking economic Armageddon is coming, but after a less costly summer vacation, the consumer just might have a different attitude, especially if commodity prices keep dropping, and it looks as if they will, if oil prices are any guide.

Jim O'Neill, chairman of Goldman Sachs Asset Management, is keen to point out that five-year forward prices of oil -- less prone to ebb and flow of short-term spot market moves -- have fallen below their 200-day moving averages. "I'd rather trust the 5-year price than the spot price, and it is now below its own moving average. This has to be good news for anyone, other than those long crude oil.

And then there is the light of China relighting, as it infuses money into infrastructure to stimulate its economy.

Weaker import data are not a reflection of a weakening in spending by Chinese consumers. Unlike in the United States, imports into China are largely made up of raw materials used for manufacturing or infrastructure projects. The consumer seems to be quite stable if you look at the retail sales numbers, employment is holding up and we are seeing wage increases.

Trade in the day; Invest in your life ...

Trader Ed


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