A look at two significant economic powers:
1) Europe
2) China
PIGS in Europe pose a considerable risk. PIGS refer to Portugal, Ireland/Italy, Greece and Spain. All have serious debt problems within their economy. With the strengthening euro, these countries may well have to leave the euro as their currency in order to save their economies. Secondly, because banks in Europe are not as transparent as those of the US, no one really knows how much toxic assets these banks hold, though it is likely that they are as leveraged, if not more, as compared to their US counterparts. A European banking crisis may be the next to roil the financial markets. Finally, it is possible that the pound will have to undergo a significant correction, going down to the level of euro if not lower. After all, deleveraging is going to be a serious hurdle for the UK economy, which has focused on the financial sector as the main engine of growth.
With regards to China, I must firstly admit that I was surprised by the speed and the relatively smooth execution of the “recovery” taking place. My impression of China was that with a burgeoning population and a repressive government, the trade between the government and the people seem to be that as long as the people have jobs, they will not create much social unrest (much like Singapore years ago). Yet, with China’s notorious bureaucracy, it could be that in a bid to create jobs, the stimulus money is being used for unnecessary and wasteful projects, such as constructing buildings no one wants to occupy or tearing down perfectly fine structures . A prime example would be The Great Mall of China. Adding more supply to a world already stretched with overcapacity? I dunno, but it sure doesn’t look like a “solution” to me. Furthermore, with stocks and real estate soaring in China, there seems to be a bubble forming. We all know that Chinese (individuals) have significant savings, yet it is a fact that the more money people pour into shares, the less the earning potential of the companies relative to the price they command. When companies become more interested in making money off their shares than their core businesses, it is a stark warning that a bubble is forming.
On another note, despite all the so-called recovery, I find the markets more fragile than ever. With asset classes mirroring each other in their relentless march upwards, an external shock from reality will be enough to send everything crashing back down. Deleveraging is far from done.
Let us wait for the pop.
