Two elections in Europe in a month will certainly ruffle the feathers of financial markets.

The populist surge is being restrained for now, but several factors are likely to drive up sovereign bond yields in Europe.

The dollar’s multi-year bull run might last a couple more months, but its fundamental underpinnings are weakening.

Globalization and alliances are at risk.

With the sizeable majority voting no to political reform in the Italian referendum, the anger vote has claimed its next victim – Italy. The dominoes of Brexit, Trump and now Italy continue to fall.

The rise of populism in general, and Trumpism in particular, brings severe geopolitical and economic risks and could have a disastrous impact on growth and productivity.

Another European banking crunch is on the horizon thanks to legacy problems that have not been fixed.

The European Project faces a much greater danger from the rise of populism than from the sovereign debt crisis.

The advantages of helicopter money are dubious and they come with large risks attached.

The failed coup in Turkey shows that we are in one of those periods in history when politics matter as much or more than economics for financial markets.

US growth should start a strong rebound this year, increasing the chances of rate rises.

Central bank initiatives are carrying less and less influence and their diminishing returns increasingly point to a toxic race to the bottom.

When the numbers look bleak and central banks are out of tools, cash and gold make sense.

Weaknesses in Japan and Asia will mean a flight to quality.

It is going to be a bumpy ride for Asia and other commodity-producing economies this year.

The euro is on course for parity with the dollar in 2016.

Britain’s renegotiation of its relationship with the EU could be a good thing for Europe too.

The country is an indicator of the European Union’s future.

The US Federal Reserve has harmed its credibility by postponing a rate hike.

Renzi’s reforms and favourable winds seem to be working some magic on the country’s numbers.

Structural problems and over-leverage mean the focus will switch to Asia for the next global currency moves.

Investors ignore valuation at their peril – a period of lacklustre returns looms. The Fed’s move on interest rates is key.

The newly elected Tory party must wrestle with an invigorated SNP and its old bête noire, the EU. The proposed in/out referendum will cast a long shadow over the UK.

The eurozone recovery looks increasingly secure but the low growth rate is still a big cause for concern.

At times the ECB seems to lurk so far behind the curve that it appears to be using some sort of random monetary-policy generator.

Political pressures and lack of growth have put the European project under threat. Reform is urgently needed to set Europe back on course.

The eurozone’s economic fortunes should start to recover with the arrival, at last, of full-blown quantitative easing. As the world’s leading currencies are set for a race to the bottom, it could be time to buy gold.

Time is running out for Italy to make the reforms it needs to produce a self-sustaining recovery.

The US looks to benefit from a changing energy landscape, at the expense of Russia and the Middle East, while Europe will be happier to be less reliant on those producers.

The financial sector remains central to the eurozone’s economic woes. Promises of ECB support only prolong the problem.

The ECB president is striving to stave off deflation in the eurozone yet Germany will not countenance full quantitative easing. Something must give.

The big happening in the next 12 months will be the repricing of global capital. It will impact the price of every currency and asset. It’s a complex and exciting story.

Key energy suppliers are increasingly politically unstable and Europe faces a rise in prices, even though demand is falling.

ECB president Mario Draghi has resisted using his quantitative easing bazooka up to now. However, with inflation expectations already moving lower, he will have to fire it before the year is out.

There is no time to waste for intervention to overcome persistently low inflation in the eurozone.

The ECB view that eurozone disinflation is slowly reversing is unconvincing. QE might be the only strategy left, although it is not risk free

The crisis in Crimea should give the west pause for thought in its relations with eastern European states and with Russia.

The EU elections are likely to deliver big gains for populist parties of the left and right, namely those opposed to the European project and/or further integration.

A more optimistic picture of the eurozone economy is clouded by deflationary pressures, which are especially perilous in Greece. There is no easy fix, but a cheaper euro would help.

US claims that Germany’s external surpluses are hindering global recovery are inaccurate and unjustified

The debt crisis is not over. A renewed bout will spring from banks in the EU periphery.

Germany will dig in its heels about structures that might put it in a minority in decision-making and might expose its taxpayers to unwanted bailouts.

The Fed’s U-turn on tapering and the likely shakiness of any coalition Merkel builds in Germany both add uncertainty to investor sentiment.

Despite recent positive GDP figures, there is still depressed consumer demand and tight credit in large parts of the single-currency area.

Dovish forward guidance from the European Central Bank has been followed by a similar approach from the Bank of England.

The immediate actions of key financial strategists have a direct impact on the markets. But what of the trends that are beyond these leaders’ control?

There is just about enough global growth activity to sustain growth-dependent assets. But stagnating Europe remains the weak link that could disrupt peaceful progress.

The Cyprus solution is inadequate as well as sending the wrong messages on depositors’ risks and free capital flows. Then there’s Slovenia... and Italy.

In the ledger of economic recovery, reasons to be optimistic are neatly balanced by reasons to be pessimistic.

The mini-deal reached to avert the US fiscal cliff offers no solution to excessive public borrowing, which has to be dealt with by the end of this month.

Spain, Italy and Greece should not expect a happy new year – the eurozone’s bumpy ride is set to continue.

The US, Japan and Europe will be too cold next year. Manufacturing from emerging economies might be too hot. The result, though, might be just right.

Domestic political concerns continue to stall progress on solving the euro crisis. Fortunately, there are more propitious financial indicators elsewhere in the world.

Financial markets should benefit from recent policy moves in the eurozone and the US, but the underlying economic picture remains uncertain and potentially grim.

Eurozone moves to resolve the euro crisis are propitious for global markets. But an Israeli attack on Iran this autumn would undermine economic recovery.

The pressure is on for the US to get its private and public sector debt down – through inaction.

Spain cannot expect pan-EU economic reform measures to be introduced quickly enough to save itself from a troika programme.

None of the policy responses, monetary or fiscal, addresses the real global sickness: debt.

The end of QE support means that markets must face up to a repricing of assets on the basis of economic reality.

Greece will be forced to default and face an exit from the eurozone. That’s when the issue of contagion will rear its head again.

The strongest support for a bullish view of growth comes from US prospects. However, caution is warranted even here. Bearishness seems appropriate elsewhere...

"Bankers are not going to repeat the errors of the past or buy 10-year bonds with three-year funding. Such a duration mismatch would ultimately be suicide"

Europe’s leaders aren’t giving the currency what it needs: reform, fiscal discipline and international support.

Unless crucial links in the chain of contagion are broken and sufficient resources are provided to cover all sovereign liabilities, the eurozone is doomed.

The contagion of a euro debt crisis will not be restricted to Europe’s weaker states.

GDP growth must be sufficient to outweigh possible deleterious effects of sovereign budget cuts and measures to increase revenues. It’s an impossible ask for Japan and an extremely tough one for the eurozone.

In both the US and the eurozone there is a failure to recognize that the crisis is about solvency not liquidity.

A lengthy, post-stimulus grind of deleveraging is the most likely model for the world economy in the immediate future. This heralds some years of balance-sheet restructuring.

There are doubts that the peripheral countries have the will to cut and tax their way to stability. That leaves growth as the way to balance the books. Where will it come from?

Portugal’s debt crisis is as severe as Greece’s but can be resolved, painfully. The big upcoming sovereign debt risk is not from the eurozone but from the US and Japan.

Continuing political instability in North Africa and the Middle East, together with oil-supply constraints, will increase energy risks and therefore prices.

Higher global inflation and lower growth – stagflation – is on the way. Deflation is much further down the road.

Conditions for expanding the EU’s EFSF are set to be agreed by the end of the month. Even if only some of the Franco-German proposals are implemented, the euro will be greatly strengthened.

Germany’s fragmenting political scene tends towards stasis on big decisions, with key voting groups settling for conservatism. It bodes ill for the country’s role in solving EU problems.

If market confidence in the eurozone is to be restored, not just Greece and Ireland but also Portugal and Spain need the attention of the EU’s Financial Stability Facility.

The Irish government has been forced to take drastic steps that will cause short-term suffering. But its approach is one that other countries might later regret not having adopted.

The EU’s plans to tighten measures to prevent eurozone instability and discipline transgressors are admirable in theory. But implementation will be a tough task and is not in any case achievable until 2013.

Renewed quantitative easing is not a sound answer to the threat of double-dip recession or deflation. A credit bubble cannot be cured by pumping in more credit.

Market satisfaction with renewed US quantitative easing moves is as misguided as the Fed strategy itself. QE2’s perversions herald great pain farther down the road.

Tough times lie ahead for the financially challenged parts of the eurozone. But the rapid rebound in other eurozone countries will sustain Europe’s Economic and Monetary Union, as will Germany’s determination to export fiscal rectitude.

Markets have focused on the woes of the peripheral eurozone member states and their sovereign debt crisis but we should remember that public finances in the UK, the US and Japan are in an equally bad, if not worse, state.

The EU’s single-currency system is under great stress but will not reach breaking point so long as Germany wants it to survive.

Burgeoning sovereign debt is a threat to economic recovery, not a way to achieve it. It will crowd out borrowing for more productive purposes and will inevitably foster inflation and possibly defaults.

Piling on public-sector leverage in an attempt to cure a recession that was itself caused by excessive private-sector leverage makes no sense. It might even create stagnation.

There is no easy way out of the overleveraged situation many governments have got into. A sovereign debt crisis looms, and not just for the most profligate.

Greece has a tough road ahead of it to restore economic health and credibility. But those who believe it will default, leave the eurozone or abandon the EU are living in a fantasy world.

Germany’s fiscal discipline imperative, which perforce will be imposed on the whole eurozone, is the key to a more dynamic, less state-heavy EU economy.

The financial markets rally cannot be maintained because there is no way we can go back to the bubble economy of the past that was gorged by excess leverage. Far from being unwound, this has been sustained by governments.

The financial markets bounce is unsustainable. Demand will fall and corporate costs will rise as artificial stimulus is withdrawn and fiscal retrenchment kicks in. Expect an almighty splat as the markets drop.

Gordon Brown’s government has no clear strategy for dealing with the budget deficit. Nor does its likely successor, the Conservatives led by David Cameron.

The buoyant stock market is built on credit stimuli that cannot continue until there is a recovery in the real economy – and that is still way over the horizon.

Increased government borrowing is an unsound way to stave off recession. It puts sustained economic growth in peril rather than promoting it.

Big overseas holders of US dollar assets, with China at the forefront, will not be sold another pup. Instead of supporting wayward US financial policies they will increasingly diversify to other currencies.

The authorities have run out of ways to deal with the debt overhang and to create new credit. The only palatable way out looks to be a period of generalized inflation

There are limited IMF funds for ailing emerging economies, available only on stiff terms, and that means serious consequences for those that have lent to them.

Germany’s commitment to the EU project will guarantee bailouts for weaker eurozone members. But it’s a different story for hard-pressed central and eastern European states and their banks.

The eurozone’s advantages for both strong and weak members far outweigh any disadvantages that might incline countries to walk away.

This year is not set to be one of economic recovery – the financial assets that are cheap are cheap for a very good reason, and it’s not a propitious one.

The spread of the credit crisis to emerging countries will have more than just domestic repercussions.

Governments worldwide have moved to recapitalize banks. But the amounts injected will only be sufficient to avert a great depression; they are not enough to sustain lending and avert a global recession.

Short of a radical restructuring of the banking sector, the US government bailout will prompt a market rally. However the longer-term effects will be deleterious.

The greenback revival, driven by ECB recognition that the eurozone is faltering, will be sustained by the narrowing of the US current account deficit, the fall in the oil price and the US pursuit of a soft monetary policy.

There will be more rallies but the equity market trend is downward, and there’s a worrying backdrop of rising inflation mixed with declining growth.

Underlying the headlines are distortions in the market that can be overcome by liberalization.

Financial institutions’ woes are not at an end. Non-deposit institutions still have losses to book and the whole credit creation model is broken. So a quick and easy upturn from the credit crisis is not to be expected.

Only suckers believe that the remedies applied to the credit crisis have cured the underlying sickness. There’s more painful adjustment to come, and it could last two to five years.

More assets are yet to be hit in the credit crisis and, as leverage continues to fall out of play, liquidity will keep on drying up. Equity prices are bound to fall still further too.

The effects of the sub-prime crisis are spreading and could cost 2.5% of world GDP. Emerging market economies will not be immune.

The bad news: in 2008 a global recession is bound to set in. The scant good news: the oil price will fall back and the development of environment-friendly technology will fuel investment.

Eastern Europe has borrowed cheaply this decade to fund a credit binge. Now, as the global credit crisis starts to bite, the region’s economies are becoming increasingly vulnerable.

The big banks’ Mlec fund might well unblock the present credit log jam. But there’s no escaping the fact that global liquidity has contracted and capital is being repriced upwards.

Global liquidity is set to keep contracting and inflation will keep on increasing despite a growth slowdown. There is a serious risk of global recession in 2008.

The global economy may be strong, but that does not make it immune to cyclical liquidity contraction.

Bond markets are still too sanguine about inflation prospects. But present global growth rates will inevitably drain liquidity from the financial system.

The world economy is set to keep growing fast for the next few months. But this will take an inevitable toll on the cost of capital, which is already rising.

Market mechanisms, not inflexible penal taxation, are the way to deal with global warming. And market approaches also open profitable channels for investors.

The present run of stock market buoyancy cannot be sustained. And that’s not just because credit is set to contract – so, too, are corporate profits.

The recent sell-off in global stock markets will not be a repeat of last May – a short correction leading to new highs. There is now more to worry about in the global economy and the liquidity cycle is at a turning point.

Market expectations of interest rate stability fly in the face of growing signs of inflationary pressure and the likelihood of a move by the Federal Reserve.

Nothing is more likely to cause instability than a long period of stability. And excessive growth of credit and liquidity is a clear warning sign of crashes to come, probably within the next year.

Strong business confidence, healthy demand for German products and an increasing share of income going to capital belie fears that Germany’s growth rate is under threat.

Continuing high levels of capital liquidity rest on flows from securitization and derivatives, and from dollar dominance in international trade. Neither source is immune to a violent adjustment.

There are signs that liquidity-generated inflation is spreading from financial bubbles into the output economy.

Eurozone countries are continuing to boost productivity vis-à-vis that in the US; consequently European equities are outperforming American ones.

Inflation is set to feed into the US economy, with destructive effects. But the beginning of the process won’t be the consumer slowdown that so many expect.

With the recent sell-off behind them, Japanese and eurozone equities look to be more attractive growth or defensive prospects than US stocks.

Less liquidity in equity markets suggests that investment strategies harnessing volatility are appropriate.

The ability of the US to run a high current account deficit rests on a widespread belief that inflation and the cost of capital will remain low. But the conditions that underpin the deficit and the dollar’s role as the principal source of global capital are unlikely to be sustained for long.

Forget the stymied constitution, Parisian événements, electoral tangles and government overspending – eurozone corporates are doing just fine and consumers are picking up on the mood.

The US housing boom is set to collapse, with adverse effects on domestic consumption. This, unlike the slowdowns in Australia and the UK, will have a marked effect on global growth.

Conflict over oil and gas supplies is set to fuel tension between western Europe and Russia in coming years.

A repricing of capital is coming soon. But advances in risk management suggest it will be a prolonged process, not a quick flip into deflation.

Europe is in better shape than a cursory examination of its politicians might suggest.

Japanese equities are at the start of a sustained bull market that in the next two years will take the Nikkei well above 20,000 from its current 14,000 level.

China’s inefficient economy is under threat because its capital costs are set to rise, but it is as likely to falter because US consumerism hits the wall. And there are signs that American profligacy cannot be sustained much longer

A punctured US property bubble is not far down the line as inflationary pressures mount. When it comes, as treasury yields inevitably move up, the US economy will slow sharply

News of an election is already perking up the Germany economy. If a centre-right coalition wins, as seems likely, expect yet more improvement

A neat theory has it that long-term interest rates are stubbornly low because of excess savings in Asia. But the Federal Reserve can't get off the hook that easily

The US economy is in a fool's paradise – Europe and Japan are by no means doomed to lag behind it. But none of these rivals can afford to abandon free trade to cope with China's massive growth

As the huge US and global debt bubbles burst under the weight of the cost of servicing, the US is certainly not the place for investors to be this year. Look instead to Europe, Japan, cash and gold

Forecasts of a soft landing for the global economy are off the mark – disinflation is at an end and interest rates are on the rise. For safe havens investors should look to gold and the euro

Americans are poor exporters. A falling dollar can't change that. What with globalization, low-cost rivals and the downplaying of the greenback, a collapse rather than an adjustment looks likely.

The productivity gap between the US and Europe is not as wide as is commonly believed. And eurozone productivity is growing, with more of that gain accruing to investors than to workers.

Inflation differentials between countries are returning and investment analysts will reinvent the technology for weighing them. First in the balance will be the US whose assets look set to weigh light against those of Europe and Japan

Asian governments have been fighting a rearguard action to hold down their currencies. They have stopped external surpluses from fuelling domestic inflation. But they are at their limits.

Current data suggest a gradual tailing off of the house price boom is likely in OECD countries. But there's still room for a sharp decline that could fuel recession and have a serious impact on overstretched banking systems and agency lenders.

Japan got through deflation in its own sweet way and its recovery is also idiosyncratic. In the long run the yen will slide but for now conditions will favour foreign investors, holding up the currency.

Deflation is on the way, summoning up a long and dreary financial winter. But it should be preceded by a burst of autumn sunshine

Although many governments will keep pushing loose fiscal policies, capital repricing is inevitable ? probably led by the ECB. That lead should favour the euro and European bonds, at least for a while

Is an oil disaster just around the corner? Barring political upheaval in the Middle East, which will not come right away, probably not. Rather, look toward benefits from falling oil prices by the year-end.

Free money and a profligate fiscal policy in the US have achieved the near impossible - job creation. But don't count on a sustained upswing and meanwhile look to equities as the asset of last resort.

A high-spending chancellor and a continuing consumer boom might not be in the long-term interests of the UK. They are, though, fundamental to foreign investment that is pushing up sterling.

Money will, of course, remain cheap. Indeed, the forward market now forecasts that the Federal Reserve will not raise interest rates this year. But it has been cheap for a long time. It has already driven massive amounts into equities and reduced volatility to historical lows. In early January, the options put-to-call ratio reached levels indicating that no-one wanted to take out any insurance against equity markets falling. However, the recent turn in these indicators suggests that a wall of worry is now being built.

Central bank and government profligacy in the west and Japan looks set to buoy up the gold price for some time to come.

We enter the year to a deafening beat of bullishness. The long rally since the lows of March last year has brought US and European equity prices back to 70% of their peak in March 2000. Optimism rules and the consensus is for further upside in 2004.

It is a common view, especially in the US, that continental Europe is shackled by big government and a lack of reform. The corollary is that its economy and its stock markets will underperform those of the US or the UK.

The US economy is growing at over 8% a year. Jobs are returning, industrial production is improving and households are still spending. Everybody expects this business cycle to be like those before and they've lapped up stocks in the US and Europe, in anticipation.

The decision of the Organization of Petroleum Exporting Countries to cut production means that oil prices are set to stay high. This will keep Europe's consumers spending less and will dim prospects for eurozone recovery.

Last month's G7 finance ministers' meeting in Dubai prompted a sharp fall in the dollar. I reckon this is a turning point in the fortunes of the currency since its peak in February 2002.

The bulk of corporate earnings results for the second quarter of 2003 from S&P500 companies are now in and equity bulls are claiming that they justify the sharp equity rally since mid-March. I'm not convinced. More companies beat analysts' expectations, but then estimates had been revised down sharply.

Does the recent widening of government bond yields, especially in Japan, signal the bursting of the bond bubble? I think not. Both the equity and bond markets are bubbles and both will burst eventually. But equities are more likely to pop first.

There are several big bubbles driving the global economy and its financial markets. There are the twin bubbles of US household debt and house prices, driven by easy money. And there is the Japanese government bond bubble, fed by excess savings and cheap credit. But the next great bubble in the world is continental European (principally German) labour. This euro wage bubble is sustained by sticky prices and state subsidies.

At its latest committee meeting, the Federal Reserve stressed the perils of deflation. Fed chairman Alan Greenspan made it clear that if there's a whiff of it the Fed will act. In sharp contrast, European Central Bank president Wim Duisenberg slumbers on, occasionally mumbling about the dangers of inflation.

Now that the military battle in Iraq is over, my sense is that equity markets want to go up. But I don't believe that this is the start of a new bull market. It is just the eye of the storm of the secular bear market. The bounce will eventually die down and the bear market will reassert itself. We have not seen the lows yet.

The new world order, established after the fall of communism in Russia and eastern Europe, is set to shatter. Global leadership by the US confronting the USSR was succeeded by US leadership flying solo. Now comes fragmentation. The US might be the most powerful nation but over the next few years its role will be contested by China, the EU, South Korea and even Japan. This implies a much higher risk premium for financial assets.

UK prime minister Tony Blair is facing the biggest test of his political career as he tries to persuade the British public to support military action against Iraq in alliance with the US. But his government is not just dealing with a major foreign policy problem. The UK economy is also under scrutiny.

Stock markets started 2003 in a relatively buoyant mood. The view seemed to be that the world economy would come out of a soft patch, that the Bush administration would deliver tax cuts that sustained US consumer spending and that war in Iraq would go smoothly and quickly, slashing oil prices.

Last month's surprise resignation of US Treasury secretary Paul O'Neill and White House economic adviser Lawrence Lindsey smacks of desperation in the Bush administration. Only two weeks earlier, O'Neill had indicated that a costly stimulus package was unnecessary as the US economy was recovering nicely. He suggested that a simplification of the tax code was his sole priority and that government funds should be directed only to troubled sectors, such as the airlines.

We are in what amounts to a bear market rally. Many analysts and investors don't see it that way and complacency is back. US corporate earnings in the third quarter of 2002 were up 9%, ahead of analysts' downward-revised 6% expectations. The Republicans have taken full political control and will cement existing tax cuts and make new ones. And now the Federal Reserve has surprised the market with a big interest rate cut.

With the public corporate bond markets volatile and unreliable, companies need to take advantage of MTN opportunities. Debt capital market bankers have the time to present them with imaginative proposals. But some of these, such as private-to-public deals, are not without their perils.

The Irish covered bond, endlessly promised and hyped for the past couple of years, is set to emerge in the new year. Some features that were unique attractions when the legal framework was first proposed in early 2000 have been nullified by other markets' progress in the meantime - the amended German mortgage banking act, for example, allows the inclusion of assets from a wider range of countries in Pfandbrief covered pools.

There was a huge rally in global equities in the middle of October after markets reached six-year lows. The catalyst was the third-quarter earnings reports of US corporations. Most seemed to beat consensus forecasts.

Banks are heavily discounting syndicated loans for relationship reasons and taking a double hit when they hedge their risks with more realistically priced credit swaps.

Last month I argued that the summer rally in US equities would not last. The S&P index hit its year low on July 23 at 797. It rallied to 972 on August 27. Now it's back below 900. In August, investors had turned bullish on hopes of interest rate cuts. And they were encouraged about corporate governance: CEOs signed off accounts with few nasty surprises.

In my view the bear market in equities will resume beyond the so-called summer rally. Crucially, the huge fall in household wealth will dampen consumer demand and rising risk aversion will delay a revival of global investment. There will also be much weaker corporate earnings growth, making equities overvalued; a weaker dollar spreading deflation into emerging economies; and poor leadership from the US administration on global economic policy and geopolitics.

The recent equity collapse may well mark the end of the bear market. But I doubt it. Sure, there is a strong equity rally from oversold levels out there somewhere. And improving corporate and macro news will at some point drive it. But there are powerful opposing forces. Wealth destruction in equity markets, a plummeting dollar and rising risk aversion in debt capital markets will damage the global economy.

The euro continues its recovery against the US dollar. Everything seems rosy in the EU garden. Dissatisfaction among citizens has not become a concerted anti-European platform. The extreme right in France has failed in elections and it is inconceivable that German dissatisfaction with the euro will spill over into actual opposition to it. The British government is growing increasingly confident about its ability to take the UK into monetary union. Above all, enlargement seems to be on target.

At some point in the next two quarters, the global backdrop for emerging market bonds will turn increasingly gloomy.

China

In last month's column, I wrote about the revolution in Korea's economic model, moving from a high savings, high investment, export-led economy to a more mature, consumer-led, market economy. That structural change is also visible in Taiwan but with some important differences.

I have just got back from a visit to Korea. It's booming. National output rose 3% in real terms last year. Economic growth is accelerating. It grew at an annual rate of 3.7% in the past quarter and I reckon it's got further to go. Something near 6% this year looks likely.

US economic recovery is clearly under way. But is it a profitless recovery? Some bears say so. I don't agree. This year, corporate profits will not rise as much as the consensus forecasts. That's why I reckon that US Inc and the equity markets will recover at a canter rather than a gallop. But they will still rise sufficiently to support a 10% to 15% rise in equity prices by the year-end.

The world is in recession. But it won't be by the end of the year. It will be the US economy that will show the way out of the mire. And it will be the US consumer that will hold the centre in the battle against recession.

Back in January 1999 the euro was heralded as a strong currency that would soon outshine the dollar. Europe had a surplus on its external balance of payments and tight fiscal policies. The US had a huge current account deficit, net external liabilities and budget deficits. The dollar was bound to dive. How wrong the dollar bears have been.

Every indicator we look at shows that the world is in recession. That's the reality. It's always easier to drown if everyone else in the pool is drowning too. So who will be the lifeguard?

The US economic recovery will be delayed by the terrorist attacks of 11 September and anthrax scares. But in the wake of the US administration's massive monetary and fiscal policy boost since that tragic day, a V-shaped recovery in 2002 is now likely.

I am convinced that the outcome of the human tragedy of September 11 will be a gutsy renewal of solidarity and confidence, recently lacking in the US, on the part of Americans and foreigners.

The swing of the political pendulum in the US has had an equal and opposite reaction in Europe. In the 1990s, under the post-cold war order of transatlantic relations, Bill Clinton's centre-left US administration promoted its own brand of caring capitalism. Inflation was banished, the world economy grew strongly and financial markets soared.

A new emerging-market crisis, to follow that of 1998, has surfaced. The immediate Argentine crisis will be resolved. The politicians there have proposed budget cuts that, if supported domestically and implemented, will provide some relief for a while. But this won't address Argentina's growth dilemma. That's a supply-side issue and the downside of a vastly overvalued currency. And it won't do the trick of getting interest rates down to levels where Argentina could grow either. As for Turkey, I have no hope that interest rates there can be got down to sustainable levels either.

The euroland economy stinks of stagflation. Its politicians are faltering on reform amid electoral paranoia, and the threat to jobs from the global slowdown. That means, combined with the European Central Bank's confused interest-rate policy, that the outlook for capital flows into mainland Europe remains poor. I reckon that will continue to undermine the euro. The place to be in Europe is the UK, where I expect sterling will hold firm, despite the risk of possible early entry into the single-currency system.

Which economic bloc is going to perform best this year, Europe or North America? The consensus is that the US is heading for very low growth, say under 2%, while Europe will do better, with 2.5% at least.

South Africa is a contradictory country. Its economy is the size of Poland's or Thailand's. It has income disparities similar to Brazil's. In population and wage rates, it's Argentina. But it spends three times more of GDP on public education than China and twice as much as the average of all emerging markets.

In the first quarter of this year, the US Federal Reserve has cut interest rates by 150 basis points. But Nasdaq is down 25%, most European equity markets have fallen 15% to 20% and even the Dow, which had been flat for two years, is now off 14% for the year.

One of the great gainers from falling global interest rates will be emerging market financial assets - though not everywhere. I've just visited one emerging market that should outperform this year: Brazil.

The senior government official shook his head vigorously in affirmation. "Yes, Japan's budget deficit will grow. Yes, there will be a government bond crisis." Then he said: "The best scenario for Japan would be an earthquake that struck the downtown headquarters of the ruling Liberal Democrats when all its senior politicians were there. Then we might get some of the reform Japan needs."

Nasdaq is still collapsing and there are worries that the US economy could be recession bound as the tech investment boom ends. But I remain optimistic. I reckon the global economy is in for a super-soft landing to sub-3% growth in 2001. Oil prices will stay around $25 a barrel and global inflation will fall, boosting real incomes. Risk appetite will recover. The mini-bear market is almost over.

It's hard to imagine a worse news flow for markets. As I write, the US is without a winner in the presidential elections. The lawyers argue in the courts about whether various counties in Florida can conduct manual recounts. And people spend their time giving opinions on chads - those little round bits of paper hanging by a thread from the punch hole on a Florida ballot paper.

It's just one piece of bad news after another for markets at the moment. Falling stocks of oil in the US and the Arab-Israel nightmare are keeping oil prices well above Opec's stated target of $28 per barrel. Major US corporations announce each day earnings results that disappoint investors. The dot com and hi-tech sector takes a huge pounding.

When the euro was first launched in January 1999, the consensus was that a strong central bank, a huge trade surplus and low inflation would drive the new currency upwards from its opening level of $1.17. I had little confidence in that view.

The increasing pace of developments in both the syndicated loan and the debt capital markets

We are not quite at the end of the current equity market correction. The next few months may be volatile or downright violent. But I'd start buying into any downturn in US and European stocks right now - particularly in traditional economy sectors where smart management can apply cyber-magic to the benefit of shareholders.

Author: David Roche Bank of Japan governor Masaru Hayami missed a step when the bankruptcy of the Japanese retailer, Sogo, stopped him ending the zero interest-rate policy (ZIRP) at the BoJ’s July meeting. But he looks determined to end ZIRP within the next two months.

The days of the weak euro seem to be over. The euro has bounced back from the nadir of $0.88 to $0.96 now. But it's still way below the level of $1.17, when it was launched nearly 18 months ago. At the time of its launch, I forecast that the euro would slump to 1:1 against the dollar. When it reached that level, I expected it to turn round and head back up. But that prediction has been confounded so far.

What do you give to a man who has everything? For her husband, Alison Lutnick chose a round of golf with Tiger Woods. For $51,000 husband Howard, CEO of inter-dealer broker Cantor Fitzgerald, joined three others in playing 18 holes with golfer Woods last month.

Dan Case couldn't do it. Roddy Fleming couldn't do it. Even Neal Garonzik, long-time friend of Chase CEO William Harrison, couldn't do it. Through all the quiet discussions to buy a top investment bank and the change of tack last year to build through smaller acquisitions, vice-chairman Jimmy Lee remained king of Chase's investment banking heap.

"If I were Euromoney editor, I would beat up on institutional investors for the insanity they've been creating," says Allan Kennedy. He has written a book, The end of shareholder value, about the embracing of this ethic and its adverse aVect on business practices. Kennedy has seen the "insanity" spread at close quarters. He held a top position with McKinsey.

What's the signiWcance of Merrill Lynch's decision to appoint a British banker, Kevan Watts, in London as co-head of its global investment banking group? "The location is clearly a large part of it but my background outside the US also played a role," Watts says. Watts joined Merrill in 1981 and spent 17 years toiling for it outside the US. He worked in advisory and Wnance for UK clients in the 1980s and recalls Xoating Euromoney in 1986 at £4.60 a share. "It's been a very successful company," he says.

The high-tech stock market mania has come to a screeching halt. The US Nasdaq index is now down 20% from its highs. Does this herald the beginning of a huge secular meltdown in stocks around the world? I think not. On the contrary, it marks a healthy reallocation of capital away from companies of the "new" economy towards the "old". The major argument against this optimistic view is that the new cyber economy will destroy us all by creating competition so great that prices will collapse faster than costs. Then whole swathes of the traditional economy will be wiped out, as capital structures collapse.

As I write, the euro stays deep in its despond at just $0.96/e. That's a far cry from $1.15/e at its launch. Why does the euro stay weak?

Is Japan heading back into recession? The news out of the country's Ministry of Finance is that Japan's national output probably fell in the last quarter of 1999, after shrinking by 1% in the third quarter. Technically that's a recession. Will this new downturn continue and what does it mean for the Nikkei and the yen? You can answer these questions if you understand the plate-shift movements taking place under the surface of Japan's seemingly stagnant economy.

Author: David Roche

Author: David Roche

The dollar and the Dow have dived. Serious imbalances in the US economy are now evident. The current account deficit is nearing unfinanceable proportions. The US economy could only grow at an above-average, yet disinflationary, pace while the rest of the world remained stagnant. That's no longer the case. Global growth is accelerating. So the dollar is no longer the currency of choice. And a weak dollar is synonymous with rising commodity prices and resurgent inflation. And it's not just the US economy and financial markets that are becoming paralysed. I reckon 2000 will be a year of US foreign economic policy paralysis. At its heart lies the presidential campaign. The impact on international relations could be severe. Those with Russia are already becoming strained. A deal on Chinese World Trade Organization accession may be missed, undermining Zhu Rongji and China's reformists. Trade tensions with the EU will escalate. And no action will be taken to support the dollar.

Faster and more synchronised world growth is bad news for bond markets. But the prospect of accelerating growth in Europe and a slowing US economy next year points to the outperformance of US bonds vis-à-vis the EU.

by David Roche

by David Roche

by David Roche

The contrasting economic fortunes of the core of Europe and those at the edge of, or outside, the euro area persist. The consensus view has been that euroland economic growth will begin to accelerate this year and that there will be a slowdown (or even recession in the case of the UK) in the periphery.

It's not just the tragic events in Kosovo that are hitting the economies and financial assets of central Europe. The current state of the European Union isn't helping either. It's ironic that, just as central Europe's reorientation towards the EU once underpinned its post-communist revival, it's now proving to be its nemesis. Slow growth in the EU this year means big external financing gaps for Poland and Hungary. Germany, which accounts for around 30% of the region's exports, is crucial. But the collapse of demand from Russia, which accounts for another 5% to 8% of exports, doesn't help.

The fall of German finance minister Oskar Lafontaine is bullish for German financial assets, but only in the short term. Euroland remains a slow-growth region. So, after a brief rally, I reckon the euro is set to weaken again against the US dollar, moving towards parity. The European Central Bank will now be much less reluctant to cut interest rates in order to fend off EU recession. There's no justification for maintaining real rates of 2% to 2.5% when real GDP growth in the euro zone is sub-par and slowing and inflation below 1% and falling. Short rates could go 50 to 75 basis points lower by the year-end. That will help German Bunds and equities, which have underperformed the EU average by over 10% so far this year. That performance gap will narrow quite quickly.

The euro will fall by a further 10% against the dollar and reach parity with the US currency within a year.

It is ironic that the strongest disciples of free markets are often the messiahs of currency pegs, fixed exchange rates and currency target zones. Those who believe the market should set the price for everything reject its decision on pricing international economic input and output.

The key to prospects for world growth in 1999 is Japan. I expect the US economy to slow during the year and the core of Europe to grow by less than 2%. So the OECD as a whole is unlikely to achieve even 1% real growth this year unless Japan picks up.

It was before the wave of strikes that hit France in December that I glided into the Gare du Nord on one of France's ultra-smooth, ultra-expensive (to the taxpayer, not the traveller) TGVs. I had two questions begging answers. First, would the Franco-German axis in Europe hold? And second, would France meet the Maastricht criteria for a European single currency by the end of 1997?

Continental European equity markets have rallied hugely since the US Federal Reserve began to cut interest rates. It's an opportunity to sell.

Global interest rates are falling, and will fall dramatically. Alan Greenspan has already cut rates by 0.5%, with one surprise cut in between meetings of the Federal Reserve. And the Fed is going to cut some more this month.

Next year, the world economy will shrink. Only Europe will have moderate growth. Wealth destruction will produce a growth recession in the US. Japan will continue to emulate an economic black hole in the middle of a time warp. Emergent economies' growth will be negative.

When Germany's federal election takes place on September 27 the miracle of chancellor Helmut Kohl's winning in 1994 against all predictions won't be repeated. There are good reasons why. Germany's economy may be picking up, but domestic demand recovery is tentative. During 1997 the rebound was export-led, and although the domestic investment cycle is turning up, household spending remains flat at best. At 10.7% unemployment is still too high and much of the recent job creation has come from government-sponsored schemes, especially in the eastern Länder where Kohl's ruling Christian Democrats (CDU) remain deeply unpopular.

The emerging-market crisis will roll on, mutating like a virus as it kills investor dreams. Sure, Latin America's flaws are not those of Asia. But they're deep enough for the region to get whacked.

The initial membership of Emu is decided, as is the board of the European Central Bank (ECB) and the exchange-rate parities for converting Emu participant currencies into the new euro on 1 January 1999.

I expect the US equity market to fall 30% to 40% this year. The catalyst for the turn in sentiment will be static (or falling) corporate profits, rising inflation and higher interest rates. Mania will drive the collapse. When the dust settles, the US economy will slide into recession. Consumers will retrench to pay down debts. The dollar will fall. It will be the dawn of a two-year bear market.

Japan is stuck in a time warp. Little has changed, and what has is for the worse. The economy is in dire straits. Half-hearted reform erodes the real incomes of households and corporations without the stimulus of real supply-side deregulation. Household savings rates are already historically low. Export demand is waning. The economy will be down this year and next.

Despite the current signs of relief in Japanese and other Asian financial markets, deflationary forces in the region are set to grow. That will force the US and Japan to signal the end of the Asian crisis with a new global policy framework and massive fiscal stimulus in Japan. Investors should prepare for a policy reversal.

The financial world will feel better now Korea has got most of its foreign debts rolled over. The bankers who lent Korea the money in the first place declare they have solved the Korean crisis a mere momentary liquidity squeeze and the Asian crisis along with it. The world may believe them for a short while (though it's ironic it should grant credibility to bankers it was their stupidity that let the crisis happen).

Economic growth in several major east Asian, Latin American and eastern European economies will halt in 1998. Emerging market banks' $550 billion of non-performing loans (probably well above $600 billion if unofficial estimates are correct) may cause a rash of failures ­ or even systemic financial crisis in some countries. Korea, China and Slovakia are among the most vulnerable.

The global bear market has started. It will knock the stock markets of the mature economies back 20% off their peaks, and emerging-market debt and equity by much more.

First the UK's new Labour government dropped hints that it was gearing up to join Europe's single currency earlier than expected, and before the full launch in 2002. Then it seemed to pull back and suggest that UK entry would not happen in the five-year life of the current parliament. That's made for continued uncertainty. Financial markets want to know when.

I've just returned from Germany, visiting the great in government, bureaucracy, Bundesbank and the European Monetary Institute. I'm convinced the Bundesbank will raise interest rates by 25 basis points before the year-end and by around 200bp by the end of 1998.

The world's economic and financial leaders at this month's IMF/World Bank meeting will preside over a strengthening global economy. Real GDP will be stronger next year than this. But the reasons differ by region.

We investors are nightwalkers in a dream world, where success is not predicting what economies will do next, but what the markets will dream they will do. So in trying to predict where markets will be by the end of 1998, a realistic starting-point would be to say: we don't know. But, at least, we can outline the critical variables that will make you richer or poorer over the next year or two.

Contrary to the pessimists' view, Europe will show economic recovery this year and next. And that will ensure monetary union stays on track for 1999. In core Europe, super-cheap money has been complemented by weak exchange rates. And those easy monetary conditions are likely to win out over Europe's Maastricht fiscal masochism to produce economic recovery.

The world is all perversity. The worst that could happen to investors is stronger global growth, producing weak financial markets. That will happen if Japan picks up this year at the same time as core Europe, and there is a continued boom in the US.

Core European growth is picking up. Late last year, I said growth disappointments would make the "Emu on time" outlook seem less probable by early 1997. Consumer spending would disappoint because of Maastricht masochism and the fiscal squeeze, and because of job losses and labour market deregulation.

January's dreadful German unemployment figure is the most politically significant euro event since the Dublin summit. Chancellor Kohl was always seen to be more powerful from abroad than he was in reality at home. He is now seen as a chancellor with a great plan for European integration and no strategy for German economic rejuvenation.

Europe is changing. Against all expectations, the advent of a single European currency, backed by a strong fiscal "Stability and Growth Pact", could prove the catalyst for a much more efficient corporate sector. Despite the economic absurdity of the Maastricht criteria, the struggle to meet them is producing what Europe needs most a smaller government take from national income.

Last September in this column, I argued that the industrial economies could be heading for much lower growth than expected in 1997. Now I'm even more convinced that OECD growth will fall short of consensus estimates, which means that central banks will not be raising short-term interest rates until late this year. This affects all investment decisions. It means that the yen will be strong, and the Deutschmark and dollar weak in 1997; bond yield curves will flatten.

by David Roche

by David Roche

Japanese bond issuance sharply increased in the first nine months of this year as borrowers rushed to raise funds before interest rates rose. But the revival might fade next year. Charles Olivier reports from Tokyo on changing attitudes to capital-raising

by David Roche

by David Roche

by David Roche

by David Roche

by David Roche

My optimism depends on the EU's single market surviving the demise of Emu.

I've said it before in this column: the 1999 date for European monetary union will be postponed. I'm saying it again because the chorus of Europe's politicians proclaiming that EMU will happen on time is deafening. But I think postponement will happen, by common agreement of the 15 member states, probably before the end of this year.

The beacon of European integration can never be turned off by a nation with Germany's history, as Herr Kohl has made clear in recent comments. But there is a dimmer switch - delaying the start of European economic and monetary union (Emu).

Privatization has been one of the strongest oars rowing the boat of global economic liberalization. By David Roche.

by David Roche