I maintain my prediction that the asset bubble fueled by many governments across the globe through financial stimuli may come to hurt the global economy within the next two years. From China to US; Brazil to EU nations, we will witness more troubles. I have this confidence that we are on economic life support and things are not really working out as the earnings seem to suggest.
Goldman Sachs just reported a drop in revenue. The same goes for Bank of America.
For Brazil, 2011 will be a very challenging time. Their high growth rate will potentially catch up with them. The economy cannot continue to grow at its present rate when most of the world economies are marginally growing. There is risk that Brazil will produce more than they can profitably sell internationally. Yes, they can produce more coffee and other materials than the world is ready to buy.
Also, if they continue to grow at this present GDP growth rate where the Q1 was 9%, Brazil will burst in 2012. Some of their firms will look for international raw materials and may not find them. That will force an immediate contraction that will result to layoffs in Brazil. Layoffs could precipitate to turmoil with loan defaults.
Please understand that moving from 0.2% contraction in 2009 to 2010 Q1 9% GDP growth is a great achievement in Brazil. But this came largely via government incentives and new demand on exports along with more accessible credits. The reality is that the economy could overheat resulting to inflation and possible bubble. The capacity of this nation to rein on inflation will be very important in the short term development in Brazil.
Think about Brazil hyper-growth this way: they need 1000 tractors and their trading partners can supply 700 because of their own economies; Brazil must then have to re-adjust and that process can cause trouble. I have heard that some farmers could not harvest their products because they could not get enough tools delivered on time from abroad.
The preparation of World Cup and Olympic present two reasons to pump money into the Brazilian economy; nevertheless, the economy must have to look at inflation. For Brazil to avert crises in 2011, it must slow down and raise interest rates in this or next quarter.
The world has passed through a recession that hammered on stocks, commodities and real estates. The next one if governments do not curtail the impending asset bubble will affect bonds-sovereign, municipal and corporate. The reason is that increasingly investors are getting worried on sovereign debt over corporate debt.
Nkpuhe (our old blog) has predicted that a leading EU nation will leave the monetary within five years. We stand by this prediction. (Greece is making is look so).
We also predict that in the next fifteen years, the challenge of American immigration system will not be preventing illegal immigrants from coming into America but preventing an exodus of ambitious and talented foreigners who will be going home from US. Nkpuhe thinks that many Latin American origins will be leaving US as Brazil continues its upward movement (again, if it can manage it). India is going to hit equilibrium where Indians in Americans will not see a major difference between working in India and America. The same will apply to Chinese. It is going to be a time of unprecedented emigration of bright and intelligent workforce that powers the American nation. If the Congress is awake enough, now is the time to play to ensure that does not happen.
History teaches us that the most important factor that defines immigration is the economy. People will move to where they think they will get the best of life. It makes sense that if China topples US as the largest economy by GDP in years, more people will be moving to China. After all, Chinese has lead in at least six centuries in the last ten.
According to Moody’s, the US government could lose its pristine AAA credit rating. That is a very bad thing and that will cause fundamental changes in the monetary policy across US. We are living on borrowed time with a stimulus backed life support. But the dangers have not been averted as the root causes of the problems remain. Our instruments to manage risks are very poor; developed for the industrial economy and too weak for the knowledge economy. Governments must fund new tools to help understand the global economy.
The next crises will be the private educational loans which are leading the subprime educational loans to people that are even homeless. This market is small, but it will not help in no small measure the government that backs these loans and banks that provide the rest. We foresee subprime educational loan default to be coming up in Q4 of 2011.
But note this: most recessions turn out to lead to great economic growths. The problem is when to define this recession has stopped and when the growth begins. This calls for us to look for signs that can indicate when the recession is over. The recession is not over. It will be over only when the government incentives and near zero interest rates are withdrawn and the economy rides on for two quarters without contraction. If you think otherwise, let the Federal Reserve increase the interest rates; you will notice that the banks will have problems and we can get back to where we started in 2008.
Looking at this, one can say that I am bullish in the short-time in the global economy and bearish in long-term. I expect a major correction within the next three-five years and after that global economy will grow naturally (again, if the government does not impede). It is possible that we can continue to ride the gloom and boom in the near future based on the cushion from government incentives; nonetheless, correction will surely come. What is happening today is postponing the D-day; governments are not solving root causes of problems.
But in this trouble as we pointed out last week, there are opportunities. Nations can never crash into inexistence. Provided that humans are living in them, they will rise again. That was the philosophy that propelled Carlos Slim-Mexican tycoon to great wealth. He bought at the low of Mexican crises few decades ago understanding that nations can never caput. Based on that, man has to be bullish about the future and no constellation can overcome the power of man. For me, the future is deep into the future, after some corrections in the mid-future.
Think about this: Greek can still borrow even at this their precarious conditions. And they can borrow at reasonable rate compared to what some countries paid for as interests 30 years ago. This shows that we live in an era of risk appetite and it will be insane to doubt the power of human survival. As we said last week, buy the best stocks in Greek because they will surely rise. Nations do not caput forever. And the earth is still rotating around the Sun.
Finally, as more American firms continue to build their best plants and facilities in China and hire the Chinese to operate them, the technical excellence America has owned will move to China within the next two decades. In two decades, it will be the Chinese that will be teaching the Americans. By then they would have advanced on these facilities.
first written June 2010 and updated today on Blue.