New York university professor Nouriel Roubini is hardly Mr. Sunshine.
The New York Times famously dubbed him “Dr. Doom.” And for good reason…
On Sept. 7, 2006, he stood in front of an audience of IMF economists and told them a crisis was coming.
He warned that the U.S. would face a once-in-a-lifetime housing bust brought on by widespread mortgage defaults, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession.
The audience dismissed Roubini’s forecast as the latest utterings of a “permabear” – someone perpetually pessimistic about the economy.
But Roubini was right. And his audience was wrong. The U.S. mortgage market was headed for massive defaults…oil prices would spike…and the worst recession in a generation would follow.
Roubini remains pessimistic about the global recovery.
In a recent interview he said that a “perfect storm” of Washington’s fiscal woe, a slowdown in China, the prospect of sovereign default in Europe and stagnation in Japan meant there was a one-in-three chance of another shock to the global economy in 2013.
This is hardly a rosy picture. And since the start of May we’ve already started to see a significant correction in global stocks.
Why Super Cycles Matter
This is a worry for global investors. But it is vitally important that you see the woods for the trees.
I’ve just finished reading a piece of research by Standard Chartered bank. And it puts the current difficulties where they belong: in the context of longer-term cycles.
Standard Chartered calls these “super cycles.” And it’s critical you understand them if you want to make successful long-term investment decisions.
The report defines a super cycle as: “A period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanization and technological innovation.”
The first of these super cycles took place during the second half of the nineteenth century, from 1870 to 1913, the eve of World War I. During this time, global growth averaged a rate of 2.7% a year – 1% higher than was seen in the preceding 50 years.
The U.S. was the big gainer here. It moved from being the world’s fourth-largest economy to being the largest.
The second super-cycle happened after World War II until the early 1970s, when stubbornly high inflation combined with slumpy growth derailed progress.
World growth averaged 5% during this period. And Japan and other “Asian tiger” economies were the biggest winners. Japan, for instance, moved from being 3% to 10% of the global economy.
The Third Super Cycle… And How to Play It
Standard Chartered believes the third super cycle – the one we’re in now – started in 2000. Despite the recent recession, the world economy has grown from $32 trillion to $64 trillion.
And according to the bank’s calculations, if you keep prices and currencies the same as they are now, that will reach $129 trillion.
These are huge gains. And they represent equally huge investment opportunities for investors who are prepared to buy into the current doom and gloom scenario and hold for the long term.
Take China for instance…
I believe we will see a dip in the Chinese economy soon as a result of a much-needed slowdown in the real estate market there.
But factoring in a stronger yuan, as the current super cycle plays out, we could see the average income per head in China go from $4,166 to $21,420.
Put simply, China would go from being a poor economy to a middle-income economy.
This has happened before. Over the last half century, South Korea went from being on a par with many African economies – low income and underdeveloped – to being the 15th largest economy in the world.
Investors who saw this transformation coming, such as the godfather of overseas investing, Sir John Templeton, made a fortune.
And there is no reason why the same thing won’t happen again.
That doesn’t mean the current fears over the recession aren’t justified. They are. And Roubini is right to raise a flag over Washington’s dithering over the debt and the ongoing structural problems in Europe and Japan.
These matter now. But investing is not about what happens now, but about what happens next.
Now, investors are fearful. So we need be greedy.
I’ll have more specific recommendations for how to play this situation for readers of International Living Investor.