Friday, January 7, 2011

Observation : Car Sales up - Green shoots of Spring or False Dawn?

Green shoot of Spring for the Global Economy?

I tend to watch the US market closely not only because I do invest in US stocks but well, it is the largest economy in the world. As the saying goes - When the US sneezes, the world catches the flu!

One piece of news which did not get much media in Malaysia was the rise of sale of motor vehicles in the US -

Why is this significant for some observers?

During downturns, consumers tend to delay their decision to pay for high expense items like cars until they feel the economy is doing better. Also, there was no government policy to encourage car sales (ie: tax wise or scrapping old cars) So, could this be an indication that consumers are feeling more confident of the economy?

Stocks markets around the world are also generally up but this may be down to the January Effect where generally most Januaries, the stock market goes up and this may be because investors in the US sell their shares before the year and repurchase them for tax purposes. On top of general optimism of course.

My take? Believing the worse is over and spending your way out of a recession is very important for the recovery. As such, I will be cautiously optimistic but look out for these things:

1) Inflation/Hyperinflation - With record low interest rates in developed nations (US, Japan) and loose monetary policy (ie: QE) everything is rising with the latest concern being food prices. This would put strains on the recovery as people's money is worth less so they buy less goods. So companies sell less and growth would be lessened or more layoffs may happen.

2) Rising Interest rates - Once central banks raise their interest rates, in theory, there is less money going around with more expensive debt and consequently, asset prices (ie: commodities, stocks, property) tend to fall.

Also, look out for these potential time bombs:

1) The EURO Debt crisis - The debt crisis in European nations known as the PIGS (Portugal, Ireland, Greece and Spain) has not fully played out?

2) The state Debt crisis in the US - States in US such as California and New York are in heavy debt and are cutting jobs/funds left,right and centre! See:,8599,1991062,00.html

3) Credit card debt crisis - Alot of Americans who have lost their jobs are not only unable to pay off their mortgages which led to the 2008 subprime crisis but they have outstanding credit card debt. This may be the next bubble.

With all these concerns, I would be prepared for anything and be cautiously optimistic this 1st half of 2011. Observers have correctly pointed out that the fundamentals may not have been fully resolved so we can only cross and fingers and hope.

If the theory of cyclical downturns is to believe, we have had crises in 1986, 1997, 2008.. so the next one should be 2019 but hey, history doesn't always repeat itself, does it?

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