Posted: January 20, 2011
Economic uncertainty on a global scale
Part of the problem: insatiable appetite for leverageBill Greiner
Two issues have led to the economic contraction we faced a couple of years ago, and still have not been resolved. These two forces are:
A change in the growth profile of the world's economic powers. During the last 15 years, the world's economic growth leadership has shifted from countries which border the Atlantic Ocean to those which border the Pacific Ocean. This is a broad generalization, and consequently is not exactly accurate, but the theme is realistic.
A massive increase has occurred in the utilization of debt by the countries which are losing growth share on a world-wide basis. Major western countries have borrowed capital from many non-western investors to finance living standards which are beyond the capacity of their own economies to support.
The combination of these two factors (decreased growth and share of the world's income statement combined with an explosion of debt creation) has led to a destabilized economic environment - one with which the world's investors are attempting to become comfortable. Until rationalization - both economic and political - of this major, macro change takes place, the world's equity markets will probably remain in a secular bear environment.
We have been writing about this development for the past three years, as it is the core case as to why the U.S. economy is growing slowly - we have consumed our way to a point where debt structure is unsustainable, and we (along with major portions of the rest of the western world) will need to live within our means going forward. This by definition has led to lower secular growth rates, combined with investor and banking system uncertainty on a world-wide scale.
Bear markets end when the major reason behind the bear market is forcefully and successfully addressed. The negative issue(s) of why the bear market exists does not necessarily need to be solved, but a solution needs to be understood and in sight. The solution and ramifications of the solution to the problem which the world is faced has not yet been forthcoming, and consequently is not yet understood. Until this solution occurs (and it may be applied to one or a few of the troubled spots worldwide), the markets should remain in a secular downtrend.
And economic uncertainty, driven by a reallocation of worldwide growth combined with insatiable appetites for leverage, will continue to create global economic and banking imbalances.
The Roadmap to Solvency
Where is the world located in this road back to some degree of normalcy? Of course, assuming one believes the global financial and banking systems are stuck in the bear market described above, this is the meaningful question. How much further - both as measured by time and magnitude - do the world's financial markets need to move prior to a final bottoming process taking place? No one knows the answer to this question. But suffice it to say, we believe we are some period away from this finalization of the secular problems becoming more evident.
However, it makes sense for us to understand how deep and pervasive a problem with which we are faced. Once again, we believe the problem the world markets are facing has to do with a severe shift in the world's income statement. The world's economy and growth of the world's economies have changed dramatically during the last 15 years. At the same time, the world's balance sheet structure has changed dramatically.
Debt creation has occurred in many of the countries in which share of income statement has been declining. The combination of reduced income and higher debt is deadly - for any economic unit, be it a family, a business or a country.
Bill Greiner is the president and chief investment officer of Scout Investments, Inc.,a subsidiary of UMB Financial Corporation that offers investment management services for both managed accounts and mutual funds. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.