On Tuesday, December 20, the German IFO confidence index had risen in December to 107.2 from 106.6 months before; analysts had expected a level of 106.0.
This sent stock indexes up 1.4 to 3.0 percent.
How much weight should investors put in that kind of outlook?
Looking back at the previous crisis, when stock markets plunged worldwide, might provide perspective. On Feb. 26, 2008, when the financial crisis was about to gear up, the IFO confidence index for February rose to 104.1 from 103.4 in January 2008; analysts had expected a level of 102.9.
Was this great confidence in the future, that German business community joined in February 2008, justified? No. The DAX index fell from 7026.23 to a bottom in March 2009 at a price of 3642.54 — a decrease of 48.15 percent.
On May 21, 2008, the IFO confidence index was 103.5, up from 102.4 in April, and again higher than analysts' expected average of 102.1. Again, this showed a very great complacency about the future by the approximately 7,000 German business leaders. The reality of the stock market was another: The DAX index began shortly after at its most precipitous decline from 6970.73 to 3642.54 on March 9, 2009, a decrease of 47.74 percent.
Overall, the DAX index fell a staggering 55.13 percent from Dec. 12 2007 to March 9, 2009.
Only when we are in the midst of a crisis like 2008-2009 do the German business leaders wake and see the grim reality, and the IFO index points to a bleak economic future.
At the bottom of the stock market on March 9, 2009, the IFO index was not used as an indicator of whether investors should buy or sell shares. The German IFO Index fell from 82.6 on March 25, 2009, to 82.1 in February.
Was the German IFO Confidence Index different during the crisis year 2000?
No. Unfortunately, the IFO index from February to June 2000 increased month by month, where stock market fell. Only since July 2000 did the IFO index begin to fall.
So the conclusion must be that the IFO index cannot be used as an indicator of the stock market being up or down. From this may seem surprising that the stock market still reacts, sometimes vigorously, to this index.
What now?
The big question now is can we trust that the approximately 7,000 German business leaders have come up with a realistic view of the future?
Have they take account of the following?
The retail sales in Germany might not appear good. German retail giant Metro reported on December 7 a downward adjustment for both sales and earnings for this year. They expect both sales and earnings will decline compared to 2010.
The German chip giant Infineon (IFX), Europe's second-largest producer of microchips, has warned of a larger-than-expected dive in sales next year. Infineon makes chips, including those used in cars. In the last quarter profits fell by 68 percent. The message came after rival STMicroelectronics in October also warned of a dip in sales. Chip consumption has a reputation for being a good indicator of the economic future.
Virtually all EU countries, with few exceptions, must save enormous sums of public spending, which will lead to savings in the private sector, which in turn will lead to further savings in the public sector if countries are to meet the new December 9, 2011, EU agreement not to have greater deficits in public budgets than 3 percent of their GDP and a debt that does not exceed 60 percent of GDP. From a forecast from November 2011, there are 15 EU countries with a deficit greater than 60 percent. (There is, however, a small "zipfastener" built into the agreement that the debt may well be greater if it is decreasing.)
That about 50 percent of German exports go to the EU, and since almost all the countries here are or will come into recession in 2012, will lead to less consumption from both the public and the private sector. There has already been a negative sign for exports in October, when they fell by 3.6 percent, which is the largest decline since April. It was especially exports to other EU countries that declined . But EU countries are only in the very infancy of their savings, so what will happen when it finally kicks in unclear.
China has introduced import duties of up to 21.5 percent on imported cars with engines of 2.5 liters and above, which will hit German automakers.
China and other countries in Asia have recently shown signs of decline in their economies.
The industrial production in China is in decline for the first time in three years.
Brazil, which otherwise is among the world's leading emerging economies, has also been affected by the escalating crisis, with GDP for the third quarter coming in negative 0.04 percent — the lowest growth since 2009.
The growth in private consumption in the U.S. is largely at the expense of savings. In September, private consumption grew 0.6 percent., while disposable income rose by only 0.1 percent.
Not all indicators from the U.S. are as good as they would indicate. When looking at housing sales in November, a full 46 percent of sales were at a price that was about 23 percent below the average price for an ordinary sale. In addition, there are approximately 6 million borrowers who are more than 30 days behind on their futures.
The big European banks are very reluctant to lend money, as most intend to slim their balance sheets significantly to meet the new EU agreement, which comes into force June 2012. The actual core capital as a minimum must be nine percent. This can lead to a credit squeeze, if this is not already the case.
Then there are the hypothetical danger signals:
Analysts forecast that growth in China in 2012 will fall below nine percent for the first time since 2001. This will mean lower consumer spending in China, and there will be created the same number of jobs as before.
China could brood on a potential housing bubble.
If more countries in the EU in the first half of 2012 are to repay/refinance a debt of more than 1.1 trillion euro, it could be not feasible or interest could be so high that countries cannot service the debt.
One or more countries in Europe could go bankrupt.
The U.S. as the EU, not to mention Japan, could at one time or another be forced to reduce their large debt to GDP ratio. This can only happen when taxation, tax increases and public savings go up, which will result in less consumption and higher unemployment.
There could be other events than the multiple above-mentioned ills of the world economy, but if you just include the above, I find it hard to see that Germany will be deleted and go into recession, as virtually all other EU countries have done. The U.S. will also be able to fall into recession, as three major factors — unemployment, real residential sales and rising house prices — are crucial for a sustainable recovery. The jobs created can barely keep unemployment stable, and unemployment "improved" to 8.6 percent last month largely because 315,000 unemployed people left the labor market.
The world is not out of economic crisis yet, and there will be no upturn in the global economy earlier than 2013-2014, provided that all countries with large imbalances on their debt relative to GDP have been implementing the reforms, etc., necessary for the debt to be reduced. The world, unfortunately for many years lived in a state of massive overspending.
This sent stock indexes up 1.4 to 3.0 percent.
How much weight should investors put in that kind of outlook?
Looking back at the previous crisis, when stock markets plunged worldwide, might provide perspective. On Feb. 26, 2008, when the financial crisis was about to gear up, the IFO confidence index for February rose to 104.1 from 103.4 in January 2008; analysts had expected a level of 102.9.
Was this great confidence in the future, that German business community joined in February 2008, justified? No. The DAX index fell from 7026.23 to a bottom in March 2009 at a price of 3642.54 — a decrease of 48.15 percent.
On May 21, 2008, the IFO confidence index was 103.5, up from 102.4 in April, and again higher than analysts' expected average of 102.1. Again, this showed a very great complacency about the future by the approximately 7,000 German business leaders. The reality of the stock market was another: The DAX index began shortly after at its most precipitous decline from 6970.73 to 3642.54 on March 9, 2009, a decrease of 47.74 percent.
Overall, the DAX index fell a staggering 55.13 percent from Dec. 12 2007 to March 9, 2009.
Only when we are in the midst of a crisis like 2008-2009 do the German business leaders wake and see the grim reality, and the IFO index points to a bleak economic future.
At the bottom of the stock market on March 9, 2009, the IFO index was not used as an indicator of whether investors should buy or sell shares. The German IFO Index fell from 82.6 on March 25, 2009, to 82.1 in February.
Was the German IFO Confidence Index different during the crisis year 2000?
No. Unfortunately, the IFO index from February to June 2000 increased month by month, where stock market fell. Only since July 2000 did the IFO index begin to fall.
So the conclusion must be that the IFO index cannot be used as an indicator of the stock market being up or down. From this may seem surprising that the stock market still reacts, sometimes vigorously, to this index.
What now?
The big question now is can we trust that the approximately 7,000 German business leaders have come up with a realistic view of the future?
Have they take account of the following?
The retail sales in Germany might not appear good. German retail giant Metro reported on December 7 a downward adjustment for both sales and earnings for this year. They expect both sales and earnings will decline compared to 2010.
The German chip giant Infineon (IFX), Europe's second-largest producer of microchips, has warned of a larger-than-expected dive in sales next year. Infineon makes chips, including those used in cars. In the last quarter profits fell by 68 percent. The message came after rival STMicroelectronics in October also warned of a dip in sales. Chip consumption has a reputation for being a good indicator of the economic future.
Virtually all EU countries, with few exceptions, must save enormous sums of public spending, which will lead to savings in the private sector, which in turn will lead to further savings in the public sector if countries are to meet the new December 9, 2011, EU agreement not to have greater deficits in public budgets than 3 percent of their GDP and a debt that does not exceed 60 percent of GDP. From a forecast from November 2011, there are 15 EU countries with a deficit greater than 60 percent. (There is, however, a small "zipfastener" built into the agreement that the debt may well be greater if it is decreasing.)
That about 50 percent of German exports go to the EU, and since almost all the countries here are or will come into recession in 2012, will lead to less consumption from both the public and the private sector. There has already been a negative sign for exports in October, when they fell by 3.6 percent, which is the largest decline since April. It was especially exports to other EU countries that declined . But EU countries are only in the very infancy of their savings, so what will happen when it finally kicks in unclear.
China has introduced import duties of up to 21.5 percent on imported cars with engines of 2.5 liters and above, which will hit German automakers.
China and other countries in Asia have recently shown signs of decline in their economies.
The industrial production in China is in decline for the first time in three years.
Brazil, which otherwise is among the world's leading emerging economies, has also been affected by the escalating crisis, with GDP for the third quarter coming in negative 0.04 percent — the lowest growth since 2009.
The growth in private consumption in the U.S. is largely at the expense of savings. In September, private consumption grew 0.6 percent., while disposable income rose by only 0.1 percent.
Not all indicators from the U.S. are as good as they would indicate. When looking at housing sales in November, a full 46 percent of sales were at a price that was about 23 percent below the average price for an ordinary sale. In addition, there are approximately 6 million borrowers who are more than 30 days behind on their futures.
The big European banks are very reluctant to lend money, as most intend to slim their balance sheets significantly to meet the new EU agreement, which comes into force June 2012. The actual core capital as a minimum must be nine percent. This can lead to a credit squeeze, if this is not already the case.
Then there are the hypothetical danger signals:
Analysts forecast that growth in China in 2012 will fall below nine percent for the first time since 2001. This will mean lower consumer spending in China, and there will be created the same number of jobs as before.
China could brood on a potential housing bubble.
If more countries in the EU in the first half of 2012 are to repay/refinance a debt of more than 1.1 trillion euro, it could be not feasible or interest could be so high that countries cannot service the debt.
One or more countries in Europe could go bankrupt.
The U.S. as the EU, not to mention Japan, could at one time or another be forced to reduce their large debt to GDP ratio. This can only happen when taxation, tax increases and public savings go up, which will result in less consumption and higher unemployment.
There could be other events than the multiple above-mentioned ills of the world economy, but if you just include the above, I find it hard to see that Germany will be deleted and go into recession, as virtually all other EU countries have done. The U.S. will also be able to fall into recession, as three major factors — unemployment, real residential sales and rising house prices — are crucial for a sustainable recovery. The jobs created can barely keep unemployment stable, and unemployment "improved" to 8.6 percent last month largely because 315,000 unemployed people left the labor market.
The world is not out of economic crisis yet, and there will be no upturn in the global economy earlier than 2013-2014, provided that all countries with large imbalances on their debt relative to GDP have been implementing the reforms, etc., necessary for the debt to be reduced. The world, unfortunately for many years lived in a state of massive overspending.
