Weaker global economic outlook

There are signs finally that the US market is starting to tank. It wasn't easy to dismiss that fact that the sub-prime loans debacle was going to cause the global economy to tank since there is a raft of new loans re-setting their fix rates to market rates each month. There was even talk that prime loans were also of a dubious quality. Quite apart from the loan obligations there was also the threat of falling property prices in the USA, and the impact further falls would have.

There is now evidence that the US economy is slowing with jobs growth in November a paultry 18,000, compared to the days of 100-200,000 at the peak of economic activity. The blame can be placed upon the property market woes and more importantly the high oil price - now hanging around $US95-100/barrel. You could argue that the employment rate remained largely unchanged at 138.5 million - but markets are looking for evidence of the future outlook, as they adjust their expectations, expect some significant falls.
The unemployment rate rose from 4.7% in Nov-07 to 5% for Dec-07, with most job losses occurring in the construction, manufacturing and retailing sectors. Another important indicator - the Institute for Supply Management's (ISM) index of factory activity fell to 47.7%, down 3.1% from Nov-07. Now a figure under 50% is taken as a sign that we are facing recession. No surprise then that the S&P500 index last week fell 4.5% to 1411.63, the biggest fall in 5 months. Meanwhile the Dow Jones Industrial Average fall 4.2% to 12, 800.18, losing 256 points on Friday.
This should not come as a surprise as some 6-8mths ago I forecast the market would go sideways for the next 5 years, maybe even longer. We'll see...
Its noteworthy that market pundits are expecting the Fed to drop interest rates. I am not so confident about that, but I would not be projecting an interest rate rise. I am expecting a 'steady' with a 25% chance of a fall. I think the markets have it wrong.
Regardless of who has it right or wrong - there is a significant risk being carried by investors. These times are unprecedented. Generally when markets are carrying a unprecedented risk, they sell on the side of caution. The risk is of course that the derivatives market poses a huge under-regulated risk to the broader market. The risk is not too different from the risks in the equity markets prior to the Great Depression. The difference is that this time the risk is concentrated in a few investment banks.


Based on the chart above we are looking at the Dow falling from 12,800 pts today to 11,650 pts in the next few months - this support is the prior resistance set at the time of the 2000 dot-com bubble. Frankly I think there is every reason to believe that the market can fall back to base trend as - unlike before - the inflationary pressures are muh higher, so the Fed hasn't the power to support asset prices that it previously had.