The litmus test for the global economy

stocks Sept12.pngThe blog’s 6-monthly review of global financial markets highlights some interesting developments. It began 4 years ago, and was followed by the co-ordinated G-20 stimulus programme in March 2009. This ran out of steam by April 2011, leading the blog to launch its IeC Downturn Alert.

The slide above shows market performance since then. The period covers the €1tn ($1.4tn) LTRO programme from the European Central Bank, and the US Federal Reserve’s Operation Twist, as well as more recent announcements of further market support:

• The 4 BRIC countries (Brazil, Russia, India, China) are worst performers
• Russia (lilac) is down 28%; China (blue) down 27%
• Brazil (pink) is down 12%; India (orange ) down 7%

• Japan, UK and Germany are also all negative
• Japan (purple) is down 10%; UK (red) down 5%; Germany (green) down 4%
• Only the US stock market (dark blue) is positive, up 5%

• The big winner has been the US 30 year bond (dark green), up 36%

Three conclusions stand out from this.

One is that the export-development model of the BRIC countries is under great pressure. They took a seeming ‘short-cut’ to GDP growth by focusing on exports at the expense of domestic demand. Now the ageing of the Western BabyBoomers means that demand is disappearing, probably forever.

The second is that the unprecedented stimulus programmes in the West have not worked. As the blog will discuss tomorrow, the balance sheets of the major central banks are now are unprecedented levels. But they cannot create demand when people don’t want to buy.

One final conclusion is that people do want to save, with a ‘safe’ government. The JUUGS (Japan, UK, US, Germany, Switzerland) continue to be the destination of choice for investors. They now clearly prioritise return of investment versus return on investment.