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U.S. Economy Muddling Through, More Crises, More Global Risk Aversion Ahead

Interest-Rates / Global Debt Crisis Dec 19, 2010 - 06:40 AM GMT

By: Bryan_Rich

Interest-Rates

Best Financial Markets Analysis ArticleFor the better part of 2009 and for the second half of 2010, the world’s focus has been on how dreadful things look in the U.S. and how great the opportunities are said to be everywhere else.

But despite all of the anti-dollar and anti-U.S. policy sentiment that has proliferated around the world, apparently the financial markets haven’t felt the same way!


In fact, heading into the final two weeks of the 2010, U.S. assets have been a harbinger of investment performance.

Longer term the story is the same …

Year-to-date, the dollar index is up 3 percent. Ten-year Treasuries have gained 4.3 percent. And the S&P 500 is up more than 11 percent.

Meanwhile, investors lost 1.9 percent in Brazilian stocks … lost 2.2 percent in Japanese stocks … and lost 11.6 percent in the Chinese stock market index.

Among global currencies, the dollar has held its own, performing right in the middle of more than 70 global currencies in 2010, and in positive territory against a basket of major currencies.

Going into 2011, the outlook for next year continues to argue for U.S. assets outperforming those of several other major markets.

Take a look at the GDP estimates for 2011 in the table below …

While global growth is sluggish and the outlook for meaningful improvements looks bleak, in a world with few options, muddling along doesn’t look so bad. And the U.S. is doing just that, due in large part from the aggressive stimulus policies.

But Will It Continue?

There has been a lot of focus on the sharp rise in U.S. interest rates during recent weeks. And the media’s explanation of this activity has included two opposing viewpoints that portend two diverging outlooks for the U.S. economy:

The argument for a better economic outlook—

The improving U.S. economic data, combined with the stimulative monetary and fiscal stance, will lead to better U.S. growth than what has been anticipated. Therefore rates are rising in view of a strong 2011!

The argument for a gloomy economic outlook—

Given the aggressive monetary and fiscal stance in the U.S., the bond markets here are beginning to take the punishment — ultimately driving rates higher and higher, just like in Europe’s weak countries.

We’ll likely find that neither of those arguments is valid.

Take a look at this chart of 10-year government bond rates that include the U.S., euro zone, Japan and the U.K. You can clearly see this is not only a move in U.S. government interest rates, it’s a global rate surge.

The fact is, big investors have been riding the government bond markets’ returns for the better part of the year. And the recent aggressive rise in rates has all of the trappings for when these same investors book their profits into the year-end, pushing bond prices down and yields up.

In a global economic environment defined by deleveraging and depressed global demand for the foreseeable future, rates are in a historically low range. And I believe they’ll likely continue to oscillate in that range until the outlook for a sustainable recovery arrives.

And don’t expect that to come anytime soon. Already Bill Gross, the world’s biggest bond fund manager is said to be accumulating bonds at the current levels, looking for another retreat in rates.

So runaway interest rates probably won’t be the story for 2011, but here’s what you’ll likely see …

More Crises, More Global Risk Aversion

The evidence is growing in Europe that this current act of government rescue isn’t working. This week Moody’s cut Ireland’s credit rating five notches. Plus it put Greece and Spain on review for a downgrade.

Now the one left holding a growing bag of sour sovereign debt in those three, as well as in the other weak euro countries, is the European Central Bank (ECB). And the ECB is publicly showing concern about taking a haircut on such “investments” … something European officials have sworn wouldn’t happen.

The latest crisis has once again put the euro's survival at risk.
The latest crisis has once again put the euro’s survival at risk.

So the euro crisis is nearing a tipping point. A point, which if passed, could send global financial markets into chaos again.

The other area of bubbling threat to the global economy and global risk appetite is China, the world’s most-loved growth story. It’s facing a choice of slower (recession-like) growth or troublesome inflation. Given the public unrest that could result from either, the Chinese government is dragging its feet.

And that may result in an even harder landing for the Chinese economy plus a big disappointment for global investors who were counting on China to lead global growth.

Considering all the talk about sovereign debt defaults and emerging market bubbles, I expect global investors to hold their fingers on the exit buttons for investments in risky assets around the world.

So don’t be surprised if we see another global flight to safety in 2011, just like we saw in 2008.

Regards,

Bryan

P.S. With these risks evolving, it’s important for investors to be plugged into the changing global landscape. And there’s no better way than by following global currencies. Where there’s always a bull market … no matter what’s happening in other markets. And where the investments can give you up to NINE times more interest income than ordinary CDs!

I’ve prepared a special presentation to help you do that. Just click here to begin.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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