Davos, World Economic Forum

January 31, 2010

You may have heard about the goings-on at Davos. If you’re like me you are probably wondering what all the fuss is about. The Davos World Economic Forum is a rather oversold talking shop, where – truth be told – nothing very substantial happens. But Davos is important because it is a place where the world’s movers and shakers set their jib for the coming year. And, considering these players represent major forces in the economy and capital markets, their general perceptions are important to businesses, large and small, in the real economy.

The themes that are getting all the attention this year are the recovery (so called) which seems to be faring much better than most pundits expected this time last year. These positive sentiments are, however, contrasted by a dark prevailing gloom; nobody seems to expect the global economy to return to robust growth anytime soon.

The reasons lie in the now obvious structural flaws in the international system. First of all, there is the big problem of global imbalances, which have been growing for decades. The problem is most countries around the world are planning export-lead growth strategies and secretly (quietly) taking steps to limit imports. The obvious flaw in this logic is with everyone exporting ‘who will be importing’? The answer… not the United States which for sixty years has played that role and today is simply not capable of carrying the world on its shoulders.  So this structural flaw will very likely lead to a downward spiral of currency manipulations, increasing protectionism and mud-slinging – not a happy prospect for growth.

The elephant in the Davos room is, of course, regulation of the banking industry. While bankers are reluctantly admitting (at least publically) that greater regulation is coming, they prudently point out that such regulation must be globally coordinated. This is true, but as the bankers know only too well, is practically impossibility in the time frame. So the bankers are cranking things back up and trying (without much success) to avoid saying anything foolish.

The fact of the matter is it’s not the 1930’s or even the 1980’s anymore, the world of credit and banking have changed, morphed into a self perpetuating, multi-headed hydra that nobody really understands. It’s NOT about banking anymore, for the banks themselves are only one part of a much larger global credit market ‘system’ that is beyond the scope of national regulation. Such contentious issues as bank proprietary trading, securitization and credit derivatives are not going away; fact is, they simply defy national borders. So the genie cannot be put back in the bottle. And, given the damage they’ve caused in recent years and the hopelessness of trying to bring them under any kind of supervisory system, more trouble undoubtedly awaits.

Finally the sovereign debt crisis has been reduced to farce. Unfortunately it is the most likely trigger for systemic crisis this coming year. Last week with the price of Greek gilts (government bonds) falling like a stone and yields rising, the EU intervened with a ‘kind of’ guarantee, which was greeted with a huge sigh of relief in markets.  But the underlying sentiment is not good. The latest, not very funny joke going around is that the “Pigs” won’t fly: the Pigs are Portugal, Ireland, Greece and Spain, who all have chronic debt problems and who now find themselves consigned to the financial out-house, with Greece at the head of the line.

Things to Think About:

  1. Most of us were hoping that this recession would be like previous recessions. We’d have a bit of belt tightening and then things would return to normal. That doesn’t look likely, at least in the near term, so a new normal of (at best) stagnant growth, increasing trade friction coupled with growing government fiscal crises will put the squeeze on business.
  2. The status quo, easy returns of the past are going to be much more difficult to maintain in the coming years. But every crisis presents both danger and opportunities, there will be growth areas in the economy, which need to be identified and focused on. Areas of growth seem to be emerging in Energy, Health Care and the Green/Environmental market spaces.  However, even in these areas new thinking, innovation and flexibility will be required to find and capitalize on opportunities.

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