As the saying goes: "A picture tells a thousand words."
That was the case this morning, as I opened up an article entitled, "World Growth 'Worst In 60 Years.'" Accompanying the article was a picture of a Japanese stock trader, slumped back in his chair, looking royally fed up.
All that was missing was the speech bubble above his head, which should have read: "Man, I wish I'd cashed in my chips ages ago. Guess I can kiss sayonara to that fully-loaded Lexus and early retirement in Thailand." The article continues to say that global GDP growth is expected to trickle in at a paltry 0.5% this year - the lowest since World War II. That's according to the International Monetary Fund, which slashed the projection down from the 2.2% rate it predicted as recently as November
I headed into the London offices of Goldman Sachs (NYSE: GS) on Tuesday morning to meet my stepsister, the mood there seemed surprisingly okay. But I suspect it's darkened today, with the news that the recession-hit British economy is expected to suffer a 2.8% growth contraction this year - the worst among the world's industrialized nations. In addition, the IMF says that with credit losses from bad U.S. assets projected to hit $2.2 trillion, banks will need half a trillion dollars over the next two years just to stabilize their finances and stop capital declining any further.
In all, the U.K. needs an estimated £20billion ($28.5 billion) per year over the next few years in order to restore its public debt to the targeted level in November's pre-Budget report, according to the Institute for Fiscal Studies. Cue spending cuts and tax increases then. Elsewhere, the U.S. is staring at a 1.6% GDP growth decline this year, considerably better than Japan's 2.6% contraction and the Eurozone economy's 2% drop. But if you're looking for pockets of growth....
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* * * * * * * * * *These Two Economies Are Slowing... But Still PositiveOkay, so the IMF says emerging market growth is set to slow from 6.25% in 2008 to 3.25% this year. But the two main emerging market powerhouses are expected to beat that average.
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* * * * * * * * * *These Two Economies Are Slowing... But Still PositiveOkay, so the IMF says emerging market growth is set to slow from 6.25% in 2008 to 3.25% this year. But the two main emerging market powerhouses are expected to beat that average.
And while it's not the almost triple-digit rate we've become accustomed to over the past few years, due largely to the slowing export market, China's economy is still expected to post a solid 6.7% GDP growth rate this year - something I noted in my column last Friday when I talked about the best places to invest in China.
In nearby India, growth is estimated at 5.1%. The trick with emerging markets like these is knowing how to profit from them without getting burned. And in our Xcelerated Profits Report newsletter, we've managed to do that with both China and India.
Take a look at our report here. But in the light of the global economic slump - and the fact that the value of global goods dived by a 40% annualized rate towards the end of 2008 - an ominous new theory has entered the equation, just as experts are calling for togetherness... * * * * * * * * * *From Globalization To
"Every Man For Himself" Protectionism. That's the watchword at this year's World Economic Forum in Davos, Switzerland. As Federal Reserve chairman Ben Bernanke and others implore nations to work together to solve the economic crisis, it's no surprise to see some countries touting the benefits of merely looking after themselves.
Now that the world's worst economic fears have been realized and the financial crisis has spread around the globe, few countries are immune from the pain. Globalization may work when the system is sound, but when the bough breaks and economies fall, there's little backup. Political and economic pressure within countries often dictates that a nation should look after its own interests before others. Forget bank bailouts.
With the era of cheap money well and truly over, many countries are scrambling to bail themselves out after years of "irrational exuberance." And while strong nations like the U.S., Japan, China, and many in Europe have the economic strength to either print money, or have ample foreign currency reserves, smaller nations are the less publicized victims. Take Latvia, for example, which was forced to accept a bailout from the IMF under terms that would make anyone cringe:
Tax increases, wage reductions, and spending cuts. Morgan Stanley's (NYSE: MS) well-respected economist Stephen Roach puts it best. Quoted in the International Herald Tribune, he notes that the situation has triggered a "rising tide of economic nationalism." (As a side note, Roach also disagrees with the IMF's analysis. He believes that this will be the first year since the Great Depression that global GDP growth actually declines).
While all the economic stimulus packages are designed to get banks out of trouble and encourage lending, the climate of fear means many are reluctant. And when they do, it's more likely to be to entities within their own countries. Not so much "spreading the wealth," but keeping their artificial bailout wealth for themselves. *********Should They Stay Or Should They Go? Banks Paying Big For Taking Big Risks As it stands now, troubled banks are at the mercy of their governments. The risk of lending to dubious borrowers has backfired spectacularly and in the worst cases, it's up to governments to decide who survives and who fails.
For that privilege, banks are now subject to severe regulation and even nationalization - a scenario that may heighten the risk of protectionism and impact their ability to be completely financially independent and creative. But with ongoing concerns about the amount of so-called "toxic" assets on banks' balance sheets, it's either that scenario, or leave shareholders and taxpayers saddled with the risk.
As yet, the bailout money pumped into banks hasn't produced much reward for anyone and it may be that the "bad bank" model (in which the government takes on banks' bad assets) will prove more successful than simply tossing money at the problem and not knowing how it's actually being spent.
The current situation reminds me a little bit of the massive speculation in the commodities sector last year. Until the fever cools and the "bad" money is washed out of the system, it's difficult to see how global GDP growth can rebound, or when we'll see much relief from the current volatile climate in the financial sector and stock market.
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