We have all heard the saying “this time is different”, and in this case it may be. On the other hand, it may not be. The stock market has been heading higher the past few months despite economic data that continues to show global weakness. Below is a chart showing the Purchasing Managers Index (“PMI”) from around the globe. Any index over 50 means expansion, while an index under 50 means contraction. A few things to note about the chart: 1) the economies are linked – the direction of each country’s PMI follows closely with the others; 2) the overall direction is negative; and 3) all areas are showing contraction. The US’s PMI dropped to 49.8% and the HSBC Flash China PMI for August came in at 47.5 – the official reading comes out next week. In our opinion, the debt burdens of Europe and the US are the main culprits for this slowdown.
But won’t China save the day? To answer this question, one only has to look at where China gets its growth from. China’s primary method of growth is from selling goods to the rest of the world. The rest of the world has pumped up China over the past few years by borrowing. Think of it this way, it is similar to a department store offering a credit card to consumers who in turn use that credit card to buy goods and services from the department store. It is a way to make growth look good. Once the credit cards are tapped out; however, growth stalls or falls. Because China relies on the rest of the world to buy its goods, there is stark evidence of a major slowdown in China. So where will the growth come from?
We believe the most recent run up in the market has occurred because of words and not real economic factors. For instance, Draghi says the ECB will support the Euro – Ground Hog day again – even though the European crisis is far from over and the September 12th Dutch elections may cause more upheaval. Moreover, there are rumors of a possible QE 3 by the Federal Reserve. Finally, the market may be anticipating positive sentiment from the upcoming election. In our opinion, this is not investing on facts, but on rumors.
We believe it is still prudent to be cautious in this market. Managing risk outweighs trying to achieve oversized returns. We would rather give up a little on the upside until the election is over. Once the election is over, some uncertainty will be removed and better investment opportunities will exist. The investment opportunities will likely be different depending on who wins the election, but nonetheless they should be available. Enjoy your Labor Day weekend!!!!
Your THOR Team