There are many celebrating the recovery as if it were already here. This is a brief post to outline my main remaining concerns for recovery of the global economy.
1) China is overstimulating its economy, and forcing its banks to make bad loans. This pushes up commodity prices, and makes it look like China is growing, but little of the investments made are truly needed by the rest of the global economy.
2) Western European banks have lent too much to Eastern European nations in Euros. The Eastern Europeans can’t afford it, and widespread defaults are a possibility.
3) The average maturity of bonds held by foreign investors in US Treasuries is falling. Runs on currencies happen when countries can no longer roll over their debts easily, which is facilitated by having a lot of debt to refinance at once.
4) On a mark-to-market basis, market values for commercial real estate have fallen dramatically. Neither REIT stocks nor carrying values for loans on the books of banks reflect this yet. Many banks are insolvent at market-clearing prices for commercial real estate.
5) We still have yet to feel the effects from pay-option ARMs resetting and recasting. Most of the pain in residential housing is done, but on the high end, there is still more pain to come, and the pay-option ARMs will reinforce that.
6) The rally in corporate debt and loans was too early and fast. Conditions are not back to normal for creditworthiness. There should be a pullback in corporate credit.
7) We had global overbuilding is cyclical sectors 2002-2007. We overshot the demand for large boats as an example. We overdeveloped energy supplies (that will be short-lived), metals, and other commodities. It will take a while to grow into the extra capacity.
8 ) The US consumer is still over-levered. It will be a while before he can resume his profligate ways, assuming a new frugality does not overcome the US. (Not likely by historical standards.)
9) The Federal Reserve will have a hard time removing their nonstandard policy accommodation.
10) We still have the pensions/retiree healthcare crisis in front of us globally.
That’s all. To my readers, if you can think of large unsolved problems in the global economy, forward them on to me here in the comments. If I agree, I will incorporate them in future articles.