Major financial markets outlook predicted

Are the noises about the green shoots of a recovery premature wishful thinking or do they have real weight behind them when it comes to anticipating where markets stand right now?  Michael Ivanovitch, president, MSI Global, Inc.  New York, as the guest of the Cayman Islands chapter of the CFA Society, recently spoke to a packed audience at Harvey’s Grill, giving his assessment for the short and medium term prospects of the global markets. Business Editor Lindsey Turnbull was in attendance and reports. Second in a two-part series.

Michael Ivanovitch is president of MSI Global, Inc., a company he founded to conduct research on the world economy, geopolitics and investment strategy.  Prior to establishing this analytic and advisory service, Ivanovitch worked as a senior economist in charge of the financial market analysis at the Organisation for Economic Cooperation and Development in Paris.  He also served as co-editor of the OECD’s quarterly Financial Market Trends.  Before joining the OECD, Dr. Ivanovitch was an international economist at the Federal Reserve Bank of New York, thus he brought to the Cayman Islands a wealth of knowledge which he shared with the capacity audience at Harvey’s Grill in June.

The monetary base
The rate of growth of the Fed’s monetary base was, according to Ivanovitch “exploding” with an annual growth rate of around 112 per cent.

“You can appreciate the explosion when you realise that the normal non-inflationary growth rates economists expect would be around three to four per cent,” he said.

Ivanovitch said some worried that the current Fed Chairman, Ben Bernanke, was perhaps heading for another financial disaster, this time an inflationary one. German Chancellor Angela Merkel had said she was unhappy with the US’s “printing presses” when it came to monetary policy which she believed would be storing up trouble for years to come.

Ivanovitch did not however believe that the current policy was a problem, stating that he thought Bernanke had given himself plenty of time to withdraw liquidity from the markets and reduce inflationary pressures. That said, he believed that the Fed would have a great deal of withdrawing to do. The Fed, he said, remains in hugely expansionary mode.

According to Ivanovitch, the US was anxious to speed up the fiscal stimulation and in particular, US President Obama wanted to push the increase of money into the financial system.
“There is an anxiety in political circles to speed up the process,” he said.

The rest of the world
Some segments of the world’s economy were actually seeing fairly decent growth (with some exceptions), Ivanovitch thought. China’s economic growth was slowing and so the Chinese government’s response was to invoke a fast-acting stimulus package to the tune of US$585 billion (or 17 per cent of GDP) to encourage consumption and investment.

“China was a good lesson to learn for the pontificators,” Ivanovitch said. “Their programme had already provided positive signs of recovery.”

“Chine is doing what it takes,” he continued. “Their savings rate is 50 per cent of their GDP, as compared to the US savings rate, which is just 4.2 per cent of GDP.”
As low as that rate was in the US, Ivanovitch joked that in virtuous times the US were big savers, alluding to the fact that earlier this year that figure was actually in the negative.
“With 50 per cent of GDP being saved, China is sitting on a huge amount of money,” Ivanovitch said. “And they can therefore invest the money however they choose – roads, schools, water treatment systems, hospitals, high tech railways, you name it.”

The question then was raised as to how much China would assist in the economic recovery of the rest of Asia.

“China is a major consumer of food, energy, raw materials, advanced technology and so on. But they won’t be buying these consumables from their near neighbours; they’re looking to Australia (coal and gas), Russia, Iran and Saudi for oil, as well as Brazil. They’ll also be looking to South American countries such as Brazil and Argentina for food. Really, the rest of Asia does not have much of what China wants to buy and so I think China’s impact on the rest of Asia will be limited,” he commented.

Japan is the second largest economy in the world and a net contributor to world growth, yet Ivanovitch believed the country’s economy was in an “irretrievable tail spin”. He said their stimulus package was based on their exports but this was dangerous because exports could not be controlled.

“The growth component in Japan’s economy is in freefall and domestic demand was also falling,” he declared. “Japan’s economy is almost impossible to stimulate because the Japanese government does not know how to stimulate consumption.  With families living in small living spaces they already have all the household appliances, and so on that they need. It’s difficult because the population is decreasing and its economy needs strong population growth to grow.”

Ivanovitch suggested that the Japanese look to countries such as France and Sweden which had successfully reversed their own population declines by introducing childcare incentives, family tax credits and better education and so on.

He also alluded to Australia’s successful policy of stimulating their economy by assisting young couples in purchasing and furnishing their own homes.

Ivanovitch then turned to India and wondered whether India could “out-China China” in terms of its economic growth rates.

“India has stable economic growth against all the odds because of fiscal and monetary stimulation,” he said. “Yet there is a big difference between China and India in that China does not need foreign savings to finance its growth while India does. India needs foreign capital inflows to maintain its 4 per cent GDP.”

Europe’s economy would soon bottom out, according to Ivanovitch, with a potential two per cent GDP to be attained. “Germany, France and Spain all had received aggressive fiscal stimulus and the results would show up later this year.”

Germany had received a stimulus package to help reverse the recession by the second half of this year while France’s growth had been depressed by a burgeoning trade deficit. “France is an impatient country,” he said. “Net exports had deteriorated but domestic demand has held up well.”  

In conclusion, Ivanovitch said that the US and Europe would lead the rest of the world out of this recession and the timing would depend upon how soon the US financial system recovered. “It’s time to put the fiscal house in order,” he said. “The economy is slowly being pulled out from its cyclical trough and I’m sure everyone will be pleased to know that the financial system has actually not imploded. The economy will snap back; its resilience may surprise you.”



Arthur Dzaghgouni, vice president of the CFA Society of the Cayman Islands and speaker Michael Ivanovitch