No Ride on the Gravy Train Without An Engine

It is becoming increasingly clear that the US economy once again fell off a cliff in May.

Commodity prices have dropped like a stone, the Baltic Dry Shipping Index has shriveled by 40%, and new home sales have fallen to the lowest levels since the Second Ice Age.

These markets are figuring out that for the first time in history, the world is attempting to pull off an economic recovery without an engine. Every recovery since WWII has been lead by the US, and strong growth here then trickled down to Europe and Asia.

But the US was relatively a much stronger country then, before its share of world GDP shrank from 50% to 24%. The problem today is that every major economy is now simultaneously discovering religion, cutting spending while raising taxes, with hugely deflationary consequences.

Fiscal austerity only works when you have expansionary neighbours, and these days there are none of those to be found.

During 2009-2011, the dissipation of stimulus combined with the expiration of the Bush tax cuts will pare GDP by 4.6%. That means that Obama has to come up with 8.6% in growth from elsewhere, just to get to my own ultraconservative forecast of 2% year, a tall order indeed.

Britain is undergoing a 2.5% haircut, and world wide it comes to 2%.
Scribbling a few quick calculations on the back of my racing form, that comes out to $1 trillion that is being sucked out of the world economy.

Even China is reigning in spending, although taxes are not much of an issue there.

What are the consequences for asset prices everywhere? The oceans of red ink bleeding from your screen last week told the whole story. 

Courtesy: Mad Hedge Fund Trader