Here is a summary of what has happened in the past few months and potential direction of investments:
(1)-Economic data and statistics in North America has been trending positive and exceeding expectations. The US Consumer confidence is getting stronger; while Purchasing Managers index is recovering. Despite political dysfunction in the US, there is a degree of optimism about a potential rebounding of the US economy in 2012.
(2)-Ever since 2007-2008, the global real rates have been declining consistently. One key factor is relatively stable rate of inflation. Fears of deflation still hang on due to massive deleveraging by the private sector in the US. The current stance of the Fed and other major central banks is to keep the interest rates depressed until 2013.
(3)-Oil has surged in the past few months owing to geopolitical tensions with Iran. If Iran were to block strait of Hormuz, it could impact 20% of World oil supply line. OPEC claims to have spare capacity to offset such moves. Oil prices can have inflationary effect in near future, perhaps partially offsetting the decline of prices in the Natural gas sector.
(4)-Europe remains a sensitive point for global financial markets. The European GDP has declined reflecting a degree of recession and fiscal tightening due to over-indebted European nations – primarily Greece, Italy, Ireland, Spain and Portugal. Both non-commercial loan supply and demand conditions have deteriorated in the Eurozone.
(5)-The US housing seems to have bottomed with some signs of modest recovery. The incredibly low mortgage rates in combination with depressed prices cut to 1/3rd augur well for the affordability of the housing sector. The three key bottlenecks which prevent a huge rebound are surging inventories, relatively stagnant unemployment and tight credit conditions. The key metrics which are currently negative are mortgage delinquency and home foreclosure rate.
(6)-The US consumer spending, in particular of households with income level of $100K to $250K, will determine the pace of US recovery. This category of consumers, numbering at 21 million, accounts for 40% of consumer spending in the US. They are a huge lever and any cautious spending by this class, as demonstrated in the recent surveys, can put brakes on the economy.
(7)-The US employment rate is improving consistently; with fall in both jobless claims and lay-offs. The current economic situation warrants job creation of about 100,000 to 150,000 per month. At this pace, it may take another 2-3 years before recovery is achieved.
(8)-The Canadian economy is dovetailing the US economy in terms of GDP growth – about 2% in 2012 and almost same threshold in 2013. The three key imbalances characterize the Canadian economy: rising household debt, inflated housing market and current account deficit.
(9)-The Fitch ratings recently downgraded India’s credit outlook to negative, commenting that India’s economic outlook will decline without pacing up structural reforms. The key challenge is rising fiscal deficit of the government. The impact is slow economic growth at 5.3% in January, which is lowest in a decade; while hiking inflation continues to pose challenges.
(10)-China is poised for soft landing, if not already happened in 2012 and 2013; with potential risks of hard landing in the decade ahead. The main challenge is significant transformation of the Chinese economy. Emerging markets, barring China and India, are lagging behind. All of this points to low global real rates in 2012 and 2013.
DISCLAIMER: The views expressed in this Blog are my personal views/analysis. It does not represent views of any organization or group, for which I am doing consulting or employment. The purpose of this blog is academic and informative; and is not sale of any product or service. The author does not own responsibility (liability) for any information presented in this blog; as investment information tends to change rapidly.
