World Economic Forum set to begin today
The World Economic Forum's annual meeting in Davos, Switzerland, which kicks off on Monday. The fastest global growth since the start of the decade and strong forecasts for corporate earnings appear to be creating near perfect conditions for many investors, with stock buyers' optimism hitting an eight-year high. Equities worldwide are already up about $3.4 trillion in 2018, with gains continuing even as major gauges flash overbought signals. Bitcoin is on a rollercoaster.
"Historically the stock market tends to affect the mood in Davos,'' said BlackRock Inc. Vice Chairman Philipp Hildebrand, who will be among the 3,000 visitors to the Alpine ski resort. "So if things stay as they are, I expect the mood will be good.'' The question is, can things stay as they are? Not all of those in Davos are sure they can. "We are complacent at this moment," said Robert Shiller, the Nobel laureate from Yale University whose research covers the rise and fall of asset prices. He goes as far as to say there are potential parallels between today and 1929, when a plunge in stocks helped trigger the Great Depression.
Any correction would be "probably not as bad as 1929, but it could be disruptive," Shiller said in an interview. More upbeat is Harvard University professor Kenneth Rogoff, who argues the "long shadow of the financial crisis" is finally fading, so "growth will continue to outperform." The International Monetary Fund will on Monday use Davos as a stage to update its economic outlook. While the meeting's forecasting track record is patchy, delegates occasionally get the big calls right. Back in 2007, global growth seemed solid and stocks were soaring, yet former U.S. Treasury Secretary Lawrence Summers said that "it's worth remembering that markets were very upbeat in the early summer of 1914." Nouriel Roubini of New York University predicted a "hard landing."
The financial crisis proved both correct. Here, according to some who will be in Davos, are the potential threats to the current outlook. The world's secondlargest economy surprised on the upside through 2017, but is beginning to show renewed signs of cooling. A plan to reduce risk in the financial system has slowed credit growth, but the country's debt pile, equivalent to about 264 percent of gross domestic product in 2017, remains a concern. How the Chinese authorities rein in borrowing without tipping the economy over will be one of the year's biggest challenges.
"I think of China as probably being the epicenter if we got hit by a global recession," said Rogoff. It's not just China. Global debt rose to a record $233 trillion in the third quarter of 2017, more than $16 trillion higher from the end of 2016, according to the Institute of International Finance. Private non-financial sector debt hit all-time highs in Canada, France, Hong Kong, South Korea, Switzerland and Turkey.
As interest rates begin to increase, borrowers might start to feel pain even though the ratio of debt-to-GDP has fallen as growth accelerated. "We've seen the world leverage up," said Tim Adams, the institute's president who will be in Davos. "It's been an incredibly low rate environment which I suspect is going to change." The trigger for the end to that environment could be an inflationary surge that forces central banks to dump their piecemeal approach to reversing the emergency stimulus of the past decade.
With economies expanding so quickly, commodities prices are picking up and manufacturing gauges are pointing to supply constraints. The US also just slashed taxes, and some big employers, like Walmart Inc., are beginning to lift wages. "We could start to see inflation rising more than most people think in financial markets which means the Fed and other central banks will have to raise rates sooner and faster," said Nariman Behravesh, chief economist at IHS Markit. "That could rattle things up."