what could spoil the party?

What could spoil the party?

It’s hard to say, as investors are caught in a win-win mentality. A pick up in the global economy is a good thing for financial markets – it will boost corporate profits and equity prices. So is a slow-down in the global economy – easy money from central bankers will continue to flow into stocks.

Still, there are three trouble spots that pose a threat to global financial markets.

First, Japan. In spite of a rebound in economic growth, the Japanese economy is ready to fall off the “cliff,” according to Carl B. Weinberg, due to a simultaneous increase in taxes and the expiration of a massive spending stimulus. “Japan’s challenge is to navigate past the implementation of a three-percentage-point increase in the national sales-tax rate and the end of a massive$130 billion fiscal stimulus program – both at once,” writes Weinberg in a recent piece in Barron’s. “Japan’s economy is a train wreck about to happen, and its stock market will follow it over the cliff.”

Second, China.Though the country continues to grow at robust rates, momentum may be tapering, as the Chinese government begins to crackdown on the country’s shadow banking system, which provided the liquidity that fueled that growth. “Shadow banking presents an especially difficult challenge,” write Lingling Wei, Bob Davis and Shen Hong in a recent piece in The Wall Street Journal. “On one hand, Beijing wants to encourage the development of non-bank financial institutions, which often lend to smaller firms that are overlooked by China’s biggest state-owned banks. . . On the other hand, the rise of shadow banking has been a major reason that debt has increased at a pace similar to the US, Europe and Asian nations before they crashed.”

Third, India. The country’s growth is at risk, due to a rise in bad loans. “India is coming off a lending boom that was partly powered by cash turning to emerging markets over the past few years as investors sought higher yields,” writes Nupur Acharya in a recent piece in The Wall Street Journal. “That drove down borrowing costs and added liquidity to the financial system. Now, with domestic interest rates rising to curb inflation just as growth slows, an increasing number of borrowers are struggling to pay back what they owe to the banks.”

The bottom line: Not everything is well in the global economy. Behind the better growth numbers that have cheered financial markets, there are trouble spots that may spoil the party.

http://www.forbes.com/sites/panosmourdoukoutas/2014/01/21/global-financial-markets-what-could-spoil-the-party/

Nothing ground-breaking here and also no mention of the ongoing debt problems in Europe. But the key take-out for me is the comment "investors are caught in a win-win mentality".

When investors en masse believe that 'There Is No Alternative' (the TINA concept of investing widely espoused by the pundits) it's a crucial warning sign that the established trend is near its end.