Davos

[dash]

[I was surprised Nouriel Roubini made it onto this panel!]

The webcast is available here: http://tinyurl.com/2uasuc

http://news.bbc.co.uk/2/hi/business/6294661.stm

The global economy is set for a good 2007, leading economists have forecast at the World Economic Forum in Davos.

Strong growth in Europe and the Asia Pacific region should balance a possible slowdown in the US. The experts also identified risks: a weak US housing market, rising oil prices and soaring interest rates. However, the world was also better prepared to cope with any fallout, they said, because globalisation had removed imbalances in the world economy.

'Goldilocks economy'

About 40% to 50% of the global economic output is now being produced by emerging economies. As a result the world was no longer dependent on the US economic engine to pull it along, said Laura Tyson, professor of economics at University of California, Berkeley. Growth no longer relies on the US, Professor Tyson says. The economic rebalancing across the world, with countries such as India and China now providing more output and demand, had helped to reduce a lot of volatility.

As a result the current "Goldilocks economy" - which is getting neither too hot nor too cold - was set to continue for at least another year, Ms Tyson said.

Growing optimism

China's growth was set to continue at about the 10% mark, benefiting from low inflation, more domestic consumption and higher profits, predicted Zhu Min, a top executive of Bank of China. Montek Ahluwalia, the deputy chairman of India's planning commission, was similarly optimistic. There were some signs of inflation, some signs of overheating, he said, but they were under control. The level of investment was high, Mr Ahluwalia said, who forecast that over the next five years India would reach an annual growth rate of about 10%.

Dissenting voice


The story of 2006 is the story of what did not happen
Jacob Frenkel, vice chairman, AIG Jacob Frenkel, vice chairman of financial services giant AIG, said the predictions of last year's doomsayers had not come true.

"The story of 2006 is the story of what did not happen," Mr Frenkel said.

"The dollar didn't collapse, oil prices didn't reach $100, there was no big increase in protectionism and we've even seen some improvement in the budgetary situation [of some governments]."

But there was a dissenting voice on the panel.

Nouriel Roubini, chairman of Roubini Global Economics, warned that the world economy faced three threats: a US housing market slowdown or even recession could result in sharply lower US growth; oil prices could soar again to levels that companies would find much harder to cope with; and soaring interest rates could hit both corporate investment and consumer spending. As an early warning, many US companies had already cut back on investing and were returning money to shareholders, for want of any worthwhile investments, Mr Roubini said.

Bank of China's Zhu Min pointed to another problem: big trade deficits could still hurt the top Western economies. Most panellists, however, agreed that while these threats were real, they were unlikely to hit this year, but rather in 2008, if at all.

Inequalities

Professor Tyson pointed to what she saw as potentially the biggest long-term threat, the growing inequalities in the world. More and more workers were losing out on the gains of globalisation, especially in the middle classes, who had seen their wages "compressed". She quoted research suggesting that the average American had not benefited from globalisation. The gains of the $1 trillion in extra income reaching the US appeared to have gone to the top 10% of society.

Given these numbers, politicians would find it increasingly difficult to convince voters that globalisation was a good thing for everybody - even if in the long-term that was indeed the case - Professor Tyson said.

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[HenryTo]

Hi Reid, thanks for the note.

For those who also want to read the STA's January issue, here is the link:

http://www.stocktradersalmanac.com/sta/pdf.jsp?id=1007&file=sta_newsletter_1007.pdf

[reidbrownfield]

Henry, Stock Trader Almanac guys agree with you. I just read their January issue (free on their web site). They have the annual forecast in it. Reid

[HenryTo]

Hi Dash,

Thanks for posting. I think the top will come when folks like Dr. Roubini are ostricized - such as Julian Robertson and Warren Buffett got criticized in 1999/early 2000. That being said, he runs his own firm so this particular "topping out" indicator isn't as easy to gauge as, say, a money manager (the latter will just resign or get laid off). Perhaps when he closes his website down?

Dr. Roubini raises some good points - but his timing has nearly always been off. And in this business, timing is everything. Even should he be able to time an event (such as oil spiking back up to $80 a barrel, for example), there is no way to predict what will happen to prices of stocks or other financial assets. Oil spiking up to $80 a barrel affects certain assets in different ways - and the reaction of the stock market will obviously be different if it was trading at a 16 P/E vs. 22 P/E, for example.

My sense is something big will happen this year - probably later this year. Global Macro and Managed Futures have underperformed for awhile now - and it is time to see a resurgence (they always do relatively well in times of financial crises). But this probably won't happen until we see some kind of "blow off" in U.S. equities and the disappearance of liquidity - as exemplifed by a widening in emerging market or corporate bond yield spreads. We are still not close to that at this point - and may not be close to it probably until the DJIA reaches 14,000 points. But don't hold me to that level.

Best regards,

Henry