I don’t have a clue as to why the Dow is still trading above 12,000. The global economy in 2013 looks awful.
The Eurozone crisis is worsening, heavy-handed, almost emotionally-driven fiscal austerity measures are deepening recessions in most member countries, continuing high oil prices and a severe credit crunch are completely undermining any prospects for recovery.
And, I am an OPTIMIST!
The Eurozone banking system is turning into isolated stovepipes as cross-border and interbank credit lines are cut off and capital flight continues. Greece’s upcoming disorderly exit from the Eurozone will create a huge, apocalyptic bank run. I have only used “apocalyptic” once once in 370 posts.
Spanish and Italian interest rate spreads are back to their ridiculous and unsustainable levels, and the Eurozone appears to need not just an international banking bailout (as happened recently in Spain) but a sovereign bailout as well. Smart money says the Eurozone goes full bore into a disorderly exit from itself in 2013.
Back at home, the US economic performance is weakening, with first-quarter growth a ridiculous 1.9%. Job creation stalled in April and May, and it is probable that the rate could completely stall out by year end. We have talked about why jobs aren’t coming back before. There is the real risk of a double-dip recession next year, as tax increases and a continuing housing market disaster will reduce growth in disposable income, consumption and confidence. Doesn’t matter who gets elected in November.
Political gridlock will continue. There will be fights over the debt ceiling, student loans, the JOBS act, fiscal policy and taxes. There will be new rating downgrades and this time, a real risk of a government shutdown, which will further depress consumer and business confidence, reduce spending and accelerate a flight to safety that should knock the Dow down to below 8,000.
China, is actually a mess. Their growth model is totally unsustainable, their leadership is way too slow in accelerating structural reforms, and its investments are heading underwater. Leadership must reduce national saving and increase consumption, but politics and a difficult leadership transition will result in policy that does too little, and does it way too late. And, how many women do you see here?
We are all tied together now on this little planet. The Global economic slowdown will create a massive drag on growth in emerging markets, given their trade and financial links with the US, China and the European Union. At the same time, government intractability in emerging markets, and a collective surge towards greater state capitalism, will slow the pace of growth and will reduce their resiliency.
If all of that isn’t freaky enough, consider the long-simmering tensions in the Middle East between Israel and the US on one side, and Iran on the other, on the issue of nuclear proliferation. The current negotiations are likely to fail, and as we have pointed out on this blog a couple of months ago, tightened sanctions will not stop Iran from building nuclear weapons. The US and Israel will not accept negotiations, so even if the rest of the world were rosy, a military confrontation in 2013 would lead to a massive oil price spike and a global recession.
If you are a Global economic leader, you’re first response should be to shy away from risk, especially when no matter in which direction you turn, you see more and more. So, most leaders are adopting a wait-and-see position which exasperates the slowdown and makes a Global recession largely self-fulfilling.
And, if you think that we have already seen this movie in 2009-2009, and think, so … how bad can it be? Think again. Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of, or have already run out of policy bullets. Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. And, “Twist” is a cruel joke. Cruel, because it creates a sense that Congress is actually doing something to fix the economy when the time for fixing has come and gone.
Economies and markets no longer face liquidity problems, but rather credit and insolvency crises. Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited any possibilities for further fiscal stimulus.
Sovereign risk has now become bank risk. In the Eurozone, sovereigns are dumping a larger fraction of their public debt onto their banks’ balance sheet.
To try and prevent a disorderly outcome in the Eurozone is futile because of the first law of cat-herding. The current fiscal austerity needs to be implemented much more gradually, a growth contract should complement the EU’s new fiscal contract, and a fiscal union with debt mutualization (Eurobonds) should be implemented. In addition, a full banking union, starting with Eurozone-wide deposit insurance, should be initiated, and moves toward greater political integration must be considered, even as Greece leaves the Eurozone. But, of course none of that is possible. Look no further than Germany for the answer.
Germany, understandably, resists all of these key policy measures, as it is obsessed with the credit risk to which its taxpayers would be exposed with greater economic, fiscal, and banking integration. Why on earth, should Germany carry the weight for countries who have irresponsibly led themselves into fiscal and economic policy disaster?
The Eurozone bubble may be the largest to burst, but it is not the only one threatening the global economy in 2013. Stay tuned. Sell all your equities. Stock up on canned goods and booze, and batten down the hatches.