The global equity sell-off resumed with great force this week all around the world. As we survey the carnage, I am wondering how the "decoupling" pundits are faring now.

A recent interview (worth reading) called "Inflation not the problem" with global asset strategists Albert Edwards and James Montier summed up something I was writing about on this blog last year. Now we are seeing the impact of the Western slow down on emerging market economies:

"Emerging markets earnings optimism is crumbling just as quickly as the developed markets. There is no decoupling at all, so if you've got a sharp slowdown in growth in China and in emerging markets generally, I think perceptions will be totally transformed in six month's time. But all you can do is sort of warn of these things."

This is a problem for commodity perma-bulls that look to continued Asian demand to offset a prolonged decline in western demand. Their hope ignores how reliant Asia is on China continuing a 10% + growth rate. And how dependent China is on America and other western economies. Slowing demand will chip away at Asia's export driven expansion exponentially.

Westerners are spending less on cars, flat-screened televisions, cellular phones, name-brand clothing and other goods manufactured in Asia. The US consumer alone accounts for 19% of the world GDP demand. Housing and its leverage was the key to world consumption over the past few years, and its pull-back now is having an enormous drag on world economies.

In light of the worldwide de-levering and global earnings contraction now underway, asset prices even after recent declines, are still horribly expensive.   more »

Warren Buffett gave an interesting interview with Bloomberg yesterday. You can watch the video clip here.

Highlights:

He has endorsed Obama for President in 2008 (remember Paul Volker has as well)

He's concerned about ``stagflation,'' or slowing in the U.S. economy while inflation accelerates:

``We're right in the middle of it right now. I think the `flation' part will heat up and I think the `stag' part will get worse.''

Buffett, 77, is the world's richest person, and runs a company with a $72 billion portfolio. He's said the U.S. housing slump has been a drag on Berkshire's earnings, adding today he's unsure when the economy will recover.

"Capitalism has downturns... We are in one now. But we will come out of it, just like we did before...It's not going to be tomorrow, it's not going to be next month, and may not even be next year."

I was talking about looming stagflation last year and the long always cheerleaders were pooh-poohing it. I have always said we will eventually come out of this difficult economic climate. But just because we will come out of difficult times eventually, does not mean investors should blindly stay the course throughout the downturn. Holding equity investments over the next few months is a very high risk proposition. The market will not be able to accurately price and discount the coming hit to earnings until we are further through the delevering process.

All the people urging investors to "buy the dips" over the past 18 months have been painfully wrong. Beware of those saying the same thing now.   more »

Today we received the latest instalment in the S&P Case Shiller Index. For the month of April, the 10-City Composite posted a new record low of -16.3%, and the 20-City Composite recorded a record low of -15.3%.



No one should be surprised that the cities that experienced the greatest gains in the latest real estate boom were the biggest losers. Las Vegas and Miami share the dubious distinction of being the weakest markets over the past 12 months returning -26.8% and -26.7% respectively. We should recall that these markets had some of the fastest growth in the 2004/2005 period, with annual growth rates of more than 53% and 32%.

Let’s look at the real-life math of these numbers:   more »

Ms. Park was the Guest Portfolio Manager on BNN Wednesday June 25 at 920 am on Market Lookahead. You are able to see the clip on their web here for a limited time.   more »

Given my post yesterday I was a little heartened today to see the results of a recent survey showing financial consumers (at least in the US) may be finally waking up:

"U.S. consumers are more sceptical than ever that financial service companies have their best interests at heart, according to a survey released on Monday.

The survey of 5,000 consumers, conducted by Forrester Research Inc, ranks major financial service providers according to the perception of how important clients' financial interests are to a company.

It found A.G. Edwards, a brokerage unit of Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz), and other troubled companies such as American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) and National City Corp (NCC.N: Quote, Profile, Research, Stock Buzz), to be among the biggest losers of their customers' faith.

"The subprime mortgage crisis, sagging stock markets and falling rates of return on everything from savings accounts to real estate have left consumer feeling less confident," said Bill Doyle, a Forrester analyst.

In Juggling Dynamite I liken the financial sales firms to very profitable drug pushers in our society. So far at least, Canadian consumers still seem to be asleep in la la land loving their banks/broker/dealers. Time will tell if they too may begin to wake up. I guess it depends on how many Canadians suffer big financial losses over the course of the present down cycle in real estate and financial markets this time. Stay tuned.   more »

All through the past couple of years as financials have ground down to one new low after another, the broker dealers of the world kept urging us to buy the dips. Now that these stocks have evaporated enormous amounts of investor capital, the broker dealers are now starting to issue "underweight" recommendations in their typical after the horse has left the barn style.

Today Goldman Sachs & Co strategists urged U.S. stock investors to "underweight" [that’s code for sell] the nation's financial and consumer discretionary sectors, admitting that it was mistaken when it upgraded both sectors just seven weeks earlier. See: Goldman cuts U.S. financials, admits goofed on upgrade

This is something I try to warn investors about every day, but unfortunately most have to experience the pain of it first hand. Broker-dealers are there to sell us things; they are not there to help us manage our risk. To this day most investors are taking their investment advice from stockbrokers and mutual fund sales people.
My heart goes out to the average investor. It should be illegal but instead Wall and Bay street types enjoy significant socio-economic status in our society.

If my children ever tell me that they want to become investment bankers some day I will know that I have failed in their moral instruction.   more »

Asian stock markets dropped broadly on Monday, with Tokyo and Hong Kong down for the third-straight session. China's official news agency reported that the stock market regulator planned to control the fundraising pace of listed companies and to clamp down on market rumors. See Asian stock markets decline and Asia's IPO market cools.

China's Shanghai Composite is now down more than 55% from its peak in 2007. And so far, still dropping....



This is what risk looks like. I suspect North America has some catching up to do in the months ahead.   more »

The inevitable is happening, people are finding alternative energy and alternative methods to gas guzzling.
Perhaps a time of insanity and waste is coming to an end for a while. We can hope....   more »

The trouble with being an unbiased, independent, market realist is that you tend to sound alarm bells about impending risks before most others seem to notice. Over the past couple of years I have been accused of being "a bear" for voicing concerns about asset bubbles, excessive leverage, reckless spending and risky investment markets at the end of this super-long (credit-juiced) economic expansion. Its ok, I can take being called a bear when risks warrant extra caution. As I see it, becoming appropriately bearish during part of each cycle is necessary in order to provide valuable risk management.

This past week it seems that market psychology has started into the next leg down of angst and belated worry. New "bears" have been crawling out of their caves all around the world of late. Yesterday a big bearish growl sounded from the research team at Royal Bank of Scotland: RBS issues global stock and credit crash alert

"The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

RBS warning: Be prepared for a 'nasty' period. Such a slide on world bourses would amount to one of the worst bear markets over the last century."    more »

Those that argued emerging economies would prosper and decouple from a western world slowdown should now be hanging their head.

International markets that were happily coupled during the expansion from 2003-2007, are now still painfully coupled in the ongoing contraction. John Authers brings us some excellent charts today in "Decoupling thesis is wide of the mark." Watch the clip here.

It would seem that the bear market of 2007 is still very much in process around the globe. One cannot help but feel sadness for the hopeful emerging market investors in places like China that were lining up around the block last year to open their on-line trading accounts with borrowed money as capital. With some Asian markets now down more than 50%, the experience has undoubtedly been brutal. See Shanghai index below 3,000.   more »

Ms. Park will be speaking at the World Gold, PGM and Diamond Investment Conference this weekend June 14 and 15 in Vancouver, BC.
Cambridge House is organizing the event with a solid line up of expert speakers as well as presentations from leading companies in the metals and resource sector.
You can learn more or sign-up up for the event free at www.cambridgehouse.ca.   more »

OPEC President Chakib Khelil said that had it not been for the weak dollar, political tensions and speculation, oil prices would probably be around $70 a barrel. “In terms of fundamentals, there is no problem of supply and demand. There is much more a bubble due to speculation, which is based on a depreciating dollar and geopolitical tensions,” Khelil said yesterday.
See Current Oil Prices are unjustifiable.

Saudi Arabia yesterday called for an urgent meeting of oil producing and consuming countries to discuss what it called the “unjustifiable rise in oil prices.” It also offered to coordinate with the Organization of Petroleum Exporting Countries (OPEC) and other major producers to ensure adequate supply in order to curb prices.

Co-ordinated top down efforts to support the dollar and curb speculation, along with ongoing demand destruction from a slowing global economy will ultimately prevail to drive commodity prices down from recent heights. Once it begins in earnest, the velocity of the correction is likely to be shock the many that have been conditioned by a 5 years bull run to expect only upside in these markets.

Beware of those selling “long-term” investment stories. We must survive the short term before we can benefit in the longer-term.   more »

Source FRB: Federal Reserve

The problem with the Feds acting as back stop for the junk paper dealers is that now almost half of the Fed vault is full of junk. In just the past 12 months, Fed holdings have slipped from 92% AAA treasuries to just 57% AAA with the remaining 33% a varied assortment of "mystery meats."

This begs the question: how much junk can the Feds absorb without sacrificing their own financial credibility?   more »

This week as oil spiked the energy heavy Canadian Index topped fresh highs. But before we Canadians bring on the marching band, let us see one thing clearly. The parabolic spike in the price of oil is not a good thing for anybody. It is not a healthy sign of a strong global economy. As I have said many times of late, recent jumps in the price of oil have nothing to do with consumption demand. If anything constructive is coming from rocketing prices, it is that consumers all around the world are in fact quickly reducing consumption.


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The best time for tighter regulation on banks and off-balance sheet accounting would have been in 2001 and coming out of the ENRON fiasco. But that did not happen. So now we have to make the necessary changes to in a reactive way to clean up the mess. Unfortunately it will be all hitting the books when the economy and credit markets can least afford it.   more »

In many ways we live in desperate times. Connecting the dots of how we got here is not too hard. Too much credit, too much greed and too much consumption brought us to poor economic health and great imbalance in world markets. Credit-frenzied and wasteful western consumption, on top of emerging market demand spurred great price gains in world commodities. Sub-par yields and returns in conventional equity and bond markets over the past 5 years, brought conventional investors to seek out commodities as a hot new investment class. All of this frenzy fuelled inflation and soaring costs which are now stemming the ability of consumers to consume and the ability of lenders to lend. We are coming full-circle as we must. But the ride back to sanity and equilibrium is proving painful.   more »