On a January 13, 2009, conference call, Eurasia Group President Ian Bremmer and RGE Monitor Chairman Nouriel Roubini discussed the political and economic risks in the year ahead.
Geopolitical Risk
Bremmer noted that equity markets are focused completely on the financial crisis, and while many of the negative effects of the crisis have been priced into the market (or are at least anticipated), certain geopolitical risks are not. Greater geopolitical risks will exist in South Asia (India/Pakistan, North Korea), Iran and Russia. Any flare-up of tensions or new developments in these areas will surprise the equity markets, causing further damage to stock valuations.
Economic Risk
Roubini observed that a severe global recession is forming, and thus expectations for economic growth in the second half of 2009 are too great. Spending on capital expenditures is collapsing, and with worldwide $3 trillion losses, many players in the financial system are insolvent.
Although the U.S. economy should recover in 2010, the recovery will be very small (.5 to 1 percent GDP growth), and it will therefore feel like a recession. There is also a continued risk of stag-deflation, i.e. slow or no growth combined with sliding asset values.
Economic stimulus programs and monetary policy may alter the outlook for stag-deflation and provide a basis for more growth. However, the programs enacted thus far, and even the latest stimulus package are not large enough to have the intended impact. There are also other factors that need to be resolved first or they will block the effect of any stimulus:
- Credit crunch remains in the corporate sector—private investment will not follow government spending if it cannot get access to funds—thus, any activity by the Fed is the equivalent of “pushing on a string”;
- No free lunch—the combined effect of stimulus packages and monetary policy is a large budget deficit, the long-term effects of which cannot be predicted—ironically, this makes the U.S. Congress the Number 1 risk to U.S. business prospects;
- Someone has to buy our debt—China has been a large buyer of U.S. treasuries, thus financing our deficits—if China spends more on its infrastructure to stimulate its economy, we will need to attract other buyers and that means offering higher interest rates on our debt, which is inflationary
The U.S. economy can and will recover, but the lesson here is that it will take a long time—much longer than we have become accustomed to in prior post-WWII recessions. This fact, and the dreadful corporate earnings that have and will continue to accompany the recession, will have a negative impact on equities markets. Roubini noted that if earnings on the S&P500 fall to $50-60 per share, and price-to-earnings ratios fall to typical recessionary lows (roughly 12), then it is almost certain that the S&P500 will drop again to its November 2008 lows, and may fall to 600.
Read more about the conference call at RGE Monitor.com.
Like this:
Be the first to like this post.
Gregg D. Killoren
victoria1014
2009 Economic and Political Risks
On a January 13, 2009, conference call, Eurasia Group President Ian Bremmer and RGE Monitor Chairman Nouriel Roubini discussed the political and economic risks in the year ahead.
Geopolitical Risk
Bremmer noted that equity markets are focused completely on the financial crisis, and while many of the negative effects of the crisis have been priced into the market (or are at least anticipated), certain geopolitical risks are not. Greater geopolitical risks will exist in South Asia (India/Pakistan, North Korea), Iran and Russia. Any flare-up of tensions or new developments in these areas will surprise the equity markets, causing further damage to stock valuations.
Economic Risk
Roubini observed that a severe global recession is forming, and thus expectations for economic growth in the second half of 2009 are too great. Spending on capital expenditures is collapsing, and with worldwide $3 trillion losses, many players in the financial system are insolvent.
Although the U.S. economy should recover in 2010, the recovery will be very small (.5 to 1 percent GDP growth), and it will therefore feel like a recession. There is also a continued risk of stag-deflation, i.e. slow or no growth combined with sliding asset values.
Economic stimulus programs and monetary policy may alter the outlook for stag-deflation and provide a basis for more growth. However, the programs enacted thus far, and even the latest stimulus package are not large enough to have the intended impact. There are also other factors that need to be resolved first or they will block the effect of any stimulus:
The U.S. economy can and will recover, but the lesson here is that it will take a long time—much longer than we have become accustomed to in prior post-WWII recessions. This fact, and the dreadful corporate earnings that have and will continue to accompany the recession, will have a negative impact on equities markets. Roubini noted that if earnings on the S&P500 fall to $50-60 per share, and price-to-earnings ratios fall to typical recessionary lows (roughly 12), then it is almost certain that the S&P500 will drop again to its November 2008 lows, and may fall to 600.
Read more about the conference call at RGE Monitor.com.
Share this:
Like this: