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Don't Take Bigger Risks as Global Economy Slows

Thursday, 15 July 2010 10:00 AM Current | Bio | Archive

This may be anecdotal, but it also may be a significant sign of how “real” things go for the moment in Europe.

French President Nicolas Sarkozy canceled the traditional “Bastille Day” garden party at his Elysée Palace residence as a symbolic cost-saving measure.

Several thousand people are usually invited by the French president to the reception, which follows a military parade on the Champs-Elysées Avenue. Bastille Day is the French national holiday which is celebrated on July 14 each year to commemorate of the storming of the Bastille on July 14, 1789.

The anniversary of the storming of the Bastille fortress-prison was seen as a symbol of the uprising of the modern nation, and of the reconciliation of all the French inside the constitutional monarchy which preceded the First Republic, during the French Revolution.

Meanwhile, U.S. retail sales disappointed in May, falling 1.2 percent. The drop in overall sales in May was centered in a 9.3 percent plunge in building materials.

Besides that, it also looks more and more global growth will continue to slow.

According to the first assessment of 2011 global oil trends of the Paris-based International Energy Agency, the IEA expects oil demand to slow next year in China and in most other parts of the world.

The IEA forecasts world oil demand to grow by 1.3 million barrels a day, or 1.6 percent, which is below the 2.1 percent rise in global crude consumption expected this year.

The main reasons are improving energy efficiency in industrialized nations and, more importantly, a gradual phasing out of economic stimulus in emerging markets like China that should slow the pace of oil consumption.

Chinese oil demand is expected to rise by just 4.8 percent next year to 9.6 million barrels a day compared with the robust growth of 9.1 percent this year.

China is the world's second biggest oil consumer at a distant second to the US, which is forecast to consume 18.9 million barrels a day on average in 2011, which is also down slightly from this year.

Yes, it will be a long, long way to (full?) recovery.

In my opinion, investors would do better by not betting (e.g. by using leverage when investing) based on hopes.

Instead, they will be probably better off remaining prudent while taking into account the realities of this still-fragile, so-called global recovery in both the industrialized and emerging economies (which include the BRICs of Brazil, Russia, India, and China).

It will be a long road full of potholes and probably “seasoned” (hopefully not!) with a couple of “Black Swan events,” which are high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology.

Also, investors should not forget that higher leverage often means an increased-risk profile for the investor. And with higher risk, investors may win big, but they also may lose big.

No, it’s not a time for raising your risk “appetite.”

And by the way, the IEA also says the Organization of Petroleum Exporting Countries (OPEC) will continue to have 5.5 million to 6 million barrels a day of spare oil production capacity far into 2011 in order to offset any unexpected supply disruptions.

I think that a more realistic scenario for growth in the United States is now 1.5 percent in the second half of this year and well into 2011, which will feel, without any doubt, like a recession.

There is no indication whatsoever we won’t see a further rise in unemployment, larger budget deficits, further falling home prices, and larger losses by banks on mortgages and loans in the United States.

Besides that, we could see a protectionist surge in the United States that will further damage its relations with China.

In the eurozone, we can expect growth to be closer to zero by the end of this year as a result of fiscal austerity and stock market corrections that will go along with rises in sovereign, corporate and interbank liquidity spreads.

As a result, increasing volatility and sovereign debt risk will further undermine business and consumer confidence far beyond Europe.

In my opinion, China also will not be able to keep the global economy afloat as its growth could easily dwindle from plus 11 percent to the 7 percent rate by year’s end as already indicated in the IEA.

Finally, the Nelson A. Rockefeller Institute of Government, which is the public policy research arm of the State University of New York, said in its latest State Revenue Report the growth in states’ tax collections does not indicate broad fiscal recovery in the United States.

Yes, the recovery is slowing down.

Investors shouldn’t fool themselves by believing this time will be different. No, reality remains what it is.

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This may be anecdotal, but it also may be a significant sign of how real things go for the moment in Europe. French President Nicolas Sarkozy canceled the traditional Bastille Day garden party at his Elysée Palace residence as a symbolic cost-saving measure. Several...
Thursday, 15 July 2010 10:00 AM
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