The European Union formally adopted an oil embargo against Iran and a freeze of the assets of the country's central bank as part of sanctions meant to pressure the country to resume talks on its nuclear program.
In October, EU Foreign Policy Chief Catherine Ashton sent a letter to Saeed Jalili, Iran's top nuclear negotiator, saying her goal was a negotiated solution that “restores international confidence in the exclusively peaceful nature of Iran's nuclear program.”
She also says she hasn’t yet received a reply.
Investors shouldn’t expect consumer friendly oil prices in the near future, which won’t help to firewall effectively the developing recession (contagion) in the eurozone, and even depression in countries like Greece, Portugal, and in the other PIIGS nations that are in deep trouble like Italy, Spain, etc.
Meanwhile, AP reported that an American aircraft carrier, the USS Abraham Lincoln, has sailed through the Strait of Hormuz into the Persian Gulf. The Navy says it's a routine maneuver. No need to say geopolitical risk could be on the rise in the near future. Yes, rising (dangerous) tensions and uncertainties, once again…
During the second half of this week, in Davos, Switzerland, the annual World Economic Forum will take place. The forum warns in its seventh edition of “Global Risks 2012” that economic imbalances and social inequality risk are reversing the gains of globalization. Socioeconomic risks compared to a year ago have definitively moved to the front burner.
I’d like to say that as an investor, I wouldn’t take that lightly.
In Europe, especially in Eastern Europe, but also in what’s called the core eurozone nations, we see politicians using more frequently than we have been used to over the last decades of “populist” rhetoric hereby stirring up “nationalistic” sentiments and possible future actions that could easily ignite a new round of “protectionism” that virtually has been in decline for decades. As an example, look what’s happening in Hungary.
There is no doubt in my mind at all that the world will face further economic shocks this year and social upheaval could roll back the progress globalization has brought us since WWII. Reality is unfortunately so that the world’s institutions are still ill-equipped to cope with today’s interconnected and rapidly evolving risks.
As far as economic risks are concerned, the World Economic Forum demonstrates the impact of a major systemic financial failure remains on top of the economic risks list for Europe (4.21 on an “impact” scale from 1 to 5), North America (4.16) and Latin America (4.36), where such an event would have by far the largest impact of all compared to the rest of the world.
Interestingly, that specific risk appears to have less impact on Asia (3.69).
Also, the World Economic Forum risk report depicts as potential impact and likelihood of global economic risks over the next 10 years as follows:
• Unmanageable inflation or deflation;
• Chronic labor market imbalances;
• Prolonged infrastructure neglect;
• Hard landing of an emerging economy.
The top 5 overall “impact” risks are:
• Major systemic financial failure;
• Water supply crises;
• Food shortage crises;
• Chronic fiscal imbalances;
• Extreme volatility in energy and agriculture prices.
Yes, the “Goldilocks” economic times we all have profited from over the last decades seem definitively to be over.
I don’t think it should be a bad idea that long-term investors should “try” to start adjusting their way of investment thinking by taking that new reality into account.
Believe me, it won’t be easy because it’s a new world in the offing that all we haven’t experienced.
In the U.S., the National Association for Business Economics (NABE), which was founded in 1959 and is the professional organization for people who use economics in their work, says in its survey that fewer companies in the U.S. plan to boost payrolls in early 2012 even as growth is expected to grow at more than 2 percent.
Keep in mind that GDP has to grow at plus 3 percent in order to bring down unemployment in a healthy and sustainable way. The share of companies seeking to add workers in the next six months fell to 27 percent, which is the lowest in at least five quarters.
Nayantara Hensel, chairwoman of the NABE said “optimism reflects growth in the economy … but the optimism could change as there’s also uncertainty. That’s why we see a degree of caution on employment.”
About the eurozone sovereign crisis, we can say there is still no light at end of the tunnel.
On Greece and as things stand at this moment and notwithstanding all the optimism that was touted last week the troublesome fact is there is no agreement on PSI – private sector involvement and, as a result if nothing changes, it seems unlikely that the second bailout will be authorized by the Eurogroup.
As such, there is now a reasonable prospect that Greece will experience a disorderly default on March 20 and possibly an exit from the eurozone.
Keep in mind that even if an “agreement” would be forthcoming, it is likely to be seen by the ratings agencies as a default with all the negative implications (contagion) that would have. In my opinion, there are still a lot of triggers that could cause a selloff in the markets.
I will only get interested when the selloff gets deep enough. I still don’t see any reason to change my “risk off” preference.
© 2013 Moneynews. All rights reserved.