Back in early 2011, I was one of the few economists to warn that global GDP growth would slow dramatically in the near future and that the emerging market economies would not be immune from that upcoming contraction. My prediction was based on the premise that the then incipient sovereign debt crisis in the developed world would cause the export-driven BRIC economies to stall. We now know that the Japanese economy is contracting, while Europe's GDP is falling off a cliff. And just last week we received more concrete evidence that emerging market economies are starting to feel the pinch from the developed world's debt crisis.
Brazil cut interest rates by three fourths of a percentage point after reporting that their GDP growth during 2011 dropped to 2.7%, down from 7.5% in the prior year. China lowered their GDP forecast to 7.5% in 2012, from the reported 9.2% in 2011. The Indian economy grew at its slowest pace in more than two years at the end of 2011, as high inflation and Euro-zone insolvency put downward pressure on the economy. Russia's GDP grew by 4.2% in 2011, and is predicted by S&P to drop down to 3.5% this year. And the United Nations predicts that global GDP will only increase by a paltry 0.5% in all of 2012.
The McDonald's corporation corroborated the global slowdown in growth when they announced their earnings report for Q4 last week. The company missed their fourth quarter revenue target and warned about its Q1 operating income due to, according to the company's press release, "...commodity and labor cost pressures, particularly in the U.S." But the company also noted that the main cause of their revenue shortfall for their last quarter was a sharp falloff in sales from Europe, Asia, the Middle East and Africa.
Can it really be any wonder why this is occurring? Moronic central bankers across the globe persist in believing that economic prosperity can be brought about by printing more money. They also cling to the specious argument that inflation can't occur when growth is anemic. That gives them plenty of impetus to step up their monetary madness; even in the face of rising prices.
But in reality, all you end up getting is a serious dose of global stagflation, which only continues to increase in intensity. It is my view that the worldwide slowdown in GDP will cause further iterations of QE to occur within two quarters, not only in the U.S. but around the world.
However, since these rounds of quantitative counterfeiting resemble birth pangs in nature -- in that they are occurring more frequently and with greater intensity -- I anticipate the rate of inflation to increase rapidly across the globe during 2012. As such, I would continue to avoid consumer discretionary stocks and increase your exposure to precious metals and oil investments on any pullbacks.
Michael Pento is the President of Pento Portfolio Strategies