A Perfect Storm (revisited)

Posted on 23 July 2013 by Douglas Chadwick

At the end of April 2012 I wrote an article entitled “The Perfect Storm”. In this article I envisaged the catastrophe lying in wait for the Investment World that would be created by the following three events. Firstly, the slowing down of the Chinese manufacturing miracle would create internal unrest and bloodshed sufficient to unseat many Asean countries` economies. Secondly, the Euro as a currency and Euroland as a market would cease to exist. Finally, that the safety and security of American government Gilts and Bonds would be eroded. Well, a year down the road very little if any of this has taken place. During this period we have seen the world stock markets rise to approach, and in some cases breach, their all time highs and then fall back close to where they started.” Volatility” is still the by-word. China has seen its rate of manufacturing growth almost halve to an enviable (for the rest of the world) seven percent. During this time the Chinese government has contained any unrest by allowing wage rates to rise and by investing internally into the country`s infrastructure. The Chinese middle classes are fast forming the largest population of tourists as they catch up with travelling the world. Provided that the Chinese government is able to continue in this approach and let internal consumption continue to rise and create the majority of the demand for their manufacturing base, then China could very well not be a problem for the investing world, but in fact a great opportunity. Today the Euro and Euroland still exist in their original form, but what the next few years will bring is still very much a case of watch this space. There are still huge differences in the strength and viability of the various member state economies. The questions of austerity for some and not for others and high unemployment for some and not for others are open wounds that continue to fester. The politicians for all their bluster continue to kick this can further down the road for somebody else to eventually resolve. The UK politicians are facing demands from the population to hold a referendum as to whether the UK should leave the E.U. Should this referendum take place and the vote be carried then many other E.U. countries may follow suit. That would spell the end of the E.U. as a future world force. The safety and security of American government gilts and bonds is still a meaningful question, but one that no longer would seem to be an imminent danger. In fact quite the reverse may be the situation. The American economy would now seem to be on a rising curve. Increasing manufacturing at home, falling unemployment, increasing new house starts and the godsend of Shale oil and gas is revolutionising the economy for the better. It has now reached the point that Q.E. will be curtailed in the near future. There is still however the matter of enormous existing debts to be serviced but inflation and the removal of overseas purchases of oil and gas will all contribute to the reduction of these debts. This being the case, then the American dollar strengthens and the country`s bonds and gilts are secure. Now that is quite a turnaround from a year ago. What will the next year bring for the investing world to consider and act upon? Perhaps the developing world`s emerging middle classes will create such a demand for gold jewellery that the price of mining stocks will rise due to demand without gold having to be considered as a safety valve against the dollar. Maybe the U.K. will become a rising market if it continues to increase employment in the Private sector whilst reducing the amount of people employed by the State. Perhaps the UK Austerity measures can be made to stick and attention would be focused on the vast amounts of wealth that is wasted on unmonitored projects and institutions. This may in turn revive the desire to be self reliant and less dependent on State handouts. All of this could lead to a rise in the UK stock market and a place for your investments. Now wouldn’t that be nice!