On the First Anniversary of the Trough in Equity Prices
The Dow Jones industrials (10552.52) and S&P 500 (1138.50) as of March 8, 2010 have moved up significantly from their respective troughs on March 9, 2009 and are now about 25% below their peaks on October 9, 2007 (see chart 1).
The Dow Jones Global World Index excluding the U.S. is off 31% from the peak on October 31, 2007 (see chart 2). Among the major economies of the world, stock prices indexes of Argentina (+0.1% from peak on October 31, 2007) and Brazil (+4.2% from peak on December 6, 2007) are the only outliers to show readings that have exceeded the peaks posted in 2007 as of March 8, 2010.
Real GDP growth across the world is yet to match the noticeable gains seen in equity prices during the past year. The U.S. economy largely held steady on a fourth-to-fourth quarter basis in 2009. Growth in the European Union fell 2.3% in the final three months of 2009 on a year-to-year basis. Real GDP advanced at a rapid clip in China (+10.7%), while India (+6.1%) and Australia (+2.1%) also recorded gains in real GDP in 2009. Although equity prices advanced in Argentina and Brazil in the last twelve months, real GDP fell 0.3% in Argentina and 1.5% in Brazil during in the third quarter of 2009 compared with the year ago level. Typically, equity prices are leading indicators of economic growth. Based on this consideration, are the sharp upward movements of equity prices over the past year sending a message of robust economic growth in the quarters ahead? The answer depends on the economy in question. With respect to the U.S. economy, credit market headwinds and weak labor market conditions cast a shadow on the possibility of a strong recovery.
Richard Thies
Protectionism: Not-so-tall Cotton
In a long-running trade dispute concerning US government subsidies to cotton growers, Brazil announced a wide-ranging list of retaliatory measures against US exporters to take effect next month. The announced measures include tariff increases on a diverse menu of imports, summing $591 million. The remaining $238 million will be announced March 23rd and will focus on changes to intellectual property rules. This type of cross-retaliation, rarely sanctioned by the WTO as it has been in this case, is evidence of the clear upper-hand afforded to US cotton producers by the subsidies. That being said, the counter-move by Brazil was a bold one, intended to injure a diverse subset of US industries and thereby increase political pressure on Washington. The retaliation comes from a nation who has been materially harmed by cotton subsidies and who has been attempting to expand its own cotton exporting industry for the past decade. It also comes from a nation who is getting used to its sound economic footing - the growing influence of Brazil on inter-American economic affairs is something Washington will have to accept.
Considering this is not even the leading protectionist-related story in the news today, the obvious fear is that this is part of a growing trend. The conventional wisdom has gone something like this - during the worst of the crisis, trade wars were off the table because everyone knows how devastating they can be. However, now that we're past the worst of the doom and gloom, it should not be surprising that trade issues are returning to the fore. Further, it should not be surprising to see retaliation come from countries like Brazil and China who have emerged as relative winners from the crisis.
While no one is suggesting a full-scale trade war is looming (Brazil still badly needs the US consumer), it is part of a worrying domestic trend. Namely, the price of tariffs imposed on US exporters is jobs. The US Chamber of Commerce suggests tariffs imposed by Mexico in the recent cross-border trucking dispute will cost tens of thousands of jobs - the same will happen with this Brazilian affair unless a solution is reached. Despite this reality, the political space for reworking our agricultural subsidies figures to be akin to finding a bipartisan solution to healthcare - nonexistent. In the meantime, Canadian exporters will continue licking their chops at our expense.
