Thursday, August 14, 2008

Watching the numbers is different from the news - growth around the G7

I am a business news junkie, so I have been a diligent reader about all the news on the credit crisis over the last year. Like most investors I have turned negative on the US economy. The evidence has been mounting that the US was is and will be in a recession, yet looking at the data now shows a different story.

The US is the only G7 economy that has been growing above 1%. UK was an anemic .2 % for the second quarter while the rest of the G7 are posting negative numbers. Note that the other G7 economies except for Japan have have started a lower growth levels.

No wonder the dollar has been on a rally. The rest of the world is worse off than the US. While we have all been focusing on the housing crisis the rest of the world slipped into negative growth. There could be an explanation for this based on short-term stimulus. The US economy has been boosted with tax rebates in the second quarter and the Fed has been aggressive at cutting rates. Perhaps the US policies have just delayed the slowdown which should have happened earlier in the year. The facts appear that the rest of the developed world is doing worse off. This relative growth difference gives a better explanation for why the rest of the G7 stock markets have done worse than the US. The exception is Canada which has been helped by its energy focus.

Tracking business cycles is often the key to timing markets and these numbers provide a good explanation for the dollar current strength, but if the US just delayed what is happening in the rest of the world we can expect some bad relative news in US equities and the dollar in the last quarter.

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