World capital markets show the same trend in late four months, stock price index rallied since March 2009. Start with Dow Jones Industrial Average (DJIA), then Nikkei of Tokyo and other stock market around the world including Jakarta Stock Exchange (JSE) follow suit.
The trend thus followed by oil price even with more moderate ways. Oil price is back to punch through US$ 70 a barrel, the same price level as in the mid 2006 and 2007. Stocks and oil price movement seems like sending message that the worst of recent world economic crisis has been passed, the capital market has already leave the most bottom of the curve and welcoming the recovery.
Commodity price has showed its teeth earlier than stock market. For the last eight months, copper price has stepped up quiet abruptly. Until June 2009 copper price has gained 63 pct hike than the early year. Copper led the commodity market hike followed by oil which gain 60 pct from January. Tin price also has rose significantly since March for US$ 11,000 a ton and only in four months it ended in US$ 15,000. Investors who hold commercial paper related with commodities among the happiest since its price rose along with its backed asset.
Consumption from China is the sole suspect of commodity price hike. Copper and tin price indicating the still strong demand from electronic, housing, and auto industries. China’s GDP growth until second quarter 2009 still 7.9 pct strong, even rose 1.8 pct form previous quarter. China’s economy growth surpassed all prediction and forecast by respected body such IMF and World Bank who previously forecast the growth under 7 pct.
The bullish trend actually started after first quarter of 2009 financial reports of American companies showed more blue sign than red, even if it almost highly believed that the good performance was helped by government stimulus. In the Q1 2009, Ford Motor gain net income US$ 2.3 billion. Bank of America who received US$ 45 billion bail out claimed net profit US$ 3.22 billion until Q2 2009 and they put aside US$ 700 million installment for US government.
Even company like Citigroup which during crisis always book loss and still predicted will endure the same fate surprisingly gain US$ 3 billion in profit, although they put aside loss from joint venture with Morgan Stanley. While telecommunication company AT&T still gain US$ 3.77 billion of profit a bit less than previous year but once again it still beat the prediction.
The most anticipated news by market is the good news from the market floor. Goldman Sachs, one of the biggest market player, booked US$ 3.44 billion net profit, rose 65 pct from the same period in previous year. Goldman give its investor net income US$ 4.9 per share, far above what was being predicted by analyst surveyed by Bloomberg who gave the figure to US$ 3.65 per share.
Goldman previously took US$ 10 billion from the government stimulus package as part of US$ 200 billion bail out fund channeled through financial institutions. In recent economic condition, how come Goldman got so much fortune? Apparently, trading in financial market must be their biggest bet since other big player such Merrill Lynch, Lehman Brothers and Bear Stearns were forced to leave the playing field last year. Nobody knows whether Goldman use bail out money to invest in the stock market.
Better than expected, the words become magic poison to explain as to why the stock market, oil price and commodities are showing recovery trend with even very bullish curve despite until last year many analyst from reputable institution predicted the world economic downturn will not ended before 2010. Bullish trend did not weaken whatsoever regardless the current release by government that jobless claim number keep getting higher. In mid July 2009, The Fed predicted that the unemployment rate will likely to surpass 10 pct until end of 2009. American economic growth in Q1 2009 still minus 2.5 pct even though The Fed has revised the economic growth forecast for 2009 to a better position with maximum contraction will not exceed 1.5 pct than last May prediction which put the contraction between minus 1.3 to 2 pct.
”Economic situation was expected has reach its lowest position. The question is, how much growth we can get and how quick is the recovery and no more how worse the situation will be,” said Robert Macintosh, chief economist of Eaton Vance in Boston, as quoted by Reuters.
Thanx to Government Stimulus
America as the center of world economic crisis is not the only one who kindly presents stimulus package to hold economic for not falling further down. China government with huge US$ 2 trillion reserve, biggest in the world and twice the Japan’s, has greater capability to do so. China announced stimulus plan worth US$ 586 billion (Yuan 4 trillion) last year. The biggest part went to infrastructure and public welfare services. China consumption will be the world ‘s last hope to keep world economic wheel keep running.
Rock Jin, chief economist of Beijing based Sinolink Securities, said that 2.5 pct portion of 7.9 pct China economic growth came from investment backed by government stimulus. The rest is from production. ”If the investment can be kept at 2.5 pct of he GPD growth, the 8 pct target of economic growth this year can be achieved without any trouble,” said Jin as quoted by Associated Press.
China economic performance has made IMF to revise their prediction of China growth up to 1 pct to 7.5 pct. While The World Bank also change the predicted figure from 6.5 pct to 7.2 pct. And maybe they still undervalue China. But this growth might not connected with the fact that China’s export still weaken and the same fate goes to foreign investment. China seems rely on domestic consumption from its 1 billion citizen to sustain the economic growth.
Stimulus indeed intended to reduce dependence on export by increasing domestic consumption through infrastructure projects. Chinese industrial products once mainly for export were diverted to underdeveloped region that have yet enjoy the recent country fast economic growth. Their consumption boost by providing cheap and easy credit from the bank that have receive stimulus package. This scheme has made China industrial product rose 10.7 pct compared to previous year. Retail sales up 15 pct while capital expenditure of China companies for factory and fixed asset increase 33.5 pct.
More surprising was the growth from property sector which rose 53 pct. Auto sales also rose 17.7 pct up to 6.1 million cars, far from widely predicted of contraction which will reduce auto sales growth to 6.7 pct. China’s stimulus package is predicted will flow faster as consumer price index was 1.7 pct lower than last year.
America government channeled the biggest portion of February 2009 stimulus plan worth US$ 787 billion, exclude the previously given US$ 200 billion for financial institution, to boost consumption such tax levy and various public welfare services such medic. The stimulus main focus indeed on the financial sector and housings, were the epicenter of crisis, and recover public consumption even though the Americans over consumption was the most responsible for subprime mortgage crisis.
China took different path with infrastructure project followed what FD Roosevelt did in combating the Great Depression 1929-1930. Yes, China was not the cause of the crisis and in fact they are not in crisis. Japan after hit hard by 1990s crisis follow the infrastructure prescription but fail to bring back their once mighty economic performance and inherit many splendor bridge and highway road that still not bring advantage for recent economic activities.
Recovery? Not So Soon
The Economist magazine this week wrote, despite economic recovery phenomenon was a welcome prospect but is not all clear. ”For this recovery has fragile foundation.” said Economist. The biggest portion of demand come from government stimulus that is unsustainable. Around the world government stimulus has helped economy for not getting worse. Government stimulus has 75 share on China miraculous strong growth. The fall of public consumption in America was paid by the rise of government budget deficit up to 12 pct of GDP. Government do help the economy for a temporary, but not by budget deficit. Economist predicted China’s reserve will just remaining 6 pct of GDP until 2010 and so will other G-8 economic power such Japan and Germany.
Nouril Roubini, prominent economist of New York University, warned coming threat from Eastern Europe financial crisis which can cause a bigger problem for Western European banking system. If the crisis in the region once called emerging market cannot be contained, it will easily spread westward and can only worsening the recent world economic crisis.
Roubini who gained epithet as ‘doctor doom’ for his financial prophecy of America’s economic armageddon two year earlier, said that the crisis still not reach the bottom yet even America can evade the free fall. ”Maybe still next six month. But US economy recovery will be very shallow, slow, and ugly,” said Roubini to Blommberg radio in early July 2009. ”Even if next year the recession is over, we will still feel that it is still in recession,” he added.
He remind us that America government budget deficit has reached 12 pct of GDP as the government debt ratio will rise to 80 pct of GDP up to US$ 9 trillion with additional interest expense of US$ 700 million. To make it worse, public consumption will be decline from 71 pct of GDP to 67 pct followed by the hike of household saving rate from 5 pct to 10-11 pct in the next 12 months.
American public consumption has risen from 1980s that only 65-66 pct of GDP to 75 pct of GDP in 2007. Meanwhile, household saving rate has dropped from 10 pct in 1980s to zero in 2007. Liquidity flow driven by low interest rate policy has boosted household debt from 67 pct income to a breathtaking number of 137 pct.
Roubini predicted America will face a paradox of thrift. When public more keen to save their income in a crisis, demand aggregate from consumption will weaken and only push recession deeper. The impact is, public saving value is diminishing.
China government seems success in their effort to maintain public consumption by implementing more loose credit policy. Great numbers of stimulus fund went to banking system which encouraged to disburse it to public quickly. Citizen of countryside offered to buy electronic goods despite the lack of electricity infrastructure. China banking previously face serious problem with non preforming loan. Loose credit policy only will make it worse.
But as long as the so called world socialist governments, including US, still has piles of stimulus fund, either from reserve or printing new money (debt), we will likely continue enjoying bullish tren. Party in stock market all over the world still going on, take advantage while government still willing to pay the bill (from the tax payer money)….