Stagnation is upon us!

October 3, 2011

Stagnation – Goldman Sachs’ view

According to Goldman Sachs, there is a 40 per cent chance that the global economy will move into a period of stagnation should US and Europe policy makers fail to restore confidence.

Goldman Sachs believes that the USA and Europe already exhibits signs of stagnation defined as a long period of sluggish growth of below 1 per cent, low inflation, rising unemployment, a stagnant property market, and low returns on shares.

Also, having researched 150 years of macroeconomic history, Goldman Sachs found that the probability of stagnation is much higher after banking and financial crises such as the one that began in 2007.

1930’s crisis looming?

Several commentators have suggested that the recent 2007-09 bear market is only the first leg down of a 1930s type market cycle.

The last two years can be characterised as a rather flat-line period of stalled growth. Many expect the next leg down to start anytime, due to the ongoing debt crisis in Europe, a slowing American and European economy and a potential hard landing in China and other emerging countries.

Action taken, so far

To counter the risk of stagnation, the U.S. Federal Reserve is replacing $400 billion of short-term government debt with bonds of longer maturity in a bid to lower borrowing costs and bolster the economic recovery.

Most Bank of England policy makers said last month that it is “increasingly probable” more asset purchases will be needed to support growth, while European Central Bank officials are likely to debate restarting their covered-bond purchases and further measures to ease monetary conditions.

Two years into the euro-area debt crisis and with investor concern growing that Greece will be unable to avoid default, the U.S.A. and the United Kingdom are urging European governments to go further and show more urgency in order to restart growth before stagnation becomes ingrained.

Dividend Income

If the second leg down were to happen, we are likely to see a sharp pull back in shares and commodities.

Cash-rich long-term dividend income investors will then be able to invest in many historically undervalued high quality dividend paying companies.

Do you expect a second leg down in share prices? What action are you currently taking to survive and prosper if a period of stagnation hits us?

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{ 1 comment }

Anonymous October 16, 2011 at 5:35 am

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