Henk van de Goor's Bloggers@large

Wall street hit hard

In no way can this be seen as a normal bear market. This is undoubtedly the worst financial crisis in the developed world since the 1930s. The only period remotely similar was the bear market of 1973-75, which was itself a part of the extended 1966-82 bear market in US shares. That bear market was driven in part by a 13 fold increase in oil prices from 1972 to 1980. This time we have had a 14 fold increase in oil prices from the $10 low of 1999. Last time we had massive inflation of 20 percent per annum. That has not yet arrived but may well be in the pipeline.

However, in my view, the situation is far worse this time since the US financial system is extraordinarily stretched and stressed. Last time we only had the minor bankruptcies of Franklin National Bank and Continental Bank to contend with. Then there were no derivatives. This time they amount to more than 10 times world GDP and a greater multiple of bank capital. Within that total the most toxic ones are those unlisted, opaque, over the counter variety amounting to over $50 trillion, again multiples of US bank capital.

The revolution in market finance that began with the deregulation of the 1980s may be about to eat its young, as we have seen with the putative bailouts of Fannie Mae and Freddie Mac; if nationalization goes ahead the US visible national debt increases by $5 billion and is effectively double. The US would no longer qualify to join the Euro!

The US budget deficit could be on the verge of exploding upwards. Including war costs it is already over 4 percent of GDP. The economic slowdown and President Obama's plans for healthcare, whist noble and justifiable, even after tax increases, could send the deficit north of $1 trillion or 7 percent of GDP by 2010.

I believe we are entering a new phase in the global economy, one with increased government regulation, controls and spending. The old Thatcher-Reagan supply side revolution is likely to take a breather and a return to a modified Keynesian is a possibility. This is driven by the increased scepticism in developed economies about globalization, largely because the rewards have not been adequately distributed. This accords with the likelihood that the 36 year cycle in US Presidential elections will probably make the Democrats the leading party of government in the coming years with all that means for interference in the economy – and inflation.

The extent to which the growing scepticism of globalization in developed economies affects the future growth of emerging markets cannot be determined at this time. At the margins growth may be reduced slightly but the fundamental factors changing the shape of the global economy are too strong to be derailed. Emerging markets remain a field of great opportunity, especially after recent declines in countries like China, India and Vietnam. Others with essential commodities are exciting. Powered by Chinese and Indian investment, Africa could have a renaissance. Those with financial imbalances like those in Eastern Europe should be avoided.