January, 2010 Archives


Economic Crisis Not Over Till It’s Over

by Riaan Nel in News

I’m posting my opinion page article which appeared in The Register-Guard on Sunday, December 27, 2009.



We are two years into what some are calling the Great Recession, and all indications are that it is coming to an end.  It appears that the current market rally reflects the strengthening economic backdrop with the world’s emerging economies fueling a synchronized global recovery.

However, many challenges continue to face the global economy.  Global credit markets remain impaired, and the wealth destruction that occurred during the Great Recession will diminish the availability of credit for a long time.  Less credit will be available in the future, inhibiting growth.  Therefore I am forecasting a lengthy period of slow economic growth.

With credit markets still fragile, another shock to the system could lead to deleveraging all over again.  Another shock could also lead to a steep correction in the stock market.  It is my fear commercial real estate might be the trigger!  According to the MIT Center for Real Estate, close to half of commercial mortgage loans will come due within the next five years.  Deutsche Bank predicts approximately 65% of these loans will fail to be refinanced.  The resulting distressed sales will further depress the commercial real estate market.

Another important challenge going forward is that consumer spending will remain depressed in relative terms for a long time to come.   American consumers are still drowning in debt, with stagnating income growth and less available credit.

There have been a lot of press reports lately about the dangers of the current Federal budget deficits and government debt.  The alarmists claim that the unprecedented budget deficits, coupled with our $12 trillion national debt, will lead to a crisis in the bond markets with soaring interest rates. I agree that at some point we will see long-term interest rates increasing, which will result in an increase in mortgage rates.    But over the short-term I think those fears are overblown. 

What about inflation fears?  There has been an explosion in the Federal Reserve balance sheet since the onset of the Great Recession, increasing from $1 trillion to over $2 trillion.  Such unprecedented expansion of the Fed’s  balance sheet increases the money supply which could stoke inflation.  Inflation will become an issue over the longer term, but for now we are still battling deflationary forces.

What about the dollar? Over the next year and over the medium-term, the dollar will remain relatively “weak” compared to the emerging world’s currencies.  At some point the Chinese will have to allow their currency to appreciate, but they are still very dependent on selling cheap products to us and consequently continue to intervene in the currency markets to keep the yuan artificially low.

 What will happen in the stock market?  The markets have had an extraordinary run since March 9.  The question on all investors’ minds is, “Will this rally continue?”  The stock market is a forward looking social institution, and I believe it has rallied in expectation of increasing company earnings as we moved out of the recession.  I feel the market is getting ahead of itself though, and that a correction has to occur.  On the other hand there is still a tremendous amount of cash on the sidelines ready to enter the equity markets.  With cash investments earning virtually nothing the trend of cash moving into the markets could continue. 

Looking beyond 2010 some of the more significant investment opportunities will be in the emerging world, although I expect a correction in emerging market equities at some point.  The most significant long-term implication of the global economic crisis is the diminishing relative power of America.  We will experience an ever-increasing role to be played by rising powers in the emerging world – countries like India, China, Russia, Brazil, and other Asian countries.  As CNN’s Fareek Zakaria points out, the world’s tallest building is not in the US anymore but in Taipei, and will soon be in Dubai, recent events notwithstanding.  The largest publicly traded company is in Beijing.  The largest investment fund in the world is in Abu Dhabi.  The biggest movie industry is Bollywood in India, and Macao in China overtook Las Vegas in total gambling revenue! 

Going forward we here in the Northwest will realize more and more that global structural changes will have an enormous impact on our daily lives.  For now the systemic risk is over, but the next decade will be known as a decade of significant global economic change.



Riaan Nel is managing partner of the investment firm Detlefsen Nel & Associates in Eugene.  He is currently completing research for his graduate thesis on the global financial crisis.