Monday, April 7, 2008

Global Slowdown? - The Good The Bad and The Ugly

The Good
# Commodity price bubble might burst – inflation to start cooling down
Drop in commodity prices will have a cooling effect on inflation. Will lead to a positive cascading impact on consumption and growth revival. Commodities include food, metals , agri commodities, coal , oil etc. Prices going up consistently for past 3-5 years. The boom typically ends with a slowdown in economic activity. Oil and coal prices might still not come down much due to supply side inelasticities .

# US Housing market debt relief package (!) - support to credit industry
US Senate had begun a debate on a debt relief package to help distressed homeowners from foreclosures. If it goes through, it will result in losses for banks but will provide a degree of support to the US credit industry and majorly positive sentiments.

# Indian Government starting to act
Recent measures on export ban / lowering of import duties likely to start showing results in a couple of months.

The Bad

None of the good news is good enough. It's too little too slow to signal any turnaround. The slide continues

# Commodity price cooling down unlikely to be quick. Process can last anywhere from a 6 to 18 month period.

# Supply side constraints on Oil and Coal will continue to haunt the global economy

# US Housing relief package in right direction but going slow and the relief amounts seem low compared to magnitude of the problems.

# Measures from Indian Govt. likely to have only a marginal impact. Oil price hit yet to be passed on to the Indian consumers. To some extent Govt's hand are tied as we have strong external linkages. Any measure to kickstart will probably result in higher fiscal deficit and an initial hit on growth numbers. Will the Govt. bite the bullet in an election year.?

The Ugly

As mentioned in my previous post, UK housing continues to follow in US footsteps. No change in China and Japan growth numbers reduction. These are all major world economies and have a strong combined linkages across the globe. Are we in the middle of a truly global slowdown.?

What will happen to the stock markets ?

#The Good

If we manage our investments right, we'll probably make more money than in any of the previous cycles. Some might be able retire early.

#The Bad

I believe the whole cycle from now till the super normal returns likely to be in range of 7 years.

#The Ugly

Nothing. Really. Unless the world comes to an end