There is a growing consensus that it’s going to be the rest of the world that will drag the U.S. into a recession at the start of 2009. Tuesday’s U.S. exports data surprised to the upside, but you have to wonder how sustainable this kind of export growth is. Adam Carr at ICAP Australia pointed out that shipments to Italy, the UK and Germany – whose own outlooks aren’t great – were what drove U.S. exports higher during June. The resilience of U.S. exports has been providing some support to the stock market, but we have to wonder if demand for U.S. exports will remain strong.
Photo: NTLam, Creative Commons, Flickr
To test the validity of this thesis, you might want to keep an eye on the Indian wedding season. Allow me to explain:
Autumn is the strongest time of the year for gold seasonally by far. "From early August to early February, on average gold has rallied 14.0% in its bull to date," explains Zeal Research analysts. "The wise and prudent Asians, having lived through countless failed governments and currencies over millennia, have a deep cultural affinity for gold," they say. "This continues after harvest into the famous Indian wedding season. This fascinating cultural phenomenon tends to peak between early October and late November, and is directly responsible for those months’ strong gold rallies."
India is the world’s largest consumer of gold. Most of it is in the form of jewelry, but Indians don’t separate gold jewelry and gold investment like we do in the West. They are one and the same. Brides’ dowries may not sound like much, but collectively they are the biggest seasonal driver of gold investment demand on the planet. Something like 40% of India ‘s entire annual gold demand occurs during the short autumn wedding season!
There is mounting evidence of a global slowdown, argues Mr. Berner. While there are some exceptions, there’s no mistaking the slowing growth in Europe and Latin America. We have to assume that the U.S. stock market has already priced in this expected weakness. For that reason, Asian demand for exports is key to the outlook for U.S. equities. In general, because Asian central banks haven’t tightened aggressively, the process of deceleration is expected to unfold slowly.
And here is the crux of my argument: If the physical demand from India’s wedding season fails to spark a gold rally between August and February, it might be a signal that Asian demand has been eroded faster than the market expected. If this weakness is confirmed, it adds weight to the idea that the rest of the world will drag the U.S. into a recession at the start of 2009. Considering that the exporting sector is currently the one bright spot of the U.S. economy, such an outcome might signal a dark and gloomy U.S. stock market in 2009…
Disclaimer: I own SDS (UltraShort S&P500)