I’m positive! What can go wrong?

Founder and Publisher of the Switzer Report
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In one of my daily blogs on www.switzer.com.au, I proposed the idea that 2013 would be the year of living dangerously. Regular readers would know I’ve been tipping for some time that the US and China are on the comeback trail — economic growth-wise — and these two economies, the two biggest in the world, will underpin stock price improvements.

Adding to the better economic outlook ahead, Japan is now prepared to spend its way out of decades of economic stagnation, and even Europe is showing signs of a quicker return to growth than the experts thought some months ago.

In fact, the recent fall in the Oz dollar to 104 US cents has been linked to “growing evidence of an emerging economic recovery”, Dow Jones Newswires reported. Our currency has copped it because, to put it simply, we look like we’ll be growing slower than expected and Europe could be faster than tipped.

That’s good news for the global economy, commodity prices and material stocks.

Six things that could go wrong

Anyway, with all this good news about, and more commentators jumping on my optimistic bandwagon, what could go wrong?

Here’s my list:

  1. The ticking debt time bomb worldwide. This problem is not a 2013 issue but will come back to bite us down the track. Hopefully, over the next two to three years, we’ll see solid economic growth to help pay down some of the debt.
  2. The inflation genie gets out of the bottle. This threat is also likely to be a problem in two or three years’ time, as economies grow and governments have to step up to the plate with responsible policy responses.
  3. Gutless governments that won’t address the problem. The inflation genie mentioned above links to concerns about gutless governments or paralysed parliaments, such as the US Congress.
  4. The inability of the US Congress to reach agreement on deficits and debt. There will be another flashpoint in May over raising the debt ceiling, however, Congress still has to battle over automatic spending cuts, which are set to take place in March, and this debate could unsettle market confidence. I expect the Yanks will play their games but another holding exercise will develop to ensure Congress doesn’t kill the nice recovery of the US economy.
  5. A Middle East left-field event. You can’t rule out an X-factor rocking markets but the whole mess over there seems to be manageable at the moment.
  6. The explosive personalities of the European leaders and their people. The biggest risk lies in Europe, where the latest comments from Germany’s Angela Merkel and the European Central Bank (ECB) have implied a better than expected economic performance from the eurozone. I believe the impact of lower bond yields will help not only turn around public finances, but also confidence.

The best indicator I have that shows a positive contagion is developing, as the ECB boss Mario Draghi put it, was this — the German Dax, which measures stock price movements like our S&P/ASX 200 index, is up 31% since June 4. The stock market is driven by what investors think lies out there, and this is an enormous sign of positivity from the riskiest region in the world economy.

Sure, I expect some stupidity akin to France’s 75% tax on earnings over 1 million euro, which has seen Gerard Depardieu chase Russian citizenship and France’s richest person, Bernard Arnaut, seek to become a Belgian.

All this said and done, Europe still worries me a little. Bankers are still concerned about Europe, though the consensus is the euro has stabilised, but unemployment in Europe is a high 11.7% and isn’t expected to fall much this year.

The good news

On the plus side, the Davos meeting in Switzerland of the world’s heavyweights of government and business has a more relaxed mood this year compared to last year, when the euro looked in real trouble.

Another good sign Reuters reported was, “a larger-than-expected early repayment of cheap three-year loans by some eurozone banks to the [ECB]”.

Some 130 billion euro worth of crisis loans are expected to be repaid to the ECB this week, which reinforces my positive views for 2013.

It’s the uncertainty of how the banks in Europe are going that keeps me from declaring a boom is here, as the crisis loans handed out by the ECB were over a trillion

Euro. The best thing for repayment is economic growth, and sitting here right now, that looks like a reasonable chance for 2013.

I remain positive for the year ahead — now that’s a surprise!

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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