Davos: Bearishness Rules

I’ve only just arrived in Davos, and already I’m wondering how I’m going to be able to cope: the scene here is far crazier than at any other gabfest I’ve been to. The smart people just blow it off altogether and make sure they spend some quality time on the slopes, but I’m not smart, is the problem.

In any case, the World Economic Forum was kicked off for the third year running with a big state-of-the-global-economy panel featuring Nouriel Roubini, Kamil Nath, Ngozi Okonjo-Iweala, Ferenc Gyurcsany, Stephen Roach, and Yu Yongding. Naturally, the tendentious economists (Roubini and Roach) stole the show, with the more mild-mannered public officials being rather more cautious in their comments. But interestingly Roubini’s predictable bearishness was met with no pushback whatsoever: given the panic in global stock markets and the US central bank, he’s sounding positively mainstream at this point. Maybe that’s the ultimate buy signal: when everybody agrees with Roubini, you know it can’t get any worse.

If there was one theme running through the panel’s discussion, it was food inflation, interestingly enough. As the world’s poor continue to eat more and more, food seems to be the one commodity which is not at risk of a bursting bubble. But the EU and the US are still in a mindset of subsidizing their farmers, often paying them not to produce crops – this, as global demand is outstripping supply! As ever, there will be Doha-round trade talks in Davos this year, on Saturday, and as ever, agricultural subsidies will be high up on the agenda. But maybe food inflation provides a glimmer of hope there, since pretty soon US and European farmers won’t need to be subsidized, their crops will be so valuable.

On the macroeconomic front, Roach was convincingly bearish: the US consumption rate is now 75% of GDP, he said, an all-time world record. That’s bound to come down over time, towards a long-run average closer to 67% – but a fast slump down to 70% or so would create "the mother of all recessions". The only chink of hope came from Time’s Michael Elliott, who was moderating the panel, who said that he and many other holders of US mortgages might soon be tempted to refinance if rates keep coming down at this rate. Yesterday, Ken Houghton noted in the comments on this blog that already his HELOC has is 100bp lower than his mortgage.

And Yu also noted political risks in China: there are 150 million small Chinese stock-market investors who are going to be very angry if and when the Chinese stock-market bubble bursts. "They were hopeful that they could regain their money, and then they lost more," he said. The general consensus seemed to be that 2008 is going to be a very tough year indeed, not only for the US but also for China, Europe, and most of the rest of the world (with the possible exception of India).

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