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Global recession, credit crisis and inflation

Posted by Adrian on August 28, 2008

As most of the global economies have had their GDP crunched, the overall indicator (or consensuses) is a global slowdown or recession. The US has slowed considerably, contributing to estimates that the world GDP will fall to -0.8 %.

The US economy is by far the catalyst to the global economic crisis, the Federal Reserve slashed their interest rates down to 2.00%, at a time when inflation globally was a problem (and still is); other central banks sent confusing messages with interest rates, some increased rates like the European Central Bank (although tentatively) and the Australian Reserve Bank, Brazilian Central Bank among others; in which now there could be a slashing of interest rates by most of the developed economies central banks, with the US possibly starting to raise rates. It is overall a disproportional global economy that is now unhinging quite dramatically. The UK, Ireland and the EU are all now most likely in a recession, Asia Japan, Singapore, Malaysia and Korea are also in recession, with Asia/pacific countries such as Australia and New Zealand technically falling into sharp recessionary conditions.

Effecting the slowing economies is the retraction of the credit markets, or as it was better known just over a year ago; the credit crunch. But the credit crunch quickly became known has the ‘credit crisis’, as the credit markets literally froze up. The CDO (collateralized debt obligations) markets became untouchable and the damage to the banking system has been dramatic with an overall erosion of confidence in that sector. The credit crisis hasn’t even gone half way through and there is still no end in sight. As discussed in Global recession tipping point, gold over sold, oil price shock on the cards. Bank losses continue, the bank failures in the US should be about to occur, most probably all at the same time. Just recently the FDIC has warned that 117 banks could go into bankruptcy, this is of course and underestimate as we may see the hundred plus number appear. The LIBOR rates are showing a tighter and progressively more cautious market with interbank lending, which would indicate the mistrust that the banks have with each other other disclosed toxic assets sitting in undeclared accounts. It will be interesting to see how far the credit crisis reaches the consumer, that has become so leveraged with credit cards to cover high inflation (costs) on food, oil and everything else. The big question is, could the banks at some point cut credit lines to consumers. This is a distinct possibility, if the credit markets do not normalize anytime soon.

But the US economy is in a dysfunctional and confusing state, with a cash rate so low, high inflation, the stock market has had sporadic rallies, then dramatic sell offs, the commodity markets namely oil are (in my opinion) showing instability and volatility with pricing – that appears to be pointing to a large spike at some point in the future (please refer to:Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oil shocks be brewing?). The US export markets are solely contributing to the US GDP, but for how long? If the USD strengthens and the rest of the world falls into recession – this will most certainly effect American export sales.

The recent US dollar rally is a good indicator of Europe and the UK’s slow downs, with also parts of Asia slowing too. The USD was one of the most oversold currencies, but I still see some further selling of the USD. If the ECB decides not to cut rates (which I don’t suspect they will do), the EUR could rally. But oil is going to be the USD’s worst enemy, the oil price needs to stabilize before the USD can really regain ground. This could happen if the Federal Reserve increases interest rates, but any rise in the USD would be offset by a major conflict in the middle east, or a new cold war with Russia (Russia could cut it’s oil output).

The commodity markets haven’t finished their bull run. The food markets will fluctuate again, as the developing countries may have crop failures and the festival season in India kicks off; so demand will increase for Rice, wheat, sugar, even Bananas could be at peak production cycles; we could see a major price hike in all food commodities depending on the demand from India and China.

Of course this leads to inflation. All economies are grappling with high oil and food prices, we may not see this diminish. The commodity inflation issues, as mention above could solely be a demand issues and scarcity issue. We could be peak commodities, depending on how robust the mining industry can continue output on iron ore and other metals. But peak phosphorous is just around the corner, we could see other metals and minerals peaking also.

Morbius glass with still follow recession conditions in world economy, there will be two new additions to commentary the on global markets and economy they are: morbius glass: Energy markets, Commodities and Geopolitical analysis and morbius glass: FX watch


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