Some Scenarios for a Global Recession

I read these articles published on popular websites. My first feeling was: I need to sell everything I have. How am I going to save my money here? Pessimism is everywhere. Energy and commodities prices are going down. They will continue to do so as the global recession scenario unfolds. Emerging markets will be particularly hit. Equities are in a bear market. Forecasts for equities in some cases are so negative that are really scary also for experienced investors. Bonds should do fine, but are we sure?

Inflation is the new big enemy of this decade according to some analysts. Interest rates can only go higher in the long term, some say (including Greenspan). The US financial system is about to blow up according to someone else. Actually, the Fannie Mae (FNM) and Freedie Mac (FRE) stories and others (Lehman (LEH), Bear Stearns, etc.) are a pretty serious concern. Liquidity is shrinking, consumers are shaken.

The US has so far fueled growth in many areas of the world, becoming a big debtor. In the long term, the trend will continue, but it is likely that it will slow down. It seems that this cannot be sustained much longer and a rebalance has finally started. The US still has an important influence in the global economy. China will suffer a lot from the ongoing US simultaneous crisis in the credit and housing markets. Internal contradictions and the need to grow will create difficulties. This is true for other surplus and emerging countries.

Let's try to build a scenario. The US deficit will be reduced and the dollar will be relatively stronger. Commodity and energy prices will go down, helping to control inflation at least momentarily. I have recently noted a rebound of the stock market associated with a stronger dollar and weaker commodities and energy prices. This correlation should continue.

The US financial system will find a base to stabilize itself, although it will be much weaker than before. Also housing will at last stabilize. The problem is: how quickly will these adjustments occur? At which levels markets will attract new buyers? Do we have any elements to make some assumptions? It is quite difficult to predict. The tightening of credit is not helping and there is a vicious circle ongoing.

Geopolitically, we are seeing a long term growth of new and old regional actors. This is likely to continue. Money will continue to flow from traditional economies to frontier and emerging markets, but slower than before after that the current crisis will have considerably weakened the investors' appetite for these volatile and often unstable markets and countries.

In the short term we have to fear a shock in the markets. An event, although sometimes crashes occur without apparent reasons, that will ignite a global panic selling. No one can now whether this time it will happen or not. Hopefully, inflation will be controlled soon enough to allow central banks to act and lower interest rates timely.

There are and there will be buying opportunities. The timing is quite difficult. The recent rebound of the stock market has not been very convincing. I do not have the evidence, however, to say that the bottom has already been hit in July. I think that the key for a relatively stronger equity market will come from a turnaround of financials. we need to monitor this sector very carefully. Bad news will continue to hit the sector for some time, but this sector's bottom is key to bring some optimism into the markets.

I think that stocks eventually will benefit the most from a stabilization of the economies. Hopefully, the US will manage with the new President to start a path of control of the deficit. This would help a lot. It would also make the dollar stronger. And we could see stock indexes print new highs.

Comments

[BlackyBlack:]

I think that as this unfolds there are going to be a lot more regional resources wars, and possibly some intentional undermining of local economies and currency regimes. Who knows what effect that will have on the global economy, but I doubt what we will see in the future will be anything like what we have seen in our lifetimes. Everyone is guessing, but nobody knows what all the various actors are going to do. No one even knows who has the power anymore - that's why you're going to see the resource grab. Bluffing won't work in the future due to the huge loss in credibility of the past power brokers. At least for now most people haven't caught on that there is a huge change happening. That makes a panic less likely imminently, but of course anything goes once people wise up.

2008 Aug 21 11:30 AM

[whidbey:]

Your insights are questionable.A lower deficit will not affect the dollar much. The dollar historically moves based on interest rate differentials. I suspect the dollar will not gain much more, interest rates will stay about where they are, while consumers will slow their consumption. So equities will drive this fall sometime. The new president is just a fall guy and neither of the nitwits has brains enough to know it apparently. Z

2008 Aug 21 03:00 PM

[had enough:]

sick and tired of hearing same old story,any nitwit or 2 bob idiot can write or copy exactly what you and hundred more or so are saying.how
about coming up with something oringanal ,we know that eventully the
finanacial and housing will bottom out,I want to hear from the so called EXPERTS..are we in a ression or not in a ression, if we are how bad and how long . if where not in ression when ....no more bullshit

2008 Aug 22 12:58 AM

[Paolo Pezzutti:]

Thanks for your comment "had enough". If I had a crystal ball I could tell you. There is a very interesting article on RGE monitor: The Perfect Storm of a Global Recession by Roubini, at www.rgemonitor.com/blo....
He thinks the worst has still to come, so you should fasten your seat belt.

2008 Aug 22 06:52 AM

[David Martin:]

It seems a bit weird to think that the deficit will be brought under control when neither presidential candidate has any proposals that will do anything other than worsen it, not to mention Bernanke having a free reign to bankrupt the country.
Wishful thinking aside, the US is clearly on route to a default, as the debts are beyond anything which might be payable.
In addition, the rise in oil prices is fundamentally due to production having been broadly static for the last 3 years, with rising demand not only in India and China but in the oil exporting countries leaving less surplus available for export.
It should be noted in this context that we have used more oil than has been discovered in every one of the last 30 years.
Energy supplies will become increasingly scarce and expensive over time, regardless of short term depression induced price falls.
The US stock market is overvalued by at least 2/3rds.

2008 Aug 22 10:01 AM

[Old Trader:]

Paulo,

And just HOW is the deficit going to be reduced? I have to say, this article is one of the less "helpful" ones on the site...

2008 Aug 23 01:39 AM