Synchronized Contractions Give Birth to Global Recession

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Recently released manufacturing numbers in the U.S., Europe, and Asia are off the charts. Unfortunately the part of the charts they are off is the downside. While the media was trumpeting the biggest global expansion ever last year, the New York Investing meetup pointed out that every economic expansion in history has been followed by a contraction and therefore the biggest expansion ever was likely to be followed by the biggest contraction. The most recent figures for manufacturing activity show that this is exactly what is taking place.

In the U.S., the ISM fell to 36.2 (anything under 50 indicates contraction), the lowest since the recession of 1982. The Prices Paid component fell to 25.5, the lowest since 1949. Falling commodity prices were blamed for the sharp drop. The Order Backlog component was the lowest ever. Manufacturing in Europe isn't in any better shape. In Britain, the Chartered Institute of Purchasing and Supply index fell to 34.4. The VTB Bank Europe Index for the Eurozone including Russia fell to 39.8. In Asia, two purchasing manager surveys in China fell to 38.8 and 40.9 respectively. The Yuan fell limit down on the news. As further corroboration of a global contraction, the most recently released semiconductor sale figures indicated a drop of 2.4% in sales year over year.

The markets didn't react kindly to this plethora of bad economic reports. As of this writing, NYMEX oil has dropped as low as $50.76. The markets in Europe had crash level drops on the day, with the exception of the FTSE in Britain, which missed the cut off by a hair. In the U.S., the Nasdaq and S&P 50 are trading at crash levels so far. This is taking place after the biggest up week for the U.S. indices since the mega-bear market in 1974. Last week the S&P 500 rose 12%, the Nasdaq 11%, and the Dow 9%. Too much, too fast is never sustainable in stock market action and today's trading is showing that once again the validity of this rule.

Retail reports for Black Friday aren't much to cheer about either. While sales supposedly went up 7.2% from last year, surveys indicate that 70% of shoppers purchased only deeply discounted items. So sales might hold up, but retail profits are likely to plummet. The desperation for bargains was so acute that a Walmart worker on Long Island was trampled to death. In bad economic times, the public's actions can indeed become quite ugly.

NEXT: NBER Admits that New York Investing Was Right

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.