1 0 . 0 2 .

2 0 1 2
1 / 2 e n g l i s h . c a i i n . c o m/ p r i n t / p r i n t _ e n . j s p
B And Xie 02.08.2012 16:56
A World Fling Blind
The outlook Ior the global economy is gloomy and leaders lacking vision are to blame.
Eventually, this will come back to haunt all oI us
Recently, stock markets around the world have perIormed remarkably well. This may
even continue Ior a Iew months. The U.S. Federal Reserve's promise to hold interest
rates near zero until 2014 and signal oI a third round oI quantitative soon, combined
with an improving U.S. labor market, have emboldened risk-takers. Financial markets
are seeing more risk-on trade.
However, the Iundamentals Ior the global economy remain dire. The West is mired in
debt troubles, declining competitiveness and unsustainable social overheads. The East
is struggling to build up robust consumer demand to balance its manuIacturing
prowess. So Iar, world leaders have used liquidity and Iiscal measures to prop up
demand without addressing structural problems. In essence, they are continuing to
treat the global economy as a car with a dead battery rather than a bad engine.
So, 2012 will be an extremely diIIicult year. The global economy is likely to slip into
recession, as Europe and Japan are mired in deep recession and emerging economies
stall. Black swan events, such as a sovereign deIault in Europe, an emerging market
crash, a surge in oil prices due to conIlict in the Middle East, and a selloII in Japan or
the U.S.'s sovereign debt market, will haunt the Iragile global economy.
At the annual World Economic Forum in Davos we again saw Iamiliar Iaces Irom the
West, but some diIIerent characters Irom emerging economies. Some oI the last year's
bunch went to jail amidst the revolutions engulIing the Middle East. They were
discussing how to Iix capitalism. Apparently, the same people who blew up the world
and got their governments to bail them out are now again making millions and talking
about how to Iix things. Not many people see the irony in this. The tragedy oI the
global Iinancial crisis is that it didn't sweep away the old order.
During an economic boom people who are good at ingratiating themselves with the
establishment tend to rise to the top. AIter a boom oI two decades, leaders are already
two to three generations into such a process. These people pretty much make a living
by just looking the part. This is why the global crisis will last Ior years to come, until a
new generation oI leaders rises through a competitive process.
America's problem
The Fed's announcement sparked a 10 percent rally in stock markets around the
world. By promising to keep money cheap and holding down bond yields through asset
purchases, despite the inIlationary impact oI cheap money, it is pushing investors into
risk assets. I believe that it is targeting the stock market.
Playing with expectations works temporarily. The risk-on trade is in a mini bubble, as
today's buyers want to be ahead oI the slower ones. The buying trend is sustainable
only iI the global economy strengthens, which is unlikely. The stocks aren't cheap.
Desirable consumer stocks are selling Ior twenty times earnings. Banks are cheap Ior a
reason. Internet stocks suggest another bubble in the making. The Fed is trying to
inIlate an expensive asset. The rally, hence, is quite Iragile. As soon as a shock like
Greece deIaulting or bad economic news unIolds, the market will quickly head south.
There is a saying that one shouldn't Iight the Fed. Because the Federal Reserve keeps
money cheap, other assets become more attractive. This logic works as long as the
1 0 . 0 2 . 2 0 1 2
2 / 2 e n g l i s h . c a i i n . c o m/ p r i n t / p r i n t _ e n . j s p
Fed kno ha i i doing. B, can i pedic hee ea o? Nel eleaed
infomaion ell ha i a laghing a he oble in he hoing make in 2006,
igh befoe he cah. Thi ho ha he Fedeal Reee coldn' ee een a fe
monh ahead, le alone ea.
1
2
3
4
Ne page
Pin
: http://english.caiin.com/2012-02-08/100354567.html