Composite Leading Indicator For The OECD

Composite Leading Indicator For The OECD

The OECD has released their composite leading indicators for the world economy.

Apollo Global is no longer the “king of distress”: Josh Harris

InvestingHistorically, Apollo Global has been known as the king of distressed investments for its track record of taking distressed assets and turning a profit on them. However, the pandemic has changed the firm's approach to the markets, at least temporarily. Q2 2020 hedge fund letters, conferences and more At CNBC's Institutional Investor Delivering Alpha Conference, Read More

You can read it for yourself – quickly done.

Briefly stated:

The United States and Japan continue to drive the overall position but stronger, albeit tentative, signals are beginning to emerge within all other major OECD economies and the Euro area as a whole.

The CLIs for India and Russia are also showing stronger signs of a positive change in growth momentum. However the CLIs for China and Brazil continue to point to below-trend growth.

Others have pointed towards a sharply rising Baltic Dry Goods index as a positive indicator for China in a positive direction. In my opinion it is however not a reliable indicator at the moment for two reasons:


  • The price for Iron Ore is falling – which should indicate that demand for steel (thus construction) in China is less than assured. To be blunt: The growth in China has no long term prospects. For other economies Iron Ore is trivial in so far as scrap iron prices are stable and most of the major investments in infrastructure are replacement and that does involve production of scrap iron.
  • I’ve written a couple of notes here on ValueWalk about shipping. Generally shipping is considered a yawn provoking subject among financiers and economists of same fundamental interest as the industry of infant’s footwear.

My point was however that the shipping industry is undergoing a fundamental consolidation and structural rationalization. Thus freight rates are liable to be misleading as indicators. They are far more a function of state subsidized yards and port handling facilities.

As to OECD’s comments on China and Brazil – they are in accordance with my crystal ball (admitted at times somewhat dusty and with the timekeeping precision for 100 yard dashed of an old fashioned office calendar).

To start with Brazil:

The economy is driven by commodities export. If China is indeed slowing down raw materials from Brazil are liable to be hit hard. Grain and soya beans are functioning in a market that directly and indirectly is in the hands of the USA as the world’s largest producer of food. As long as the USA has excess capacity (wasting 40% of the corn crop in bio-fuel) there is a limit to the world market price rise of food and fodder.

The food prices are not similarly limited in China as the income distribution is shifting towards social inequality which demands more grain pr. mouth due to passing the grain calories through pigs.

Russia is very much driven by energy export and for the moment energy prices are high due to a number of factors – not least Chinas presumably stagnating (if not falling) domestic production of f.i. coal.

As to Japan: When the main competitor is forced to raise prices unilaterally and you have excess capacity (both plant and labour) it doesn’t need a rocket scientist to predict some beneficial effects.

As to the growth prospects of the USA and Europe: In my estimate there is the factor that China is changing from being an export based economy to an import based. This does flip the advantage of a undervalued currency to a drawback. In short some of the jobs exported to China during the last decade are returning.

Don’t misinterpret the remark and assume that I foresee a great future for car production in Detroit. First of all the autoworkers and the labor at suppliers to the automobile industry moved to China because they were overpaid and underproductive. So the jobs returning will be lower paid and fewer than those that left.

Where these jobs return to in the USA (and Europe) depends very much upon housing prices as a lower wage can be accepted if cost of living is reduced – and in that context housing is a factor. It is not likely that housing prices will be able to adjust downward fast enough in the old industrial centers due to the inability of the banks to take losses.

In conclusion: I find no reason to think that the OECD predictions – in general terms – are not pointing in the right direction.