Monday, November 17, 2008

Prediction: Global Economy Rebounds in Q3 2009!

Well, not really the global economy per say. But, the US, Japanese and EU (Euro zone) economies by mid next year May-June, with at least a 0.25% growth in GDP. In fact, by Q2 (USA) we will have a serious rebound in consumer confidence and investor appetite, which will show up in Q3...Here's why I say!

The US economy has corrected itself, even under the most harshest of circumstances. The financial issue on regulation moving forward, especially with derivatives trading, on one front, and futures on commodities, more particularly, has caused an easing up in this regard. The derivatives market itself has eased up tremendously, amidst the issues with the sub-prime related Credit Default Swaps (CDS) and the issues to date. What will happen is that the money, saved, coupled with the increase in money supply in conjunction with the fear in spending in the market, will cause for an increased savings in the prudent-- from the average man on Main Street, to the classy hot shot investor on Wall St. In fact, futures prices, which affect current prices, are down in oil and corn, respectively. That's a huge boost. However, the price drops in corn, have not been seen in food prices as yet. One reason can be that, as related to oil, while prices have gone down, oil supplies need to be sold for their bought price. So, the price at the food store, in the short term, in regards to corn based products and seen in livestock via feed, will also have a lag. It will go down. However, not as quickly as prices on oil would go down due to, believe it or not, higher demand---the dynamic of this, is another story.

In addition, people are pulling out of futures trading, because of the financial crisis and, because of the impending legislation on the futures market in the USofA to come. It will come. One thing we can bet on with this, is that 1. there will be no third and fourth party swapping of mortgage related derivatives and 2. if there is strict legislation on sensitive commodities, we will see a sharp decrease, permanently, in the price of oil and corn. The latter, while it takes more effort on the part of not only the USofA, but also the other superpowers, EU and Japan, and the emerging economies. This is the only skepticism. And, in more detail, the skepticism is that while the US may curb such trading practices in the derivatives markets, the other countries won't make such cuts in theirs--this is why the recent G-20 summit, while it was bland and seemed fruitless, bared some hope in at least addressing the 'real' problem in the derivatives market.

This leads to the other aspect of this issue and that is the issue in the Euro zone and Asia--Japan, more directly. Their Q reports are not entirely in sync with that of the USofA. However, the same general time frame applies. While the Euro zone has to take into account the 15 member states of the zone and their individual capabilities, rolled into one at one single point and time. Asia, has to take into account three, if only, two major players that affect regional growth; Japan and China, with Indonesia as an outlier.

The fact of the matter is, with the Euro zone, they are tied to the ECB and the ECB's response to inflation. The ECB's mandate, is to cut inflation at all cost, over overall growth and unemployment management. The EU, more than willingly trade off higher unemployment and greater investment diversification, over that of increased real GDP growth and higher investment figures. So, growth in the zone, will it will be more stable in the long run, will be seen later on that year, if they do the exact same thing the US does in regards to derivatives trading--which in their respect, they have been more keen to do than that of the USofA and their derivatives markets, have not been as big and as bullish as that of the USofA. Call it that good ol'e Corporate Social Responsibility.

In the meantime, Asia, will go the way of the USofA and especially in regards to Japan. The postwar unification of the Japanese industry and the US industry time clock as well as financial services sophistication, dictates this. Japan, while it will see moderate growth, or, a decrease in the level and depth of their recession, will grow moderately by mid-next year, if we take into account that the key G-20 summit agreement, derivatives trading capping, will be a thing to do moving forward.

All in all, boosting confidence, albeit marginally, while encouraging savings this short term to be spread out by the mid-term (next year June).

However, things can be a little better for next year, if, and only if, these three things are taken serious and in conjunction with the stabilizing and capping of derivatives/futures trading.

1. With the cap on futures trading in commodities, there must be a total and ongoing unwinding in sub-prime debt. This, coupled with the backing of all international banks that deal with international swaps and currencies, must be back in the medium term until this mess is all cleared up and the 'old trades' are totally unwound and moving forward, capped.

2. There must be a timed and targeted investment encouragement package--not a bloody free money stimulus-- but a committed and well targeted investment package, to SME's, so that they can grow simultaneously with the increased savings and take advantage of the good times, again, by next year June. This is not inclusive of a total tax break to fortune 500 companies--even though it may be considered. But, on the other end, they need a tax hike in many regards because they drive inflation as much as a group of SME's, but the only issue is they freeze out mid-sized and SME's from a sizable portion of the market. However, an investment package to SME's to encourage their growth. SME's make up more than half of the market, in any event and more than half, in their employment capacity. They have been hit the hardest and they are the ones, which keep bread on people's tables.

The package must not be for any one or few particular sectors. But, every SME industry, needs some investment incentives. Tell Pelosi to take a long walk with her 'more stimulus is needed'...she doesn't know what in the world she is talking about, except for it we were talking directly about pork. And, tell the ECB (Trichet) to get off of the pot and do something for the middle and smaller man. Tell Gordon Brown to lay off of the tax and spend labour policies and allow small businesses to breathe--something in which he is looking at, however, he has to do it, not now, but, by next year for it to take maximum effect. Or else, he wastes the opportunity and the investment window, may not be maximized by all parties involved for the time we need it. It has to be in sync, or investors, will not be timed with his political ambition--which makes perfect sense, anyways.

3. A sensible way forward in the Doha Round. This round of 'stimulus'= packages', have gone the way of the subsidy. It reeks of subsidization. This has put another damper on any success in the short term for the Doha Round. This is why, my projections for next year, is not a full 1/2% and only at a .25%. People really underestimate, even if they understand minimally, how important the Doha Rounds' completion is to global trade in goods and world GDP growth. Its that important. If the market, can't shake out the best prices through supply and demand, then everyone is paying a higher price for goods, while they can be making serious and additional savings on their consumption.

In any event, the world economy, on the backs of the big three, the EU, USofA and Japan/Asia, will rebound. As said, it can be a bit better, but, we will take what we get!

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