Recent rallies in various categories of risk assets hint complacency is winning ground and optimism is strengthening in various markets in many places. Maybe you should ask yourself, “Is there really something fundamental that has changed?”
There is no doubt whatsoever that last year’s frequent bad news streams now look as if they have gone into something like a stand-by mode. However, most of the boatload of serious financial, economical and geopolitical uncertainties all over the globe haven’t disappeared and certainly haven’t been resolved.
That said, we now see a growing number of apparently upbeat people who seem to think these uncertainties are finally changing for the better.
Unfortunately, realistic evaluation obliges me to remain skeptical. I will certainly remain so until I see a real, long-term trend growth in the United States. Until the unemployment rate is about 1.5 percent lower than today’s 7.8 percent rate, I probably will remain skeptical, because the growth and unemployment numbers are “conditio sine qua non,” or the essential preconditions, for any sustainable rally that would drive all related assets. Keep in mind that in the developed economies, the ongoing public and private deleveraging processes will continue to cut growth.
Since the onset of the now four-year-old crisis, the Federal Reserve and the European Central Bank (ECB), as well as the central banks in countries like China, have implemented non-standard policies that have prevented full-blown economic collapses and associated panics not only in their respective locales, but also in global financial markets.
These actions have, in fact, only bought time and certainly have not resolved the respective structural problems. What’s worse, governments are now left with far less free (justifiable!) capacities for stimulating their economies through renewed actions of increasing expenditures and/or supportive fiscal policies, in case that would be necessary again.
When the International Monetary Fund (IMF) lowered its world economic growth forecast to 3.3 percent for 2012 and 3.6 percent for 2013 in October, we learned the world would remain too close to recession territory for some time to come, as the IMF considers 3 percent global growth as recessionary.
These not-so-comfortable IMF global growth expectations were confirmed this week by the Organization for Economic Co-operation and Development (OECD)’s composite leading indicators (CLIs). These could be qualified as “still-treading-water” CLIs because the CLIs of the most important OECD countries — with exception of the United States (101.0), the United Kingdom (100.7) and Japan (100.2) — continue to show a long-term trend below the 100.0 benchmark.
The most important world economies remain, at least for the time being, stuck in real, below-trend anemic growth, which implies various tail risks since the bulk of recovery stimuli have already been implemented.
For now, the most important uncertainty that needs an urgent outcome is the coming and probably “stormy” U.S. debt ceiling debate. At a conference Monday at the University of Michigan's Gerald R. Ford School of Public Policy, Fed Chairman Ben Bernanke stated: “It's very, very important that Congress takes the necessary action to raise the debt ceiling to avoid a situation where our government doesn't pay its bills.”
I personally don’t think the United States will default paying its bills, but when pure politics are at play you never know.
Interestingly, at that same occasion, Bernanke also said that while it’s clear the United States has made progress in its economic recovery, there's still quite a ways to go before the Fed will be satisfied.
Meanwhile, the eurozone remains well-tangled in a worrisome and worsening recession. For instance, the German Federal Statistics Office said in a preliminary estimate that German gross domestic product (GDP) in the fourth quarter dropped 0.5 percent quarter-over-quarter. For the whole year, the economy grew 0.7 percent, down from 3 percent in 2011.
This turn of events is simply bad news, especially for the eurozone periphery countries, which are in or are close to a depression. Further slowing of eurozone economic growth endangers any symmetric adjustment between the eurozone core countries, of which Germany is by far the most important country, and the periphery countries, and eventually a deeper eurozone integration. Should these adverse circumstances persevere, the eurozone could be bound to growing tensions in its various electorates that probably won’t be disposed continuing to endure the austerity sacrifices that have been imposed upon them.
Besides that, long-term investors could do well to keep in mind the ECB has far less monetary policy stimuli bullets than what the United States had at its disposal in 2009.
Again, uncertainties are abounding and are in no way off the eurozone table.
Among the emerging economies, particularly China, I don’t expect that the near future should present any major financial/economical problems.
Nevertheless, long-term investors should keep in mind that China will have to change its investment-led growth model because it is not sustainable. Also, China will not escape the obligation of going through the process of repairing its own balance sheets. In the coming years we should not be surprised to see Chinese growth bound for a slower pace than what we have got used to lately. Again, nobody really knows at what degree China will stimulate global economic growth from now on.
Finally, worldwide geopolitical risks abound. In my opinion, Iran remains among the top worries. Long-term investors should not overlook this complex situation. In this context, the Project on U.S. Middle East Nonproliferation Strategy released an enlightening report (166 pages) titled “U.S. Nonproliferation Strategy for the Changing Middle East,” wherein the following excerpts speak for themselves: “Our analysis focuses on the speed with which Iran could produce enough weapon-grade uranium (or sufficient separated plutonium) because once the regime acquires such fissile material, it becomes far more difficult to stop the program militarily. … Caution dictates that the United States assume, and plan on the basis, that Iran could reach critical capability in mid-2014. … Israeli Prime Minister Benjamin Netanyahu, has expressed concern that Iran may reach critical capability by the summer of 2013.”
In addition, last week, Yukiya Amano, director general of the International Atomic Energy Agency (IAEA), declared he was not optimistic for reaching a framework accord at a meeting in Tehran, Iran, this week that would give the IAEA access to the Parchin military facilities, which is located about 20 kilometers southeast of downtown Tehran in the Barjamali Hills and where Western powers “suspect” Iran has performed atomic-weapons related work.
Because of all that, and unfortunately because of a lot more, I can’t become convinced the worst of the crisis is over. The global economic growth train still could lose one or even more of its wheels at any moment and, I think, will certainly do so in the foreseeable future.
In the various markets, I still see an ongoing topping process, and the high bullish readings in the Consensus Index and in the Market Vane stock index usually are signs we are heading for a correction.
Once we are there, we’ll see if there are real long-term buying opportunities. Of course, that’s my personal opinion and I don’t have a crystal ball.
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