According to an article published in “The Wall Street Journal” on May 21, 2009, the economies of the United States and three of its most prominent trading partners, Mexico, Japan and Germany, all contracted, and contracted significantly.
The United States economy contracted at an annualized rate of 6.3%, while the German economy contracted at an annualized rate of 14.4%, Japan’s economy contracted at a an annualized rate of 15.2%, and Mexico’s economy at an annualized rate of 21.5%. It was Japan’s worst performance since 1955 and Germany’s worst report since 1970.
Why these huge declines?
All three countries depend heavily on US exports, and US consumers aren’t spending money on certain items. US consumers have cut back on purchases of automobiles, electronics and other goods produced in these countries. How much are consumers cutting back on these items?
Significantly. According to “The Wall Street Journal” referenced above, for the first three months of 2009, US merchandise imports declined about 30% from the same period one year ago. Mexico’s auto production fell 41% in the first quarter as compared to the same quarter last year.
And, that’s not where Mexico’s problems end. Tourism is down significantly due to the recent swine flu outbreak. Mexico City virtually shut down for one week last month due to the outbreak in early May. Grupo Mexicanna, Mexico’s leading airline company, said this week that after a solid first quarter, passenger traffic has dropped significantly of late. Adolfo Crespo, Grupo Mexicanna’s vice president for corporate communications said this month has been “very sad and dreary” following the outbreak of the A/H1N1 flu strain. Mr. Crespo said domestic travel has begun to increase, international travel remains weak. (Source: “The Wall Street Journal” May 21, 2009).
But the global decline isn’t limited to Germany, Japan and Mexico. In his recent newsletter “Thoughts From The Frontline” (May 23, 2009) John Mauldin reports England’s economy was down 8% as well.
Mauldin reports exports have literally fallen off a cliff with Chinese exports down 41% in addition to the German, Japanese and Mexican export declines. Falling exports are the leading contributor to worldwide economic declines. Global trade is simply collapsing. Take a look at the chart below (courtesy of www.variantperception.com):
Ugly isn’t it? And, it’s ugly in almost every country.
The following are Mauldin quotes from a study the team at Variant Perception did focusing on the country of Spain:
“As we have repeatedly said, Spain is set for a long, painful deflation that will manifest itself via a spectacularly high unemployment level, a real estate collapse and general banking insolvencies. Consider this: the value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That’s almost 50% of Spanish GDP. Most of these loans will go bad.
“Spanish banks are now facing a very bleak outlook. Spain’s unemployment rate reached over 17% last month; there are now four million unemployed Spaniards and over one million families with not a single person employed in the family. Spain and Ireland had the worst housing bubbles in the world and now Spain has as many unsold homes as the US, even though the US is about six times bigger.
“Why are Spanish banks not insolvent? Spanish banks are not marking their real estate loans to market. We’ve often wondered how it is that our thesis for Spanish real estate and industrial collapse has not created more victims. The answer is simple according to an article in Expansion, the Spanish equivalent of the Financial Times, from the 19th of April titled ‘Spanish banks control half of all real estate appraisals.’ You can’t make this stuff up. We haven’t even begun to see the worst in Spain yet.” (Emphasis mine)
More from the report:
“European banks were only restricted on the basis of risk-weighted assets, unlike the US where it is the total leverage ratio that matters, so most European banks bought assets that were rated by Moody’s and S&P, who couldn’t rate their way out of a paper bag, and for anything that wasn’t highly rated, they bought credit default swaps or guarantees from AIG and MBIA. Because of that, European banks were able to lever up a lot more than their US counterparties. Given the much higher leverage levels and general worsening of collateral values, we think that all the shoes in Europe have not dropped.” (Emphasis, again is mine)
This is an excerpt from my most recent Market Outlook. For a free copy click here: www.usawealthmanagement.com
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