STOCK MARKET WATCH -- Wednesday, 2 April 2014

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19. Markets may be underestimating threats to the global economy

http://www.theguardian.com/business/2014/apr/02/financial-markets-risks-to-global-economy-nouriel-roubini

***SNIP

Similarly, the risk of deflation worldwide has been contained via exotic and unconventional monetary policies: near-zero interest rates, quantitative easing, credit easing, and forward guidance. And the risk of a war between Israel and Iran has been reduced by the interim agreement on Iran's nuclear program concluded last November. The falling fear premium has led to a drop in oil prices, even if many doubt Iran's sincerity and worry that it is merely trying to buy time while still enriching uranium.

Though many Middle East countries remain highly unstable, none of them is systemically important in financial terms, and no conflict so far has seriously shocked global oil and gas supplies. But, of course, exacerbation of some of these crises and conflicts could lead to renewed concerns about energy security. More important, as the risks of recent years have receded, six other risks have been growing.

For starters, there is the risk of a hard landing in China. The rebalancing of growth away from fixed investment and toward private consumption is occurring too slowly, because every time annual GDP growth slows toward 7%, the authorities panic and double down on another round of credit-fueled capital investment. This then leads to more bad assets and non-performing loans, more excessive investment in real estate, infrastructure, and industrial capacity, and more public and private debt. By next year, there may be no road left down which to kick the can.

There is also the risk of policy mistakes by the US Federal Reserve as it exits monetary easing. Last year, the Fed's mere announcement that it would gradually wind down its monthly purchases of long-term financial assets triggered a "taper" tantrum in global financial markets and emerging markets. This year, tapering is priced in, but uncertainty about the timing and speed of the Fed's efforts to normalise policy interest rates is creating volatility. Some investors and governments now worry that the Fed may raise rates too soon and too fast, causing economic and financial shockwaves.