The Organisation for Economic Cooperation and Development this week said there is a growing risk of deflation in the eurozone. As a result, it recommended the European Central Bank consider buying government and corporate bonds.
The OECD also said emerging markets are weighing on the global economic recovery, while developed economies muddle through a swamp of debt.
Japan, now a year into its unprecedented Abenomics program, is looking at potentially adding more stimulus to generate growth.
China talks like it is set to implement sweeping financial and economic reforms to rebalance its economy. But the details amount to either 1. a big charade aimed at managing perceptions; or 2. a catalyst for a huge growth disappointment.
The world's economy is not pretty, to be sure. But is Great Recession 2.0 starting?
No. (At least not yet.) The coming quarters are likely to be characterized merely by slow growth.
So what to do?
Try to determine how money may flow around the globe in this slow-growth environment.
Let me first remind you what I said yesterday about what the Federal Reserve has done for the financial system and financial markets: The Fed's aim of delivering stability via a highly ordered financial system in order to prop up asset prices has stunted growth in the real economy.
Money is going into stock buybacks at lofty share prices instead of being invested in real stuff that grows a company and an economy. Dollars are being shoveled into IPOs largely for companies that have been losing money upon debut. Banks are parking trillions of dollars at the Federal Reserve because the demand for loans is insufficient or unattractive.
Money is being invested in financial markets because central banks have effectively reduced the perceived risk. At the same time, they've been unable to reduce the perceived risk of investing in the real economy.
So this slow-growth environment will continue.
In the context of continued accommodation, "financial stability" and slow growth, one might look to invest in areas that have been beaten down. That would imply looking outside the U.S.
But that seems foolish to me.
Remember: The financial system must transition from order to disorder.
And slow growth cannot transition to healthy growth without a shock. That, of course, demands cautious investing.
I believe the U.S. market is the best place to be right now. Surely it will keep up if global markets rise from today's levels. Yet at the same time, the U.S. appears less vulnerable to internal risk.
The private sector in the U.S. is relatively lean five years removed from the financial crisis. U.S. financial institutions, while not immune to a potential credit-market seizure, are better capitalized than their global counterparts.
But just as important in this decision is where not to be right now.
Let's look at capital flows around the world based on one country's prospects relative to another's. Here's what the U.S. is up against:
Japan is poised to gain market share in trade throughout Asia. The country should also feel a domestic boost from Abenomics if higher taxes don't stall the momentum. A strengthening yen could also become a threat.
China faces many growth risks should the country railroad through reforms. But without reforms, China is at risk of making the same debt-induced mistakes that pressured developed markets in 2008.
Emerging markets' growth and outlook remain too dependent on developed markets and capital flows. The potential risk appears to be outweighing the potential reward as growth forecasts are revised lower.
Eurozone recovery will not be sufficient to shore up the financial system. Solutions will be evasive. Fiscal and monetary decision-making will remain paralyzed under the common-currency system.
To summarize: Japan may offer some opportunities; China is a dicey bet; emerging markets have lost their sex appeal; and the eurozone is by no means out of the woods.
Be in the U.S. But be careful.
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