...is typically a sign to me that we are approaching a market top, climbing that wall of worry.
A recurring theme throughout ULI last week was "Paranoid Optimism"--the idea that the future holds a number of low probability/high impact events, but the high probability/high impact of continuing low inflation, global trade, and a high rate of innovation means that optimism is warranted.
Bill Emmott, the former editor of the Economist Magazine, gave a ULI breakfast talk with paranoid optimism as its implied title. The benefit of the pumping of global liquidity evidenced by a lower cost of capital has a big multiplier effect--combine this with the internet driving a higher rate of innovation--the risks to a better global economy are political ones. He believed there was a 50/50 chance of a US recession in '07, leading to a recovery right about the time the new president takes office.
- The 1993 global average inflation rate of 37% has decreased to 3% in 2006.
- The US two largest problems--a current account deficit of 7% of GDP, and a budget deficit of 3% of GDP are problems, but over-dramatized. A falling dollar will be the largest result of these imbalances.
- US$ has fallen 15% since 2000, and will fall further over the next several years.
- The Middle Eastern risk premium reflected in oil prices (currently $58/bbl) is falling and will fall further.
If politics and low-probability but high impact risks--terrorists with WMD, North Korea's collapse into violent civil war, or political instability and strife in China--do not strangle global trade and development, times should be good. We have quite a tailwind at present.
George Soros is still looking for his crisis--the one predicted in his book failed to come to pass due to the pressure of global competition, increase in global labor supplies, low inflation and a high rate of innovation.
Emerging markets are now 50% of global demand--25% from China and India alone.
It is the politics behind the economics of a rapidly integrating global economy that are the risk. It is how our societies adjust to the supply and demand disruptions that growth in labor supply bring. It is how we price and incorporate environmentally friendly and carbon neutral development techniques into our best land use practices.
The environmental awareness and sustainability championed by Al Gore in his movie are becoming more widely adopted. The good news is that his ideas will eventually win--and his advocacy of carbon neutral lifestyles---the bad news is that he will not [be the next president of the United States].
The current "supercycle" of increasing commodity prices is due to twenty years of underinvestment. Or rather undersupply caused by underinvestment. The current surge of investment in creating greater supply should reverse this financial commodity bubble. The current 700 hedge funds working the commodity bubble has increased from 4 funds ten years ago, creating bubble conditions that will soon correct.
If the US does lapse into a recession next year, led by cuts in consumer spending, it is likely to be a mild one if interests rates stay low.Lower global demand by the US is likely to be counteracted by higher demand by Japan--now coming out of a ten year recession.