Recession Warnings Found in Asset Price Declines: Cutting Research – Bloomberg 10-03-13

Salient to Investors:

John C. Bluedorn, Joerg Decressin and Marco E. Terrones at the IMF said:

  • Slumping asset prices show a recession is probably on its way for the G-7 economies as declining asset prices are significantly associated with the beginning of an economic contraction.
  • From 1970 to 2011, stocks tended to fall more frequently and further than property values, so were better recession-predictors.  The 1929 US stock market crash and subsequent depression, the Japanese deflation caused in part by the asset-price collapse at the start of the 1990s, and the recent financial crisis.
  • However, the US stock market drop of 1962 and the October 1987 crash did little to unsettle the economic recovery.
  • Oil prices were not useful predictors of shrinking output.

Maite Blazquez Cuesta and Santiago Budria at the Bank of Spain study found that earning 1 standard deviation less than others can be as harmful to well-being for men as a 30 percent permanent pay cut, but the effect was not statistically significant among women.

McKinsey & Co said:

  • There are 8,000 companies with revenues over $1 billion and another 7,000 will grow over the next 12 years, 70% of which will be created in the emerging markets. All will actively search the world when deciding where to open a HQ.
  • Half of the volatility in US GDP is traceable to the performance of 100 companies, whose global revenues total $57 trillion, the equivalent to 95 percent of global GDP. Revenues will reach $130 trillion by 2025.
  • Three times more large company headquarters will be in emerging regions by 2025 than in 2010 and 330 cities will host HQs of a large firm for the first time.

Peter Hooper, Torsten Slok and Matthew Luzzetti at Deutsche Bank said:

  • The Fed is set to raise interest rates more slowly than it has done in the past.
  • In the past 6 tightening cycles back to 1961, the Fed initially tends to raise its key rate before economic slack is fully reduced to zero.
  • The median gap between the jobless rate and that at which inflation is expected to accelerate at the time of the first increase has been 0.9 percent.
  • The slower the policy tightening, the greater the acceleration in inflation over the 5 years after interest rates returned to normal.

John Calverley at Standard Chartered said Ghana and Uganda topped Standard Chartered index of 31 advanced and emerging economies based on indicators including output per capita, years of education and life expectancy, followed by South Korea, Bangladesh and Singapore. They said the idea that GDP growth is not the only thing worth pursuing has become much more widely recognized.

The World Economic Forum said Switzerland, Finland and Singapore are the best of 122 countries at being able to develop healthy, educated and able workers. 8 of the top 10 were in Europe, including Germany at 6th and the UK at 8th. The US ranked 16th. China was the highest of the major emerging market economies at 43rd, ahead of Brazil at 57th and India at 78th.

Read the full article at  http://www.bloomberg.com/news/2013-10-03/recession-warnings-found-in-asset-price-falls-cutting-research.html

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Slumping asset prices show a recession is probably on its way.

That’s the case for the Group of Seven economies, according to a study by International Monetary Fund economists John C. Bluedorn, Joerg Decressin and Marco E. Terrones. It found that declining asset prices are “significantly” associated with the beginning of an economic contraction.

Stocks tend to fall more frequently and further than property values, so they are better recession-predictors, said the economists, who studied the period 1970 to 2011. Oil prices don’t seem to be useful predictors of shrinking output, they said.

They cited the 1929 U.S. stock market crash and subsequent depression, the Japanese deflation caused in part by the asset-price collapse at the start of the 1990s and the more recent financial crisis. At the same time, the U.S. stock market slide of 1962 did little to unsettle the economic recovery nor did the plunge of October 1987.

Siding with those who say asset prices can influence economic performance, the Washington-based IMF economists said extending their work to all advanced countries may help policy-makers assess the risks of a new recession both in their own countries as well as in their finance and trade partners.

* * *

Where men’s income stands relative to society is associated with mental well-being.

A Bank of Spain study published Oct. 1 found that for men, earning 1 standard deviation less than others can be as harmful to well-being as a 30 percent permanent pay cut. The effect was not statistically significant among women.

“Policies, practices and initiatives aimed at improving well-being among European citizens require a better understanding of individuals’ sensitivities to others’ income,” authors Maite Blazquez Cuesta and Santiago Budria said.

* * *

Emerging markets will create 70 percent of new companies with revenues over $1 billion by 2025 and all will actively search the world when deciding where to open headquarters.

That’s the projection of McKinsey & Co. which estimated in a report yesterday that there are now 8,000 such corporations and another 7,000 will grow over the next dozen years.

Such businesses have an outsized impact on their home economies — half of the volatility in U.S. gross domestic product is traceable to the performance of 100 companies, according to the report. Together, the companies report global revenues of about $57 trillion, the equivalent to 95 percent of global GDP. Revenues will reach $130 trillion by 2025.

The data were contained in a study of global business hubs, which estimated three times more large company headquarters will be in emerging regions by 2025 than in 2010 and 330 cities will host HQs of a large firm for the first time.

* * *

The Federal Reserve is set to raise interest rates more slowly than it has done in the past.

So say economists at Deutsche Bank AG led by former Federal Reserve official Peter Hooper. Their review of the central bank’s past six tightening cycles shows it initially tends to raise its key rate before economic slack is fully reduced to zero.

In the episodes studied, which date back to 1961, they looked at the gap between the prevailing jobless rate and that at which inflation is expected to accelerate. The median gap at the time of the first increase has been 0.9 percentage points, they said in a Sept. 27 report.

If the Fed follows its traditional path, it would begin to act when unemployment fell to 6.3 or 6.4 percent. Waiting until 6.1 percent would be consistent with the 2004 period of policy tightening. The Fed has said it won’t raise its benchmark rate as long as joblessness tops 6.5 percent. Unemployment declined to 7.3 percent in August as more Americans gave up looking for work.

The slower the policy tightening, the greater the acceleration in inflation over the five years after interest rates returned to normal, Hooper and his colleagues Torsten Slok and Matthew Luzzetti said.

* * *

Ghana and Uganda topped Standard Chartered Plc’s first attempt to monitor the pace of development.

An index from the bank was released in September based on indicators including output per capita, years of education and life expectancy.South KoreaBangladesh and Singapore rounded out the top five of 31 advanced and emerging economies studied.

“The idea that GDP growth is not the only thing worth pursuing is far from new, but it has become much more widely recognized,” said John Calverley, Standard Chartered’s head of macroeconomic research.

* * *

Switzerland, Finland and Singapore are the best countries at tapping the economic potential of their people, according to a new index by theWorld Economic Forum.

Attempting to grade global economies for the strength of their human capital, the Geneva-based institution measured 122 nations on their ability to develop healthy, educated and able workers.

Eight of the top ten were in Europe, including Germany at sixth and the U.K. at eighth. The U.S. ranked 16th. China was the highest of the major emerging market economies at 43rd, ahead of Brazil at 57th and India at 78th.