What is economic growth?
Economic Growth is a positive change in the level of production of goods and services by a country over a certain period of time. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation. Economic growth is usually brought about by technological innovation and positive external forces.
IMF cuts world and euro zone growth outlook
The International Monetary Fund has trimmed its forecasts for 2008 and 2009 world economic growth, largely due to a marked worsening in the outlook for the euro zone.
With a sharp U.S. economic slowdown starting to spill out into other regions, the IMF had downgraded its world growth forecast for this year to 3.9 percent, down from 4.1 percent in its World Economic Outlook last month.
It projects 2009 growth of 3.7 percent, down from 3.9 percent, in a note prepared for a meeting of deputy finance ministers of the Group of 20 emerging and industrialized economies to be held in Rio de Janeiro on August 30.
“Commodity prices will remain high and volatile… market turbulence will go on through 2009,” said the official, adding that the IMF saw the world economy slowing further in the second half of the year.
The Fund left unchanged its forecast for 2008 U.S. growth at 1.3 percent and shaved its outlook for 2009 growth to 0.7 percent from 0.8 percent but was more downbeat in its new forecasts about the prospects for the euro zone economy.
It cut its forecast for euro zone growth this year to 1.4 percent from the 1.7 percent it had predicted in July and estimated 2009 growth at 0.9 percent, down from 1.2 percent, said the official who spoke on condition of anonymity.
It looks like the European Central Bank faces mounting risks to growth which will prevent it from raising interest rates.
The ECB has acknowledged that risks to economic growth are increasing but, with inflation near record highs, it is widely expected to leave interest rates unchanged at 4.25 percent through the rest of this year.
The latest forecasts mark the start of the IMF’s latest assessment of the world economy, which will be finalized when it issues its autumn WEO in Washington in October.
While the official did not specify why the IMF had cut its euro zone growth forecasts, its updated predictions come less than two weeks after data showed the euro zone economy suffered its first ever contraction in the second quarter.
Most financial market analysts expect little, if any, growth in the third quarter given the weakness of recent confidence and activity data from the 15-nation bloc.
They are also inclined to brand as too optimistic the European Commission’s April forecast, which predicted euro zone growth of 1.7 percent this year.
What is a recession?
A recession is a contraction phase of the business cycle. A common rule of thumb is that a recession occurs when real gross domestic product (GDP) growth is negative for two or more consecutive quarters. In the
ETFs in a Bear Market
Predicting (or trying to predict) the market is a daunting and rewardless task. With so many media outlets already reporting on bear markets, it may mean the worst has already passed. For most long-term and value investors, it’s a rule-of-thumb that you should always begin buying stocks in a recession – because, if you wait for the good news to hit the wire, then you’ve already missed the boat.
Below, you will find a list of Inverse ETFs. Essentially, they are intended to go up in a down market. For all intents and purposes, partaking in Inverse ETFs is the same as short selling – minus having to actually understand all that’s involved in short selling. For greenhorn investors, it can be the easiest transaction you will ever make.
For the investors and traders out there who have their sights set on hedging against market downturns or who wish to profit from a declining market, ProShares has created this list of Inverse ETFs. These actively traded ETFs are premeditated to go up when indexes go down.
Short QQQ (AMEX: PSQ)
Short Dow30 (AMEX: DOG)
Short S&P500 (AMEX: SH)
Short MidCap400 (AMEX: MYY)
Short SmallCap600 (AMEX: SBB)
Short Russell2000 (AMEX: RWM)
UltraShort QQQ (AMEX: QID)
UltraShort Dow30 (AMEX: DXD)
UltraShort S&P500 (AMEX: SDS)
UltraShort MidCap400 (AMEX: MZZ)
UltraShort SmallCap600 (AMEX: SDD)
UltraShort Russell2000 (AMEX: TWM)
UltraShort FTSE/Xinhua China 25 (AMEX: FXP)
*UltraShort funds use leverage, Short funds do not.
Now called the Rydex Inverse S&P 500 Strategy Inv (RYURX), the first inverse of the S&P was created by the mutual fund operators Rydex Funds. Rydex was well on top of their game – as they witnessed the rise of ETFs while knowing their importance, they branched their open-ended fund management operations out into one that now incorporates ETFs for traders.
Rydex Inverse 2x S&P 500 (AMEX: RSW)
Rydex Inverse 2x S&P MidCap 400 (AMEX: RMS)
Rydex Inverse 2x Russell 2000 (AMEX: RRZ)
This is not a comprehensive list of ETFs. However, over time, these two fund families have proven to have the most liquidity and are the most well-known.
U.S. Economy on Brink of Recession, Greenspan says
Former Federal Reserve Chairman Alan Greenspan raised the red flag on the U.S. economy Tuesday, stating the country is on the brink of a recession, offering there?s a better than 50 percent chance of reaching the spiraling economic condition.
A quick recovery was unlikely, he said via video link from a conference in Johannesburg. “A rebound at this stage is not something I think is in the immediate outlook,” he said.
The U.S. economy has been hit by a credit crisis which began in the sub-prime mortgage market, prompting a series of interest rate cuts to help boost the economy. But price pressures are growing, making more rate cuts unlikely.
“There are still very considerable structural problems remaining in the financial system. They will remain for a while. It’s going to be very difficult. There are a lot of unexpected adverse events out in front of us,” Greenspan said.
Asked if the U.S. economy was in recession, Greenspan said: “We are on the brink.”
Greenspan said he did not believe arguments that the housing problems in the U.S. were due to interest rates being too low during his tenure. “As far as I’m concerned, the data do not support it (that argument). The housing bubble is clearly an international phenomenon.”
In regards to South Africa, Greenspan said the country’s Reserve Bank had been right to raise interest rates in the face of accelerating inflation.
“The problem that you have here is that … significant pressures are coming from oil and food, but they are none the less real,” he said. “The price increases are real and unless the central bank leans against them … you will get a highly unstable inflation environment.”
Prospering in Bear Markets
What is a bear market and what causes it?
By definition, a bear market is when the stock market drops for an extended period of time, usually by at least twenty percent. It is the opposite of a bull market. This decline in stock prices is normally due to a downturn in corporate profits, or a correction of market overvaluation. Investors who are scared by these lower earnings or lofty valuations sell their stock, causing the price to drop. This causes other investors to panic about losing the money they’ve invested, so they sell as well; the vicious cycle begins.
How does a bear market affect my investments?
Generally, a bear market will cause the securities in your portfolio to drop in price. The decline in their value may be sudden, or it may be prolonged over the course of time, but the end result is the same: the quoted value of your holdings is lower. This leads to two fundamental principles:
1.) A bear market is only damaging if you plan on selling your stock or need your money immediately.
2.) Falling stock prices and depressed markets are the friend of the long-term, value investor.
In other words, if you invest with the intent to hold your investments for decades, a bear market is a great opportunity to buy.
What do I do with my money in a bear market?
The first thing you need to do is to look for companies and funds that are going to be fine ten or twenty years down the road. The reputations of brand name valuation will endure. If the market crashed tomorrow and caused Coca-Cola stock price to fall 30%, people are still going to buy soda. People will still eat chocolate. People will still need insurance. The fundamental human marketplace will steady itself throughout the whims of Wall Street risk and consequence. This brings us to our third principle:
3.) You must learn to separate the stock price from the underlying business. They have very little to do with each other over the short-term.
When you understand this, you will see falling stock markets like a clearance sale. Load up on low-valued stocks while you can, because history has borne out that prices will eventually return to more common-sense levels, and you will reap the profits enjoyed by the traditional value-investors.
What is a bear market?
A Bear Market is a prolonged period in which investment prices fall, accompanied by widespread pessimism. If the period of falling stock prices is short and immediately follows a period of rising stock prices, it is instead called a correction. Bear markets usually occur when the economy is in a recession and unemployment is high, or when inflation is rising quickly. The most famous bear market in
Oil Reaches New Highs Amid Inflation Concerns
Oil prices rose to a new record, just above $135 a barrel, while a government report raised investors’ concerns about the impact of inflation on consumer spending.
Crude spiked after OPEC’s president Dr. Chakib Khelil was quoted as saying his organization won’t raise its output before its next meeting in September. That sent a barrel of light, sweet crude to a trading high.
Rising energy costs can create a vicious cycle throughout the economy. The Labor Department’s producer price report, which suggests higher energy and food prices might be affecting other parts of the economy, compounded the concerns raised by higher oil.
The department said wholesale inflation is up by 0.2 percent in April following a 1.1 percent jump in March, but outside of food and energy, prices rose by a faster 0.4 percent — double what most economists expected.
In their recent release, The Federal Reserve Bank of Chicago reports that U.S. economic activity weakened further in April and is at its lowest level since the 2001 recession.
Wall Street suggests an anxiety that a slow down in consumer spending could follow if wholesale price increases are passed along; consumer spending is crucial because it accounts for more than two-thirds of the U.S. economy.
The mood on the Street was further diminished Tuesday by sluggish retail reports and statements from Federal Reserve Vice Chairman Donald Kohn that decision-makers are inclined to hold interest rates steady.
One area of political concern that the government is providing headlines with is the Senate banking committee leaders announcing they are close to a housing bill deal that would help prevent foreclosures. They also plan to change the way the government oversees both Fannie Mae and Freddie Mac.
In overseas financial news, Japan’s central bank chose to hold the ship steady on interest rates while the global economy awaits what could be a U.S. perfect storm.
Will the United States slide into recession?
In a recent survey released by the National Association for Business Economics (NABE), thirty percent of economists believe that the United States will slide into its first recession since 2001. The thirty percent marked a sharp increase from the ten percent who responded in kind in the last NABE survey released in January.
“That’s a striking difference,” said Ken Simonson, chief economist for the Associated General Contractors of America and the NABE’s lead person on the survey. He added that the tone of the overall survey was “extremely gloomy.”
It is a generally accepted tenet of macroeconomics that if an economy contracts for six straight months it may be considered to be in a recession. The U.S. economy was nearly stalled in the last three months of 2007, growing at a pace of just 0.6 percent. Many analysts say the economy’s normal growth rate should be just over 3 percent.
The government will report on the economy first-quarter performance at the end of April, while the second-quarter’s results won’t be known until late July.
Forecasters “were notably downbeat about their own companies and the overall economy,” Simonson said. Even Federal Reserve Chairman Ben Bernanke recently acknowledged, for the first time, that a recession is possible.
The majority of the economists polled — 51 percent — thought the growth during the first half of this year would report in between zero and 1 percent. Sixteen percent predicted growth in the first half at between 1 and 2 percent, while only three percent put it at between 2 and 3 percent. None of those participating in the survey believed growth during this period would exceed 3 percent.
A trio of crises — housing, credit and financial — have hit the country, inhibiting spending by people and businesses alike. And, that’s weakening national economy activity.
Against that backdrop, 70 percent of the economists said they are more pessimistic about the economy’s outlook than just three months ago.
And, 45 percent said they expect a substantial slowdown in housing in the next six months. The housing slump — which has dragged down home values and led to record-high home foreclosures – is considered by many to be the biggest weight on the economy.
Thirty-nine percent said harder-to-get credit has negatively affected their businesses, up from 26 percent in January.
The one-two combination of weakening economic conditions and soaring prices for energy and other commodities is seen as tightening companies’ profits margins, the survey says.
The Federal Reserve has reacted boldly to these indicators by slashing interest rates along with taking steps to help financial institutions overcome credit problems. Without the steps taken by the Fed, these issues to business and consumers alike could paralyze the entire financial system.
Interestingly, 69 percent said the Fed’s action had no impact on their businesses.
The survey, based on the responses of 109 NABE members, was conducted between March 24 and April 8.
Consumer Loan Delinquencies at a 16-Year High
As credit predicaments extend from mortgages into other forms of debt, Americans find themselves falling behind on consumer debts. The American Bankers Association (ABA) recently reported that for loans at least 30 days past due, the percentage has risen to 2.65 – from 2.23 this time last year. This is the highest percentage for these loans in nearly 16 years. (In the first quarter of 1992, the rate of delinquencies was at 2.75 %.)
The report released by ABA includes more than 300 banks that extend a majority of outstanding consumer loans. Its report covers loans in the following categories: home improvement, direct auto, indirect auto, mobile home, marine, home equity, personal and recreational vehicle loans.
Many people believe this indicates that the US’s economy is sluggish and that we may be in a recession. John Lonksi, chief economist at Moody’s Investors Service stated, “There’s no question that the economy is weakening beyond housing, resulting in the loss of household purchasing power.” He added, “Deterioration of household credit should continue through 2008, though the rate may moderate. If it intensifies, then the current recession may prove more severe than anticipated.”
As mentioned, consumer debt is spreading out from mortgages into other “lesser” forms of debt. ABA chief economist James Chessen ascribes the delinquency rate increase to auto loans. Reaching the highest on record, late payments on indirect auto loans (made through the dealerships) amounted to 3.13 %. Delinquencies on their counterpart, direct auto loans, increased to a 2.5 year high, 1.9%.
In addition to auto loans, credit and debit card delinquencies are also on the rise. After four consecutive quarterly declines, these debts rose to 4.38 %. The housing market is seeing its fair share of bad debt, as well. Delinquencies on home equity loans rose to 2.39 %, a 2.5 year high. Home equity lines of credit have also seen a rise in late payments while rising to .96 %.
Deficiencies tied to credit cards, mortgages and other consumer loans are presumed to impair quarterly results of large lenders such as Citigroup, Bank of America and Wachovia and even more specialized lenders such as GMAC. Recently, financial lenders have written off more than $200 billion related to subprime mortgages and other consumer debt, internationally.
Unfortunately, the outlook on the labor market won’t help the matter. In March, 60,000 jobs were shed, raising the unemployment rate .2% to 5%. “Debt repayment abilities of consumers should continue to erode until the labor market firms,” Lonski said. “It will be difficult to have a firming of the labor market if household purchasing power continues to suffer from faster growth in food and energy prices, relative to income.”