Thursday, April 23, 2009

IMF Notices Recession; Possible Sovereign Defaults

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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In what could only be described as 'you heard it here last' news, the IMF (International Monetary Fund) has just released a report that predicts the deepest global recession since the Great Depression. What caused this great revelation is a mystery. Perhaps they finally started reading last years papers and realized all the economic news around the world was bad. We'll probably never know. Meanwhile, U.S. News and World Report has complied a list of countries in danger of default - and get this, Argentina is on the list. Well, that is a shocker! A country that has defaulted on its debt over and over and over again is at risk of defaulting again. Who could have predicted it?

I have often said economists are the last people to know about a recession. Apparently, international economists take this concept to an extreme. While anyone who doesn't live in a cave has realized for at least a year that there have been serious global economic problems (the New York Investing meetup itself predicted recession in December 2007), the IMF has finally come out with a prediction of global contraction in 2009. They are predicting a 1.3% drop overall and a 3.8% drop for the advanced economies. The IMF is also predicting that the major economies will have budget deficits of 10.5%. Who the money is going to be borrowed from when almost every government has a big deficit was not in the report (they should have just included a picture of a big printing press). The current IMF forecast is the fifth downgrade for global growth in a little over 6 months. Thank you IMF for that timely update.

As for the risk of sovereign defaults, this is based on information from the ratings agencies S&P and Moody's, the people who gave subprime loan securities triple A ratings (well, there's no question that they're on top of things). Pakistan, which already defaulted 6 months ago is in danger of defaulting again. The usual Eastern European suspects, the Ukraine, Belarus, and Latvia aren't in good shape either (and you could probably add three to four more countries in the region). Closer to home, Mexico is in danger of default. It is only a question of when and not if for a possible Mexican default. Mexico gets a significant percentage of its federal revenues from the rapidly declining Cantarell oil field and its budget problems are only going to get worse. The U.S. will have no choice but to bail out Mexico. The IMF will take the lead for the other countries (picture that printing press again). Countries not on the list include Greece, Portugal, Spain and Ireland. Well, maybe next year.

As an investor you should be concentrating only on what is likely to happen sixth months in the future. News that everyone already knows is irrelevant because it has already been priced into the market. That doesn't mean that the mainstream media won't announce it in blaring headlines or give it dramatic coverage. You need to ignore all of these superficialities. You also need to consider whether or not you are the last to hear the news. If a stock price has already been going up long before some good news has been officially announced, you can be pretty assured that lots of other people knew what was going on long before you did.

NEXT: The Gold is in Eastern Capitalism

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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