The world economy: Three-way split

The Economist: The world economy: Three-way split

America, the euro zone and the emerging world are heading in different directions.

THIS year has turned out to be a surprisingly good one for the world economy. Global output has probably risen by close to 5%, well above its trend rate and a lot faster than forecasters were expecting 12 months ago. Most of the dangers that frightened financial markets during the year have failed to materialise. China’s economy has not suffered a hard landing. America’s mid-year slowdown did not become a double-dip recession. Granted, the troubles of the euro area’s peripheral economies have proved all too real. Yet the euro zone as a whole has grown at a decent rate for an ageing continent, thanks to oomph from Germany, the fastest-growing big rich economy in 2010.

The question now is whether 2011 will follow the same pattern. Many people seem to think so. Consumer and business confidence is rising in most parts of the world; global manufacturing is accelerating; and financial markets are buoyant. The MSCI index of global share prices has climbed by 20% since early July. Investors today are shrugging off news far more ominous than that which rattled them earlier this year, from the soaring debt yields in the euro zone’s periphery to news of rising inflation in China.

Earlier this year investors were too pessimistic. Now their breezy confidence seems misplaced. To oversimplify a little, the performance of the world economy in 2011 depends on what happens in three places: the big emerging markets, the euro area and America. (Yes, Japan is still an economic heavyweight, but it is less likely to yield surprises.) These big three are heading in very different directions, with very different growth prospects and contradictory policy choices. Some of this divergence is inevitable: even to the casual observer, India’s economy has always been rather different from America’s. But new splits are opening up, especially in the rich world, and with them come ever more chances for friction. ...

Comments

[William Apel]

John Mauldin at http://www.frontlinethoughts.com/ isn’t comfortable with market timing, yet he shares this: [Note – originally from John Hussman at http://www.hussmanfunds.com/]

“In recent weeks, the U.S. stock market has been characterized by an overvalued, overbought, overbullish, rising-yields syndrome that has historically been hostile to stocks. Last week, the situation became much more pointed. Past instances have been associated with such uniformly negative outcomes that the current situation has to be accompanied by the word ‘warning.’

1. S&P 500 more than 8% above its 52 week (exponential) average
2. S&P 500 more than 50% above its 4-year low
3. Shiller P/E greater than 18
4. 10-year Treasury yield higher than 6 months earlier
5. Advisory bullishness > 47%, with bearishness < 27%

“The historical instances corresponding to these conditions are as follows:
December 1972 - January 1973 (followed by a 48% collapse over the next 21 months)
August - September 1987 (followed by a 34% plunge over the following 3 months)

July 1998 (followed abruptly by an 18% loss over the following 3 months)
July 1999 (followed by a 12% market loss over the next 3 months)
January 2000 (followed by a spike 10% loss over the next 6 weeks)

March 2000 (followed by a spike loss of 12% over 3 weeks, and a 49% loss into 2002)
July 2007 (followed by a 57% market plunge over the following 21 months)
January 2010 (followed by a 7% "air pocket" loss over the next 4 weeks)
April 2010 (followed by a 17% market loss over the following 3 months)
December 2010 ….?????”