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Global Economic Overview December 2011

Economics / Global Economy Dec 16, 2011 - 08:28 AM GMT

By: Mike_Stathis


Best Financial Markets Analysis ArticleMorgan Stanley recently downgraded its forecast for 2012 global growth to 3.5% from 3.8%. Remember in August, Morgan Stanley cut its global forecast for GDP growth down to 3.9% (from 4.2%) and 3.8% (from 4.5%) for 2011 and 2012, respectively.

In June, the IMF forecast 2.5% and 2.7% GDP growth in 2011 and 2012, respectively. This latest revision comes closer to the organization’s 2% benchmark for a global recession. 

Also recall in September the IMF cut U.S. GDP growth forecasts to 1.5% and 1.8% for 2011 and 2012, respectively. The consensus growth estimates for the U.S. in 2011 and 2012 from Wall Street analysts and private economists was also cut in August to 1.5% and 2.2% for 2011 and 2012, respectively. 

On September 29, Citigroup slashed its global GDP growth forecast to 3% and 2.9% for 2011 and 2012, respectively. This was the bank’s second downward revision in less than a month.

During the same period Goldman Sachs lowered its global GDP growth estimates to 3.8% and 3.5%, for 2012 and 2012 respectively, versus its previous 3.9% and 4.2% estimates. They also reduced GDP growth estimates for the U.S. to 1.7% and 1.4% in 2011 and 2012, respectively.

As if it meant anything, in September Citigroup downgraded its outlook for the United States, Europe, Japan, Canada and the UK. Once again, this is a prime example of delayed response by Wall Street analysts. The firm also slashed its view slightly on China's 2012 growth rate, to 8.7% from 9%. This revision by no means adjusts for the risks seen to the global economy, much less internal risks growing from within China. I would have expected a credible analyst to have cut China’s growth to 8.0% by now.  
In their recently downward revision for global growth, economists at Morgan Stanley also cut 2012 growth forecasts for Asia (ex-Japan) to 6.9% from 7.3%, which we feel is generous. We believe Asia will get hit much harder in 2012. 

In late November, Goldman Sachs forecast a significant recession in Europe for 2012. Meanwhile, economists refuse to admit that Japan is already in a recession which could easily deepen in 2012.

You should expect more downward revisions from Wall Street because I do not see global growth breaking 3% in 2012.

Some Wall Street economists have finally realized that Europe will hit a recession, but remain reluctant to entertain the same scenario for the U.S.

While our model already assumed a good deal of downward earnings revisions in late 2011 and increasing in 2012, it is clear that more downgrades and earnings misses will materialize in 2012.

China is already feeling the effects of the global slowdown and has opted for actions that focus more on expansion rather than protection against inflation as it moves towards less restrictive monetary policies.
On Nov 30, 2011 China’s central bank, the People’s Bank of China (PBOC) cut the reserve requirement for its banks by 0.5 of a percentage point, effective on December 5. This represents the first cut in reserve requirements by the PBOC in almost three years. In 2011 alone, the PBOC raised reserve requirements six times, while boosting the benchmark and deposit rates five times since October.

The cut in reserve requirements from the PBOC came on the same day as the Federal Reserve, the Bank of England, European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada announced a plan to provide liquidity to the global financial system. According to several sources, this call to action was stimulated by the near failing of a large bank thought to be in France or Germany.

Largely absent from the news on November 30 was another downgrade of 37 of the world’s largest financial institutions by Standard & Poor’s. According to the research report by S&P, the downgrades were the result of new ratings criteria for banks. 

U.S. banks included in the downgrade were Bank of America, Citigroup, Morgan Stanley, Goldman Sachs, Wells Fargo, J.P. Morgan, Bank of New York Mellon.

In the UK, Barclays, HSBC, Lloyds and RBS were downgraded.

While UBS received a downgrade, several banks we feel are in trouble were left alone; Deutsche Bank, Credit Suisse, ING, BNP Paribas, Credit Agricole, Societe Generale, Commerzbank. Even the Bank of China was downgraded while the Industrial and Commercial Bank of China received no downgrade. All of the downgrades were a half of a notch.

Bank of America, Citi, Goldman Sachs and Morgan Stanley got cut to A- from A.
Barclays and J.P. Morgan were cut to A from A+.
Wells Fargo, BNY Mellon and HSBC were cut to A+ from AA-.
UBS was downgraded to A from A+.
The Bank of China got cut to A from A-. 

Ever since Standard & Poor’s downgraded U.S. government debt in August, I have stated that EU sovereign debt needs to be downgraded to lower levels because U.S. debt is much safer.

We are now beginning to see downgrades materialize, although we feel that the bulk of sovereign downgrades have been held off due to pressure from the EU, IMF and Federal Reserve as the EU deals with an escalating crisis.  
Tensions with Iran Heating Up
Iran recently reported shooting down a U.S. spy drone, pointing to increasing suspicions of some type of strike being planned by Washington and their puppet masters in Israel. This comes after UK shutdown Iran’s embassy in London and evacuated its embassy in Iran, due to attacks made after the UK announced further economic sanctions against Iran’s nuclear program.

I have discussed the intentions of the U.S. to invade Iran in the past. And I have pointed to the primary reasons for such an attack. First and foremost, Israel wants war with Iran. Rather than fight their own wars, Israel only need pull the strings of its puppets in Washington and the UK to get what they want.

One could argue that World War III began when the U.S. invaded Iraq. There would be no question that if the U.S. invades Iran this will serve as the precursor for World War III. Look for a ban on Iranian oil exports as a preliminary action towards war.

Iran is twice the size as Iraq with a much more difficult terrain and more advanced military. Unlike Iraq, Iran has also been preparing for a possible attack for many years. In addition, Russia, Pakistan and China are strong allies of Iran. While Pakistan and China might bow down to the economic leverage fueled by the U.S., Russia is likely to present an entirely different response.

Regardless, a ban on Iranian oil exports would send oil prices soaring within days, sending the global economy into a downward spiral. Moreover, the mere threat of an attack by the U.S. or Israel could send oil prices to record highs in a matter of days.

Iran’s easy access to the Strait of Hormuz could also serve as a powerful economic weapon since 40% of all traded oil leaves the Gulf region through this strategic waterway. If this waterway is blocked or destroyed, you should expect to see $200 oil within weeks. Any way you look at it, as I have continued to insist for several years now, oil securities should form a healthy portion of your portfolio.


By Mike Stathis

Copyright © 2011. All Rights Reserved. Mike Stathis.

Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.

The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.


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