Global Agenda: A useful year

2011 enabled many people to understand how grim the state of the global economy is.

By PINCHAS LANDAU
2011 will not be fondly remembered by most investors because it failed almost entirely to live up to the expectations pinned on it. Let’s briefly review the main forecasts and themes for the global economy and financial markets that were current one year ago and see how they fared in what was, by almost any standards, a tough year.
In terms of the American and, even more so, the global economy, the grounds for disappointment are clear and convincing. The story current last New Year’s Eve was that the US economy would pick up steam during the year as the recovery took root. Meanwhile, the global economy would be in better fettle than that of the US because China and other developing economies would continue their very rapid growth. Everywhere the theme would be one of getting back to normal after the Great Recession of 2008- 09.
In reality, even though growth in the US was much stronger in the third quarter than in the first half of the year, and recent data regarding the US economy has been positive, the overall picture is gloomy. Over and above specific items and data points, the fundamental problem is that the US has been exposed this year as politically dysfunctional, to a degree previously unimaginable.
Every opportunity to address the underlying issues that are dragging down the country and its economy was wasted, and every attempt to move beyond political posturing was deliberately sabotaged, in a continued bipartisan effort that revealed most of the country’s elected officials as infantile and/or in servitude to their corporate masters, notably the financial sector.
For example, that the budget deficit declined in the final months of 2011 is very small consolation since it is still running well in excess of $1 trillion per annum, while the ratio of government debt to GDP has now passed 100%.
As for the US corporate sector, the expectation was that it would again see its profits rise smartly and that this would justify further rises in stock prices. In the event, stock prices stopped rising in April (later for the Nasdaq), and by the end of the year investors were being bathed in a stream of cold water: profit warnings and downgraded forecasts regarding profits for late 2011 and 2012. This change in the corporate picture was not the result of the mediocre performance of the domestic economy, but of two outright negative shocks regarding the global economy.
The first was the failure of the US dollar to continue crumbling, as was confidently and almost universally predicted in late 2010 and for most of 2011. What actually happened was that the dollar spent six months or so “bottoming,” as the technicians so pleasantly call it, before rising sharply in the final months of the year. This is very bad news for US corporations because most of their profit gains in recent years have come from their overseas activities and have been enhanced by the weakness of the dollar.
The dollar’s rise was most noticeable versus the euro – which brings us to the biggest black hole in the global economy. Although the crisis in the euro zone was well under way by late 2010, few were prepared to believe that it would become so severe, defy the numerous but puny and unconvincing efforts of the EU leadership to address it and spread relentlessly from the periphery to the heart of the euro zone, calling into serious doubt the future not just of the single currency but of the entire European project.
The degree of political disunity in Europe was so great that the US, despite the best efforts of its own political “elite” to paralyze it and of its central bank to devalue its currency, was still seen as vastly preferable.
But what of China, the supposed great new hope and the apparently inevitable successor to the US as number one in everything? This was the second mega-disappointment of 2011. Not only did China’s breakneck growth slow this past year, but the evidence mounted steadily that China’s massive response to the 2008-09 crisis had indeed broken the country’s neck – or at least its legs and several ribs. By year’s end, property prices were plummeting across China, and the entire rickety Chinese financial system was teetering on the verge of collapse, as its export machine faced the prospect of declining demand in both Europe and the US for years to come.
Nor was China alone. The whole BRIC (Brazil, Russia, India and China) story came apart at the seams during 2011, with each one of the new superstars running into trouble and out of steam. Last, but by no means least, the massively hyped rise of gold and other precious metals ran out of steam, despite widespread assurances that the previous 10 years of rising prices were merely a prelude to much greater gains to come.
Instead of precious metals’ prices soaring and stocks climbing to and past old records, the only asset class to generate decent returns for investors was the one that was most despised and ridiculed by most professionals: namely, government bonds of the few countries capable of holding (more or less) their credit rating. American, Canadian, German and British government bonds did extremely well – because the widely predicted inflation (or hyperinflation) is still nowhere to be seen and, now that the commodity boom has faded, a renewed deflationary threat is likely.
All in all, a useful year because it punctured numerous hot-air balloons and enabled many people to understand how grim the state of the global economy is. That realization should serve them well in 2012.

landaup@netvision.net.il