Daily Gains Letter

The Surprising New Drags on the Global Economy

By for Daily Gains Letter |

The Surprising New Drags on the Global EconomyThe world’s two biggest economies seem to be competing against one another to see which can be a bigger drag on the global economy.

In the U.S., the problem is the regulators. As the old saying goes, you can’t fight the Fed.

On Wednesday, June 19, the Federal Reserve announced it would continue its quantitative easing program—at least until America’s jobs market improves substantially. At the same time, the Federal Reserve also said it would ease the $85.0 billion-per-month program by the end of the year, and could end it altogether in 2014.

For a bull market rooted more in the Federal Reserve’s monthly alimony payment than sound economic numbers, this is bad news. After five years, the world’s largest economy might have to stand on its own legs in 2014; that’s not something it’s prepared to do.

The U.S. markets reacted to the news the following day in a sea of red. In fact, less than two percent of S&P 500 companies were trading up.

And in China, the problem is disappointing manufacturing news, and it suggests the global economy is in worse shape than anyone thought.

The HSBC Flash China Purchasing Managers’ Index hit a nine-month low of 48.3 (49.2 in May). The Flash China Manufacturing Output Index came in at 48.8 (50.7 in May), a new eight-month low. A measure below 50 indicates contraction. (Source: “HSBC Flash China Manufacturing PMI,” Markit Economics, June 20, 2013.)

Here’s a quick summary of the China Flash Manufacturing Index: output is decreasing at a faster rate, new orders are decreasing at a faster rate, new export orders are decreasing at a faster rate, employment is decreasing at a faster rate, and the backlog of work is—you guessed it—decreasing at a faster rate.

The Shanghai Stock Exchange responded in kind, trading near 2,140, its lowest point since December 2012.

To me, the numbers aren’t entirely shocking. First-quarter growth in China fell to 7.7%, with many economists expecting it to fall further in the second quarter.

Government economists said they would wait until quarterly growth slipped as far as seven percent before looking to intervene in the economy. The Chinese government may not have to wait long; some economists are predicting that growth in the second half of the year could dip below seven percent. (Source: “China factory activity hits nine-month low, policy action eyed,” Reuters, June 20, 2013.)

In just a matter of months, economists went from forecasting a modest uptick in the Chinese economy to predicting the slowest growth rate in more than two decades. And the bears are jumping back in.

The Direxion Daily China Bear 3X Shares (NYSE/YANG) is an exchange-traded fund (ETF) that seeks daily investment results of 300% of the inverse (or opposite) of the performance of the BNY China Select ADR Index. This bearish ETF has experienced a sharp rebound; on Thursday, June 20, the Index popped 6.5% to $55.40. It is also up 22% month-over-month.

Whether it’s a weak Chinese economy or hints that the Federal Reserve is winding down its monetary easing policies, the global economy could be in for a hard landing. For bearish investors, there are a number of excellent international ETFs that can provide shelter in what could be the perfect storm.

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