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.
US: income inequality and rent extraction by the financial sector continues
US: states/munis still cutting spending
Europe: PIIGS/club med unable to go deeper into debt if a second round of spending is needed (like US states)
David,
As an Indian living in USA. I can tell you, the biggest grindstone around India’s neck going forward will be Drinking Water. And unless India, goes up with a solution, this could be a MASSIVE problem.
In other words, you can add issue of drinking water as one more world’s unresolved problem.
Thanks
That’s a nice summation.
I would add two points.
First, the effect of length of unemployment on consumer spending. Some of this effect will be caused by extended benefits running out (the NYT had an article on this last week.) But even if benefits are infinitely extended, they generally equal half of previous wages. These people are almost certainly using up savings and credit, at a time when assets are way down and credit is restricted.
The second point, much of the stimulus spending is front-loading demand.
Calculated Risk has a post up on this, “First-time Home Buyer Frenzy.”
http://www.calculatedriskblog.com/2009/08/first-time-home-buyer-frenzy.html
A BusinessWeek article from May on Germany’s cash-for-clunkers program mentioned, “Total unit sales in Germany were up 18% in the four months to April vs. a year earlier…”
http://www.businessweek.com/globalbiz/content/may2009/gb2009056_301566.htm
Even if these programs are extended, it won’t matter. They’ve already moved up future sales because of the announced deadlines.
In a few months we will be heading into the shadow of these programs, demand for cars, housing, etc., will fall. Meanwhile, another wave of foreclosures is building up.
One last point. That frequently reprinted graph from Credit Suisse showing Option ARM resets/recasts is somewhat misleading. Some of these loans won’t recast for a very long time. But more importantly, most of the defaults on these loans have occurred BEFORE they recast. The minimum payments usually rise each year, independent of the resets and recasts. It probably is a combination of the rise in minimums, negative equity and unemployment that’s spiking the defaults now.
Calculated Risk has all sorts of info on this.
Lack of political will in the US to address systemic problems, corrupt politicians
I have to second firsttopanic. CA and the western US are having water problems as well. Almond farms closing in the central valley due to rationing. I was considering water/food shortages, but it seems a rather diffuse thread, hard to justify in a few sentences without sounding alarmist.
Here is the question: where the 2007 food price increases all due to speculation and bio fuels? Are farmers now reducing output? I haven’t seen this discussed recently.
1) Number 10 again…. Huge entitlement problem in the future in the US. Huge.
2) Unsustainable budget deficits ( local, state and national) – Yes fiscal stimulus was needed to prevent the economy from entering a black whole but money spent is money that has to be paid back. Further tax revenues are down dramatically. The US has to raise taxes big time but to do that when the economy is in the tank is ill-advised. We are stuck with deficits for some time to come. The risk of course is that the US demands too much of the world’s capital to fund itself and the day might well come when others say enough is enough. ( currency and debt crisis – think emerging markets)
3) PIMCO has calling the period we have entered in to the “new normal.” The wording highlights that we cannot expect a business as usual economic recovery. We will have to feel the pain and consequences of deleveraging and it will not be pretty. The consumption party is over. As above the US consumer will not recover back to pre-crisis levels. Not in the short term or likely the long term. Our economy will have to adjust. Unemployment will remain high for some time which is the major problem not mentioned above.
I will stop there as this blog entry is growing very long indeed……………
That is pretty comprehensive.
The mortgage issues are much larger than the pay option ARMs. T2 partners has a comprehensive summary of the issues in powerpoint form floating around the web.
I would also offer that the mortgage bond market overall has a very large amount of extension risk. Much of it is not hedged.
Another challenge of unknown, but likely significant proportions: population dislocations and agricultural changes due to climate change and, possibly, sea level rise.
These issues have the potential for enormous economic impact. Ubu.
I will quibble a bit with #4. REIT stocks have gotten killed over the last two years — the Vanguard REIT index is down 40% vs. 30% for the S&P 500.
Some good comments posted above that I would second.
Not mentioned anywhere is phenomena that I see as the single largest problem in the U.S.: overall societal decision-making is declining in quality and the S/N ratio in public discourse has a negative trend. These declines are due to a lot of different factors including a) devaluation of knowledge, learning, and rational approaches to decisions and values, b) structurally broken “two party” political system where most political actions are viewed as moves in a zero-sum game between two opponents, c) domination of infotainment news sources, d) widespread distrust of thy neighbor in increasingly multi-ethnic, multi-cultural society, and e) reactions to increased pace of creative destruction style capitalism and its effects on cultural traditions, communities, and the balance between supply and demand for labor of all types.
And yet ECRI says the strongest economic recovery since 1983 is about to begin — should be quite apparent to all by next year. (of course that just means stronger than the last 2 weak recoveries — say 3-4% growth). I have followed their work in Realmoney and in the media for several years. No offense to David who has made some good calls, but I doubt anyone writing on this blog/comments can come close to matching their track record.
maybe their model is finally wrong. or maybe our bias is showing — how many of us who saw all the issues thought it would get as bad as it did? how many of us are now trained to look for all the issues that could cause a masssive decline again? doesn’t all the talk about the VIX jumping in the fall (70k SEP calls for VIX 47.5?) remind anyone else about october 1988 when everyone was on watch for another crash?
When have we not had serious problems? are you sure this isn’t the wall of worry we are climbing?
No doubt this recovery will end badly just like the last one did — hello, we are handing a hungover drunk a bottle! but keep in mind that the last juicing by the Fed lasted 4-6 years (4.5 year bull market, 6 years GDP growth). This won’t last as long but its barely gotten started — predicting disaster way too early doesn’t make money.
Ok, rant is over.
ECRI is very good. A couple of things to keep in mind though related to their models is that the time frame of their leading indicator is 9 months, and changes in stock prices are one of things that go into the indicator – so, e.g. stock prices rallying from March-June is one factor supporting a prediction of coincident economic activity being strong the following Dec-Feb. But that doesn’t tell you per se what the stock market will do in the following Dec-Feb.
Titles starting with ” The ten (worst, best, unsolved, richest, rules)”, the oldest in history being The ten comandments
this is not a global economic problem but the US military-industrial- (and another layer on top) the intelligence complex is out of control. 8 years and counting in Afghanistan, what are the reasons the US is there? There are still 50,000? 75,000? troops in Iraq. The US is in a depression and it is still funding the military like WW2 or the Cold War is still going on. This is why the Bush stimulus had and now the Obama stimulus is having a piddling effect. The US ecomony (still the biggest engine of the global economy)was already artificially stimulated.
Israel and a large part of the US establishment still make large noises about bombing Iran. What would the ramifications of that do to the global economy? The US is the biggest warmonger on the planet right now. War creates havoc in the global economy.
The larger wealth disparities get, the stronger the social and political rebound in the social fabric will be.
If ObamaCare passes, the political momentum might allow President Obama to pass a Cap and Trade bill.
I’m not in love with ObamaCare, but I know if Cap and Trade gets passed the US economy is going to head deeper into recession at a rapid rate.
Even the potential for a Cap and Trade system seems worth of mentioning as a disaster for the global economy.
3 points.
1-I also follow ECRI and feel we are indeed climbing a wall of worry. While aware of the L Term problems, few are expecting upside surprises, esp in the USA.
2-One other ‘worst’ would be if Europe (which by many metrics is in far worse shape than us, and they are ‘old’) blows up, and we benefit from capital flows and stable, rising $. So no reform here and we _really_ hit a wall in 3-5 years. (Ron Paul 2012?)
3-Food. World grain stocks are at post WWII lows. There is a pending (cheap) sugar shortage and the ‘bio fuel’ nonsense continues. Noone is talking about this, increasing the impact when it hits.
Thanks David, good food for thought here. HCP
-We still have an unemployment problem that with all the government spending has not created any jobs.
-That will be a problem for a long time. We are in a deflation mode for a while. Then we will have inflation.
-This I believe we will be in theis quandry for a long time. There are no easy fixes.
Non-credit money is the way for solving both national and world economic crisis. Non-credit money is not debt than gift. Non-credit money is the necessary additional quantity of money in circulation (dM) as percentage (k) of existing quantity of money in circulation (M). dM = kM ;
k = (supply – demand)/demand ;
If non-credit money is emitted according to the cited formula, inflation cannot exist. Also, taxes are annulled for the amount of non-credit money. The consumers pay less and producers get more than today, in the order of credit money. All get the gift of non-credit money. The source of non-credit money is the growth of economic rationality. There is both national and world non-credit money. We must create both national and world order of non-credit money. China’s bad loans are non-credit money in fact.