We’re living in frightening — but also exciting — times. Signs of impending disaster abound, together with portents of great hopefulness. Small wonder so many financial gurus have been tossing off extreme forecasts, cheery or gloomy.
So who’s right? Nobody has 20/20 vision into the future, and pundits who shout louder than their peers don’t necessarily see the horizon any more clearly.
However, we can learn from both the doomers and the boomers. Chances are, at least some of the issues each side is highlighting will, in fact, move the markets significantly in the months and years ahead. The key is to figure out which issues, when and to what degree.
Let’s take the doom case first. Here, in my judgment, are the most persuasive concerns the pessimists are voicing:
- Europe isn’t dealing effectively with its problems.
Despite at least 15 summits over the past two years, European leaders still haven’t found a lasting solution to the continent’s sovereign-debt woes. Greece will almost certainly default within the next few months. Hungary and Portugal will probably follow soon after. While the latest European Central Bank liquidity injections have bought time for Italy, Rome still must raise about 90 billion euros between February and April alone to refinance its debt.
In today’s interconnected world, it’s a stretch to imagine that the U.S. won’t feel any impact from Europe’s oncoming recession. (America’s technology companies net 25% of their sales from Europe.) Greece by itself may not have been such a big deal, but Europe is.
- The current economic expansion is uncommonly weak.
Whether you trace the cause to the housing bust, China’s predatory trade policies, bailout fatigue or something else, two facts stand out: Abnormally high unemployment rates and abnormally low interest rates.
Never since the Great Depression has unemployment remained stuck at 8.5% more than two years after a recession ended. A healthy economy would have created far more jobs by now. Furthermore, near-zero rates on short-term debt tell us that business chiefs continue to see a lot of risk out there and a lack of high-payoff investment opportunities — hardly a mantra for robust growth.
- The U.S. government is frantically running up debt, while an entitlements crisis looms.
Total federal debt recently crossed $15 trillion, up 64% in just four years. But the monster’s appetite is just warming up. Already, Medicare is paying out more than it collects in taxes, interest and other income (by $37 billion in 2010), and this deficit will explode in the years ahead as baby boomers crowd into the system. Social Security is in somewhat better shape, but here, too, benefits exceed current tax receipts. Yet the president and Congress keep putting off any meaningful reform.
Points of Light
I could lengthen the list of negatives to fill the Encyclopedia Britannica, but we need to let the other side have its say. Amid the disheartening news, a careful observer can spot occasional pinpricks of light glimmering through, particularly on the domestic front: