Nikkei 225 (9.648) Dax (4.644) FTSE 100 (3.989) Dow Jones (8.325) S&P 500 (898)

I agree with the upbeat market participants, that unemployment is the last number to peak, and also are different expectation indices showing clear improvements. But does it justify the V shape recovery that is priced in the equity market right now? I apologise, it would be most pleasant to say buy! Reality is as usual tougher.

Demand, unemployment and production capacity

Let’s start with the good one first. Demand is there, but it has changed. No secret that in the so-called rich countries demand has changed from “nice to have” to “need to have”. This has created the consumption drop together with a consumption stop due to debt among private households. In general do consumers still purchase, but when, then cheaper and low technology products. As an example, in the old economies are mobile phones still sold, but with fewer functions. The sold cars are smaller and many consumers buy small used cars all of a sudden. In low income countries without significant private household debt, the demand for goods is somewhat more stable, but these consumers have always bought less advanced products. The advanced high technology and work intensive products from the old economies (very particular Western Europe) are not in demand, but the less advanced products from low cost areas are still in demand.

Global unemployment is still rising and will continue to go up for some time. Right now everybody expect the peak to emerge Q1 or Q2 next year. Maybe, but what happens afterwards? The V shape believers simply argue that the world recovers again including the jobs, and it is certainly priced in at the current share prices. It won’t be that easy, and further negative implications need to be resolved. Across Europe are people willing to reduce their salaries, this indicates that assets should be cheaper as a compensation. In Europe, corporations to a large extend use to share jobs now to avoid more layoffs. In US the average weekly working hours are at a 40 year low. Both facts actually tells us that the unemployment should be higher. Just to get weekly working hours and the shared jobs back to normal will take time. Thereafter hiring will start, but much later than Q1 or Q2 next year…..

Many company news are concerning production cuts as a natural consequence of the above arguments (or, facts in my world). Just to take one example might be too simple, but statistics about the car industry is very accurate and a good global demand / capacity indicator. One could wonder why global political leaders are so eager to fight to keep all car production plants (yes, it is many jobs). The global car production capacity is 90 million units per year but the current demand is 60 million units. Of course the overcapacity has to be reduced, and other sectors will be in the same process for some time as well.

What now ?

Demand is there and the world won’t disappear, but the V shape recovery priced in the equity markets came too fast. In my view, the market sentiment has already changed towards negative, while we mentally still think that the market is on the way up. The frequent readers know that I for a long time have fancied Far East, and I still do, but so do a growing number of market participants. It correlates well with the under performance of European stocks during the last 2 months. Despite the emerging regional differences in the assessment of the markets, the global macro economic trends will dominate. For the above reasons I argue for a 10% downwards correction for equity markets in general. The coming reporting season from US companies might give relief one or two trading days, but it won’t beat the global macro economy.

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