Predictions for a New World Economy

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Due to complications from starting work in finance, I will have to stop blogging on my finance blog. Thus, since I can’t blog for a while, I’m going to write my predictions for events in the next year. It’s going to be fun looking back at what I write here, either because of how wrong or right I was.

So first of all, what’s that picture up there? Not only is it a picture I borrowed from another website, it also shows the market mind/emotion in different stages of a bull and bear market. And if I were to guess where we are right now, it’s at optimism. According to the media pundits, the job loss situation is “stabilizing” and activity is “picking up”.

All words of optimism. And I don’t doubt this optimism. With interest rates so low, something’s going to happen. The problem is, nobody knows if this “stabilizing” and “picking up” is moving towards growth or simply more stabilizing, or as some would call it, stagnation. As some of you who read my blog know, I’ve been quite pessimistic this past year. I’m not so much anymore. I believe in monetary policy and when interest rates are low, economic growth is going to return. Additionally, I was previously quite pessimistic due to the dire situation of the financial sector. However, the engines of the US, the financial sector, is becoming more profitable (in part due to the steep yield curve), and as lending picks up, economic activity is going to pick up.

On the chart up there, optimism becomes enthusiasm, then exhilaration, before peaking at euphoria. We are just at the start – optimism. Yet I’m not completely optimistic about this upcoming up cycle. I think it’s going to reach euphoria much quicker than historical bull runs.

Why? Because inflation’s going to hit the economy really quickly as activity picks up. Money velocity is going to shoot and blow the roof off the top of this house. And interest rates are going to have to go up, up, and up, and the economy will once again slow down.

But I digress – I’m supposed to be looking at the upcoming year, which looks pretty good economy wise. It’s all about the low interest rates - which are not only propping up the economy, but also the equity markets.

Lastly, I must mention the potential risk from sovereign debt defaults. There’s been a lot of conversations and fears about Greece, Ireland, Spain, etc, including my post on Nov 26, 2009 about the Dubai request for a standstill. The big questions for me are: Will the EU survive? Will these countries break off from the EU? What are the consequences from a default from Greece, Ireland, Spain or another EU country? I think there’s a good chance that a EU country is going to default. They simply over levered themselves during the good times. But will the EU disband if that happens? I actually think not – they might just kick out that country. Will the world stock markets be shocked? I think there’s a fair size of risk to this economic and market rebound coming from potential sovereign debt defaults.

In conclusion, this is going to be a good year for the economy and stock markets – if a sovereign debt default doesn’t kill the rally.