A couple of thoughts on that World Bank report
The excuse given for the market sell off yesterday was the bearish World Bank economic outlook. Media is always looking to pin any market movements on some story so one can never be sure what the real cause may have been.
One might be tempted to lump the World Bank analysts into the group containing IEA and EIA (two energy agencies) as official members of the 'late to the party' club. Yet, I noticed two things that are quite surprising to me.
The first thing that stands out is how badly the developing world is forecast to be doing:
The 1.2% GDP growth for developing countries is terrible. The developing world tends to have higher population growth so these are the types of numbers that can cause crises—not just economic but also political. Even 6 months ago, which is not that far back, I doubt many would have ever forecast a sub-2% growth rate for the developing world. Remember, the developing world, for the most part, has little exposure to the financial crisis. That is, there are very few banks in the developing world, except in Eastern Europe, that are going bankrupt.
I am somewhat bearish and expect mild deflation so the World Bank numbers aren't a big surprise to me. When I heard the announcement yesterday, what was surprising, however, was that they revised down their estimate from April (or thereabouts.) Think back to April. That was when things looked really bad. This was before the green shoots started popping from the ground. Everything was going down and everyone was bearish. Yet, the current estimate is worse than what was made back then. It's pretty amazing to me that the current estimate was revised down from what was made in the dark days of April. It's possible that the World Bank is lagging badly but I suspect that's not the case. Instead, things are indeed quite bad and possibly even worse.
Having said all that, the stock market probably prices in most of this. My view is that the market is neither expensive nor cheap, and it can go sideways for a long time.
One might be tempted to lump the World Bank analysts into the group containing IEA and EIA (two energy agencies) as official members of the 'late to the party' club. Yet, I noticed two things that are quite surprising to me.
The first thing that stands out is how badly the developing world is forecast to be doing:
Developing countries are expected to grow by only 1.2% this year, after 8.1% growth in 2007 and 5.9% growth in 2008. When China and India are excluded, GDP in the remaining developing countries is projected to fall by 1.6%, causing continued job losses and throwing more people into poverty.
The 1.2% GDP growth for developing countries is terrible. The developing world tends to have higher population growth so these are the types of numbers that can cause crises—not just economic but also political. Even 6 months ago, which is not that far back, I doubt many would have ever forecast a sub-2% growth rate for the developing world. Remember, the developing world, for the most part, has little exposure to the financial crisis. That is, there are very few banks in the developing world, except in Eastern Europe, that are going bankrupt.
I am somewhat bearish and expect mild deflation so the World Bank numbers aren't a big surprise to me. When I heard the announcement yesterday, what was surprising, however, was that they revised down their estimate from April (or thereabouts.) Think back to April. That was when things looked really bad. This was before the green shoots started popping from the ground. Everything was going down and everyone was bearish. Yet, the current estimate is worse than what was made back then. It's pretty amazing to me that the current estimate was revised down from what was made in the dark days of April. It's possible that the World Bank is lagging badly but I suspect that's not the case. Instead, things are indeed quite bad and possibly even worse.
Having said all that, the stock market probably prices in most of this. My view is that the market is neither expensive nor cheap, and it can go sideways for a long time.
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