Certain important trends in the global economy (especially the US economy) seem to have gone unnoticed, thanks to the efforts of the US Federal Reserve. These important trends should be at the back of the mind of any keen observer of the economy:
1. Cisco has warned that its revenues would miss. ironically Cisco was the first to warn about possible problems both in 2000 and 2007.
2. US states and municipalities are in trouble: they may or may not default (on a very large scale) but nevertheless it pays to note that after the consumer which constitutes about 70% of the US economy, the US states and munis constitute about 13% of the economy. So if both of them are in trouble then it could be quite bad, not immediately but over the next year.
3. Pricing power has evaporated for most of the sectors in the economy. So by the end of second quarter of 2011, deflationary forces will be quite high. that is the reason why probably Bernanke is so desperate. If commodity prices fall (due to problems in Europe, tightening in the Emerging markets, falling demand) then these pressures could become more pronounced.
4. A prominent banking analyst has pointed out that over the next 18 months, US banks will close nearly 5000 branches, or about 5 percent of the branches. Add to this the number of small banks that dot the US financial landscape that are likely to close, we are more likely to see credit tightening rather than easing.
5. Consumer will continue to remain very cautious ( see a very interesting article in WSJ: The Just-in-Time Consumer. It becomes clear that deleveraging is likely to gather steam rather than reduce. That after all may be the lasting legacy of the credit crisis, just as savings was the lasting legacy of the Great Depression of the 1930s.
2. US states and municipalities are in trouble: they may or may not default (on a very large scale) but nevertheless it pays to note that after the consumer which constitutes about 70% of the US economy, the US states and munis constitute about 13% of the economy. So if both of them are in trouble then it could be quite bad, not immediately but over the next year.
3. Pricing power has evaporated for most of the sectors in the economy. So by the end of second quarter of 2011, deflationary forces will be quite high. that is the reason why probably Bernanke is so desperate. If commodity prices fall (due to problems in Europe, tightening in the Emerging markets, falling demand) then these pressures could become more pronounced.
4. A prominent banking analyst has pointed out that over the next 18 months, US banks will close nearly 5000 branches, or about 5 percent of the branches. Add to this the number of small banks that dot the US financial landscape that are likely to close, we are more likely to see credit tightening rather than easing.
5. Consumer will continue to remain very cautious ( see a very interesting article in WSJ: The Just-in-Time Consumer. It becomes clear that deleveraging is likely to gather steam rather than reduce. That after all may be the lasting legacy of the credit crisis, just as savings was the lasting legacy of the Great Depression of the 1930s.
6. Sales in the forthcoming holiday season may be at best close to the levels last year, but the problem is that they are likely to be at the cost of a larger discounts - in some sector double last year. So the net result is that corporate balance sheets are not likely to get better - maybe not worse, but not better.
Unfortunately QE2 may not change most of these things in the near term as it is said that monetary policy takes about 9-12 months before it starts to have a major effect.
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