OBAMA’S ECONOMY IS NEARING EXHAUSTION

BlackRock, the world’s biggest investor, has warned that central banks are poised to tighten monetary policy in the Anglo-Saxon countries and China, advising clients to be ready to pull out of global stock markets at any sign of serious trouble.

"2014 is the year to squeeze more juice out of risk assets. But investors should be ready to discard the fruit when it starts running dry," says Ewen Cameron Watt, chief strategist for the BlackRock Investment Institute.

The group says in its 2014 Investment Outlook that investors have "jumped on the momentum train, effectively betting yesterday’s strategy will win again tomorrow," but vanishing liquidity could leave them trapped if the mood changes. "Beware of traffic jams: easy to get into, hard to get out of," it says.

BlackRock, which manages funds worth $4.1 trillion, says the global system is still in the doldrums and far from achieving sustainable recovery. "The eurozone, Japan and emerging markets are all trying to export their way out of trouble. Who is going to buy all this stuff? The math does not work. Not everybody’s currency can fall at once," it says.

The report says Wall Street is not in a bubble yet but BlackRock’s risk indicator — measuring "enterprise value" against earnings, adjusted for volatility — is almost as high as it was just before the dotcom bust. "The ratio of the two is the key. High valuations combined with low volatility can make for a lethal mix. This market gauge sounded the alarm well before the Great Financial Crisis," it says.

It advises sticking to European and Japanese equities, with a contrarian bet on carefully chosen emerging markets through the medium of foreign multinationals. The wrong emerging markets face the risk of "currencies in freefall, capital controls and expropriations."

BlackRock says there is a 20% risk that world events could go badly wrong, either because the eurozone acts too late to head off deflation or because of a chain reaction as the US Federal Reserve starts to wind down stimulus in earnest.

"The banking system in the eurozone periphery is under water, with a non-performing loan pile of €1.5 trillion to €2 trillion. Germany and other core countries are unlikely to pick up the tab. Eastern Europe could become the epicenter of funding risk in 2014 due to big refinancings," it says.

BlackRock says the eurozone is "stuck in a monetary corset," failing to generate the nominal GDP growth of 3% to 5% needed for economies to outgrow their debt burdens.

The European Central Bank has allowed passive tightening to occur as banks repay funds under the ECB’s long-term lending operations. The group says the ECB may have to start printing money, but the politics are toxic. "German opposition is a roadblock, unless the risk of deflation expands beyond Europe’s southern tier," it says.

The risk in the US is that Fed tapering could cause the housing recovery to stall. The Fed has purchased three times all net issuance of US mortgages so far in 2013.

BlackRock says the profit share of GDP has soared to a modern-era high of 12% of GDP, while the workers’ share has collapsed from 66% to 57% in one decade. "This speaks to troubling trends of growing inequality and weak wage growth, and brings into question the sustainability of profit margins."

Emerging markets are no longer accumulating foreign reserves at the same torrid pace. The annual growth rate of reserves has dropped to 7% from 40% five years ago, which implies far less money flooding into global bond markets. "This is bad news for struggling advanced economies and financial markets addicted to monetary stimulus," it says.

 
There is a 25% chance that the world navigates these reefs and achieves a "growth break-out." Even if that happens it will not help stocks, and will be "bad for bonds." The Goldilocks outcome for markets is another year of feeble growth, buttressed by central bank largesse that leaks into asset bubbles.

In other words, they are saying that what is good for investors is corrosive for societies.  That’s Obamanomics at work.  So just why is he demagoguing "income inequality" when that’s exactly what his policies are creating?
 
Ambrose Evans-Pritchard is the International Business Editor of the London Telegraph.