A sober article in the UK Telegraph today underlines a concern I have shared for many months now: How can the global economy decouple and bounce along happily without the US and Europe when so much of global demand over the past 5-year expansion cycle has come from our Western world over-consumption?
“The rising economies of Asia are too small and deformed to rescue world growth as America, Britain, Australia, and Club Med face their day of debt reckoning. China may make matters worse, not better.
“The seven pillars of global demand over the last year – measured by current account deficits – have been the United States ($793bn) (£388bn), Spain ($126bn), Britain ($87bn), Australian ($50bn) Italy ($48bn), Greece ($42bn), and Turkey ($34bn). Most are facing a housing bust. All are in trouble.
“China cannot possibly step into the breach. Jahangir Aziz and Xiangming Li argue in a new IMF paper that China's economy is now so geared to the US and EU markets that a 1pc fall in external demand will lead to a 4.5pc slide in exports and 0.75pc fall in GDP.
“Assumptions that it will weather a global shock are “likely to be wrong, perhaps dramatically.”
Some of the strongest voices for the decoupling argument have not surprisingly come from the investment sales firms that have reaped record profits the past few years from selling the global growth story.
Of late however, even some of the most optimistic firms have tossed out their “decoupling” song sheet, with Goldman Sachs, Morgan Stanley, and Lehman Brothers, all warning that a major US slowdown will be felt around the world:
“What began as a U.S.-specific shock is morphing into a global shock,” said Peter Berezin, a Goldman Sachs strategist.
“There is a clear risk that some of the hot housing markets in Europe and some emerging markets will cool dramatically,” he said.”
A lot of people have been asking me lately whether now is a good time to reduce their equity and risk exposure if they had not done so to date, or whether it is best to wait for prices to come back a bit before paring down their holdings. Many have experienced paper losses through 2007 and they are hoping they will not have to sell now and realize these losses.
My advice? We have not seen anything yet. If you don’t like the losses over 2007, you are likely to react very badly to market losses once a real bear market gets into full swing. Watch out for mental math and emotional accounting around your allocation decisions. If you are over-exposed to risk it is better to re-adjust and reduce exposure pre-emptively now rather than in the midst of panic selling when all the other poorly prepared investors will be running for the exits.
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