Barclays Wealth opines on the three biggest risks to the market (Via FT Alphaville):
“The first big issue facing the global economy is the reluctance of the US consumer to spend, with real household disposable income well below what it normally is at this stage of the economic cycle. The outlook here is worrying: the recovery could easily stall or peter out in 2011.
The second issue is whether or not the European Monetary Union (EMU) will survive. Fixed exchange rates make it difficult for countries to engineer gains in competitiveness, and dramatic fiscal tightening won’t necessarily help much if it leads to further declines in GDP. So, EMU could change form – and perhaps even break up entirely.
“Worse is to come…as German policymakers have chosen to now accelerate plans to rein in their own budget deficit. This decision has had the effect of ratcheting up how much other euro-area governments are expected to do. For this reason Barclays Wealth has lowered our euro-area growth forecast for 2011 to just 1%.
The final issue…is Asian inflation. The region’s ability to grow at an above-potential pace will be constrained by inflation fears. Worse still, Barclays Wealth Research suggests that Chinese inflation may be quite sensitive to shifts in the output gap. When it is positive, as it currently is, inflation normally rises several percentage points. A substantive tightening is likely to be warranted, but China and the other major regional economies still look unlikely to slam on the brakes. If so, then markets may continue to worry about growth being unsustainably fast.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.