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Outcome of Global Economy Still Hangs in the Balance


The result of the current situation isn't preordained by numbers, but by psychology.

Editor's Note: The following was originally posted on our Buzz & Banter (click for a free trial). It's being republished here for the benefit of the Minyanville community.

I haven't been writing lately because after spending several months laying out my basic views of the global economy and global financial markets, my outlook remains essentially unchanged.

It's my view that the global economy could go either way. On the one hand, the structural obstacles to recovery aren't nearly as dire as the bears would have you believe. For example, the Alfaville post by Credit Swiss strategist Jonathan Wilmot, and featured in today's Daily Feed, points out that the media narrative about how the excessive leverage in the consumer sector won't allow the US economy to grow is one of the most overvalued pieces of "common knowledge" out there.

On the other hand, perception can become reality. If consumers and businesses start to collectively believe that we're all doomed, we probably will be.

The outcome of the current situation isn't preordained by the numbers. It will ultimately be determined by psychology.

Sticking to the numbers, however, I think that even the most fanatical bears must admit that things haven't worked out as they thought. The global economy in virtually all of its aspects has thus far proven much more resilient that they ever imagined.

And relative to my own expectations, there have been some positive surprises as well. European economies, in general, have proven more resilient than I expected. And because Europe is China's largest export market, this has, in turn, been a critical factor in keeping the Chinese economy from unraveling.

Still, despite these relatively positive developments in relation to gloomy expectations at the beginning of 2009, the economy isn't entirely out of the woods, and a double dip is still a possibility. And in the context of a situation in which global governments are running out of fiscal ammo, such an outcome could have very troubling consequences. A second round of massive bailouts would only be forthcoming at a much greater financial and political cost.

On balance, I don't currently see good reward/risk on the long side or the short side.

I remain 100% cash.
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