The year 2011 has started almost on an even keel. After days of decline, the U. S. stock markets are gingerly moving forward with positive results from Alcoa for the year end.
But the challenge remains: Is this calm real or a calm before the storm? Will be see a sustained recovery in the United States in 2011?
Last year was filled with excitement as well as risks. The Asian economies were expected to do well, and they all did. You have read my tales of different parts of the world and how various sectors in different countries did exceedingly well.
The biggest surprise came from Germany. With the entire euro region under a big cloud for more than half the year, Germany continued to impress with its “export product” production. What was quite amazing was strong growth in German employment numbers and robust all-around growth, including steady domestic demand.
While we are on the issue of European crisis, I would like to make sure that we recognize the problem for what it is. The European crisis is one of leadership — or lack thereof — and not one of debt.
The debt crisis in the U.S. (Illinois, New York, Florida, California, Michigan, etc.) is much more severe than that of the PIIGS (Portugal, Ireland, Italy, Greece and Spain). Despite that, the markets aren't as worried about the debt levels in the U.S. as they are about Europe.
Why? The market perception is that the leadership in the U.S. is unified and despite the partisan politics, when push comes to shove: no congressional member or senator will allow the U.S. to default. Compromises will be reached and the U.S. will be rescued.
The same isn’t felt about the PIIGS and the European Union.
While I would never want the U.S. to default, I am also not in favor of rescuing the unworthy. Maybe a period of the harsh reality and real belt-tightening is needed. Medicine oftens tastes bitter but is a necessary evil to help the patient recover.
Moving on with the 2011 predictions, the BRIC’s (Brazil, Russia, India and China) were strong and are expected to produce above-forecast growth for 2011. And the growth rates here are above 8 percent GDP growth. So these countries will continue to outperform.
But let us not forget the periphery economies that will receive a solid shot in the arm due to the BRIC’s growth trajectory.
I am quite bullish on the Turkish and Indonesian economies. Last week I wrote about Singapore and South Korea. And let’s not forget my piece on Malaysia, which is expected to grow significantly in 2011 as well. Taiwan will have to significantly outperform its Asian cousins to gain any traction.
The one concern I have which could hamper growth in Asia is the worrisome and persistent inflation threats. Recently we have seen food prices soar around the globe and take strong hold in India, China, etc. And the natural reaction of the central banks is one that is delayed.
While I am a big fan of the Reserve Bank of India (India’s central bank), I believe they are behind the curve on tackling this menace.
And if this inflation persists for another few months, we will see a halt in the Asian growth story and a rather sharp unwind of the stock markets. That will be the biggest risk of 2011.
Commodities will continue to reach new highs and the nine-year bull run in commodities will continue. Gold, and now silver as well, are always considered a traditional hedge against inflation. As we see inflation creep into the U.S., we will see precious metals soar.
In the U.S., I believe we will see growing signs of stagflation. Jobs won't be making any meaningful recovery and growth will remain tepid. Housing will continue to flounder and we will see inflation creep higher.
The perception in the U.S. is that we don't have inflation now. This comes from the Federal Reserve's measurement of "core" inflation. However, I believe we do have inflation, and it is increasing steadily each month. Just look at your bills for the past few months on food, medical, education, energy, clothing and you will see what I mean.
Higher inflation and unemployment, coupled with low growth, is the perfect stagflation recipe.
I will be seeking more investments overseas while keeping a hawk like view on inflation in Asia.
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