Are we too Pessimistic? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 1 October 2011
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
In the last two months, markets have been crashing around the world due to fears of stalling growth and debt crises. In fact, the last year has seen high levels of market volatility due to increased pessimism about global economic prospects. If we read the financial press, most of it talks about impending debt crises and impending financial crises that threaten to derail the global economy.

Most analysts and investors seem to agree that the economic situation will only get worse from here. The Eurozone will have a default (and potentially break up), the US will go into recession, and India will continue to experience falling growth and rising inflation. In fact, the whole world will experience rampant inflation as central banks print large quantities of money.

The fear among investors is reflected in market movements. Gold has risen to unprecedented levels due to safe haven demand. Stock markets have suffered one of their worst quarters in recent history. The safe haven currencies like the dollar and yen witness high demand while other currencies suffer. The list goes on.

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The markets appear fairly convinced that the global economy is going down the toilet. Given the market movements and financial press, it comes as no surprise that most analysts and investors agree. But perhaps we should take a step back here, and try to analyze the situation more objectively. After all, things are never as bad as they seem, right?

Let's start with the US economy. Currently, the public debt is close to 100% of GDP; a figure many claim is unsustainably high. However, it need not lead to a collapse. During WWII, US public debt went above 120% of GDP and the economy boomed in the 1950s onwards. Moreover, interest rates are currently at historically low levels, so servicing this debt is easier than it would be have been in the past. Granted, the debt level is too high and it needs to be reduced. But there's no reason to believe that the current debt level will lead to a collapse.

There is much talk about the US entering another great depression. However, if we look at the hard facts, the US is nowhere close to another great depression. The economy came out of recession and has been growing since late 2009. Sure, growth rates are low and this is a cause for concern. But the economy isn't in a recession, and certainly not anywhere near a depression. During the great depression, 1 out of 3 people were unemployed. Today, that figure is 1 out of 10, a long way away.

Now let's talk about the Eurozone. The situation in Europe is bad, but it is not a catastrophe, at least not yet. GDP growth is still positive, and unemployment has remained steady at 10%. Though the debt crisis has had a large negative impact on the financial sector, the real economy hasn't suffered dramatically. Whether the debt crisis turns into a catastrophe depends a lot on how the politicians handle the situation.

It appears now that the politicians have grasped the severity of the debt problems. While we love to talk about how incapable and corrupt politicians (especially Indian politicians) are, it does look like they are making a genuine attempt this time to solve the debt crisis. Of course, they may or may not be successful, but we should see what happens first before assuming that a collapse is eminent.

Finally, let's discuss the Indian economy. GDP growth rates have been falling, interest rates have been rising, and inflation remains high. The political system is fraught with corruption and unable to pass through the necessary economic reforms to keep the economic growth high. All this paints a very gloomy picture indeed. No one's talking about a crisis here, but the mood has certainly become more downbeat.

Even though GDP growth has fallen, it still remains at high levels, especially from a historical perspective. From independence until 1991, economic growth averaged 3.5% per year. Since then, growth has increased dramatically. Currently, the economy is growing at above 7%. No, unfortunately it is not the 10% we wanted, nor is it as good as China's growth, but 7% is still very good. At the current growth rate, the country will double its income every 10 years. This is not bad at all.

The Indian economy certainly has its problems, but there is no reason to believe that things are going to get dramatically worse. Growth has been slowing but it is still high. Inflation hasn't come down but it hasn't shot up either. We are witnessing some kind of slowdown, but the long-run outlook is quite positive.

The purpose of this article is to highlight some misconceptions about what is going on in the global economy. It is certainly true that many challenges face the global economy and it is quite likely that we will see a slowdown occur in the near future.

But if we take a long-term view and look at things from a historical perspective, we can see that the global economy has been in far worse situations, and usually came out stronger. There is a possibility that we will witness an economic collapse if things get out of control, but it is by no means imminent. The reality is that things are not as bad as they seem.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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8 Responses to "Are we too Pessimistic?"

sun

Oct 4, 2011

if you see in the currency already 12% or 13% fall in the rupee.
I am not so negative. Markets always irritate you when they are going down and
this is a perfect time where you can start building a portfolio.

Knowing very well that you could have some more burns via on the way
down but markets always test your nerves to sort to speak. I am not
negative at all this point in time,The Indian market has already discounted
the Greece bad news. I am hope time can be wasted in these
situations. We always know that markets take their own time to do things,
effectively this is a time to build a portfolio that is what I will say
one thing is certain. This market gloom and doom made many stocks
valuation at mouth watering level
The sentiment that US market were trading in flat territory after
a recovery on positive auto and PMI data at 10 PM, but crashed 250
points in later trade. Why Market yesterday crashed nobody know.
But market is market. It has its’ own logic for the move.
Investment Gurus in world and
their view sensex is good level to Invest

Like 

shrikanth

Oct 3, 2011

Surely Asad is more intelligent than that... He knows but fails to highlight...
- US boomed after WW2 because of the war, it had the factories churning out what all the rest of the world needed to rebuild. Today it has neither the factories, nor does the rest of the world itself in contraction want them.
- India at 7%, and say even 3% is good when the rest of the world is at 0% is that not PATHETIC... Adjusted for 10% inflation, we are -3% already... every Indian feels it, but does not seem to understand it...
ALL THIS WHILE we can grow at 10%... oh! the futility...
whence comes the Pessimism...

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Murugan

Oct 3, 2011

the Indian economy has it's own way whether the politicians do something or not.it will continue to grow regardless of what the politicians do.

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Murugan

Oct 3, 2011

it's imminent and not eminent.

Like 

joseph

Oct 2, 2011

Are you really that confused or acting like a confused person!! As I earlier commented it is unfortunate but I think these articles are one of the most shallow analysis I have ever read!!

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rajeev dhagat

Oct 2, 2011

sir,
iwant one trial in commodity asad dossani research . i am really intrested . how can subcribe without performance.
Thanks

Like 

Pawan

Oct 2, 2011

I agree! If inflation is taken care of, there is still huge untappped demand in India. Even if our economy grows at 5%, Index earning will grow at 10%. This is better than an FD any day. I expect Index to triple in the next 10 years in a realistic scenario. Of course the days of Index going up 5 times in 5 years are gone!

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Rajeev Mujujmdar

Oct 1, 2011

I would restrict my comment about Indian economy. Asad says that our growth @ 7% is not bad at all. I agree. But where I feel concerned is what hereafter? How do we assume that the growth rate would not fall to say 6% next year? One cannot see any policy initiatives that would arrest further decline of growth. Both the ruling coalition & the opposition parties appear in a state of constant confrontation. There are serious differences within ruling coalition partners. Other issues like constant meddling by members of the NAC, recent statements of planning commission on BPL, flight of both FII & FDI away from India etc only make the situation murkier.Every parliament session ends with no worthwhile business getting transacted. It is this singular factor that inspires no real confidence of the present declining trend getting reversed. I feel Asad is too optimistic.

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