Doom and gloom at Geneva wealth conference
Delegates at the 2007 Shorex Wealth Management conference were told that a US recession was inevitable, and that an emerging markets bubble might follow.
Is the US economy facing a recession in 2008 and will this have a knock on effect as far as the rest of the world economy is concerned? It is a question with two component parts and these should be considered separately.
As far as a US recession is concerned, in fact a recent pole found that about 46 per cent of Americans thought they were already in recession. The clear definition is two successive quarters of negative growth: a call which is made by the National Bureau of Economic Research.
The biggest blue collar employer in the US is the construction industry. Most of the construction industry is involved with residential home-building and since the subprime crises has taken hold no new houses are being built, John Boich of Security Global Investors told delegates at the 2007 Shorex Wealth Management conference in Geneva.
There is not a high level of unemployment in the US construction industry - not yet anyway. This is coming, however. It is inevitable, according to Mr Boich. The US may be on the verge of high unemployment, never mind what the National Bureau of Economic Research has to say.
Mr Boich made the further depressing point concerned the fact that would not be anyone to bail out the US economy. Thanks to the rumbling-on war in Iraq and the US involvement in that conflict, the public sector is no longer in a position to provide a bail-out.
But how would a full blown recession in the US affect the rest of the world's markets? Surely the saving grace in this instance is the runaway success of the world's emerging markets.
China, India, Brazil, Russia: these places are going to continue driving the world's economies, promoting growth, regardless of the mistakes made by a few banks betting on risky mortgage-backed securities in the US.
There are some markets that are destined to feel the effect of the US slowdown in spades - Mexico for instance has about 24 per cent GDP linked to the US, another example where correlation is high would be Malaysia.
In the case of India or Brazil only about 2 per cent or 3 per cent of GDP would be directly affected by the US, however. Therein lies a buffer zone in terms of growth: in other words negative growth in the US would be cancelled out by continuing positive growth across the blessed emerging markets.
But could we be heading towards an emerging markets bubble? Places like China and the Middle East are experiencing an excess of liquidity and this could be a warning sign of problems ahead, according t Jeff Chowdhry, head of emerging markets at F&C Investments.
That is why IPOs and Hong Kong listings of Chinese companies are 400 times oversubscribed. There is simply far too much liquidity chasing too few assets.
Very fast growth in industries like autos or PCs means these emerging markets will soon catch up with the US. Another indicator of rapid growth is the increase in mobile phone penetration.
For instance, India sees its mobile phone penetration increase by the equivalent of the population of Switzerland per month. Eventually it will reach the 80 per cent penetration of other markets.
"I will put my neck on the line and say we can expect to see a further 50 per cent growth across emerging markets before this happens," Mr Chowdhry told delegates at Shorex.
But while India was once the place to find cheap outsourced IT skills, now Indian IT workers are demanding 60 per cent of the salaries of their US counterparts. Firms are now looking to places like Vietnam and the Philippines to outsource.
This all adds up to an early mirror image of the 1997 lead up to the Nasdaq bubble, said Mr Chowdhry.
Currently we are seeing subprime defaults and a credit crunch, but later once risk appetite returns where is this likely to lead? He predicted a strengthening of emerging market currencies which will provide the final lead up to an emerging markets bubble.
Some commentators believe the emerging markets bubble could happen as soon as first quarter 2008.
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