"Italian Jolt" by Peter Navarro, Ph.D. FSO Editorial 12/08/2008

ITALIAN JOLT
The Well-Timed Strategy for Week Ending December 12th
by Peter Navarro, Ph.D.
December 8, 2008

Last week, I urged a watch and wait position while the market continues to probe for a bottom. That turned out to be a reasonable call as the Dow lost 2.2% and the NASDAQ lost 1.7%. For the year, the Dow is down 35% while the NASDAQ has lost an astonishing 43% of its value. This is not the time to get enticed by media pundits urging you to jump in with both feet.

While the unemployment toll jumped by over half a million Americans in November, the statistic that really freaked me out was one reported on the back pages of the Financial Times. Over the last two months, Italian industry has cut its electricity demand by almost 1/3. To mix metaphors, this is but the tip of the iceberg of the unraveling of the European economy.

The plunging of Europe into a recession has important implications for the US. Not only does it negatively impact demand for US exports. It starts the European Central Bank on a cycle of interest rate cuts which will put upward pressure on the dollar and further negatively impact the ability of the US to generate economic growth from the sale of exports.

In hindsight, all of this sound and fury about "decoupling" that we were bombarded with last year seems to have been signifying nothing at all. Europe, Asia, and the United States -- not to mention Brazil and Russia -- are all joined at the hip; and the global ship is rapidly taking on water.

As for why the markets in the US keep trying to rally, much of any upward momentum is fueled by the prospect any one of a number of bailouts -- whether it be a huge Obama fiscal stimulus or a possible bailout for Detroit or more money thrown down the Tarp rat hole. What is missing from the public consciousness is any notion of consequences -- a debased currency, eventual inflation, crushingly large budget deficits, the facilitation of large trade imbalances, and so on.

For all these reasons, it is hard for me to get bullish. While (I hope) I will be one of the first to recognize any technical upward market trends that are supported by a change in the fundamentals, that time has not yet arrived. It promises to be a lean Christmas as the economic neutron bomb of our times increasingly quiets our factories and streets. Damn spooky it is, but it least it's easier to find parking spaces.

“Any trader or investor who ignores the power of macroeconomics over the world’s
financial markets will, sooner or later, lose more than they should—and if they are
trading on margin, perhaps more than they have.” -- If It's Raining in Brazil, Buy Starbucks

is a business professor at the University of California and the author of the best-selling investment book If It's Raining in Brazil, Buy Starbucks and The Well-Timed Strategy. His latest book is The Coming China Wars: Where They Will Be Fought, How They Can Be Won.

CONTACT INFORMATION
Peter Navarro
Irvine, California USA
Email | Website

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