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.
Japan's economic recovery is being driven by massive wage growth (which I measure by combining new jobs and pay increases) and super-easy monetary conditions (judged by interest rates and the exchange rate), but is being hindered by restrictive fiscal policy.
The US has enough consumer wealth and jobs to keep its economy on the boil, and the Fed has remained neutral on interest rate policy - up to now. Europe has super-easy monetary conditions but little else, and its core is the most dicey recovery candidate. But outside the core, most European countries are booming. And I reckon that export-led recovery in the core (about the only sign of life at the moment) will spill over into domestic demand growth gradually.
Elsewhere, Latin America looks set to maintain strong real GDP growth. East Asia will remain sub-par by its historical standards, but is probably at the bottom of its cycle now. Emerging Europe is at the top of its cycle, but will slow only a little.
This perception of a strong global economy stretching out into 1998 may be good for politicians, businesses and their employees. But it's not good for financial markets. That's because, miraculous as this bull market is, even the best investment dreams have to end. At some point, either rising costs will hit profits or inflation will force up interest rates.
Once interest rates start rising, global equity markets are going to fall by 15% or so. The markets most vulnerable to this shock will be the US and the high-public-debt economies of Europe, what I call the Southern Comfort Countries (SCC). In addition, higher interest rates will hit SCC equity markets if Europe's monetary union is postponed. In SCC markets, both earnings and valuations are sensitive to interest rates.
At the risk of upsetting the hosts of this month's IMF meeting, Hong Kong remains my favourite equity-market short in the world. I've been dead wrong until recently. But I still think that Hong Kong will fall victim to tightening global liquidity conditions; populist measures to reduce housing costs; a flood of new issues; and, ultimately, a rise in real interest rates to adjust for its return to the Chinese motherland.
The Taiwan equity market is another Asian short. Hong Kong is the economic pistol pointing at the heart of Taipei. After a year or so, when Hong Kong has been digested, China will turn up the economic heat on Taiwan. Hong Kong, where nearly 25% of Taiwanese exports and most of its foreign investment into the PRC transit, gives Beijing all the leverage it requires without the need to plop missiles on Taipei. The Taiwanese (descendants of the defeated nationalists in the civil war of 1946-49 in the main) will resist, and Taiwan equities will plummet.
But not all markets are sells in this environment of strong growth and rising interest rates. Most east Asian equity markets have performed like dogs over recent years. They are now cheaper than European equity markets. Once the Asian currency turmoil has stabilized I expect many Asian markets to rise strongly, particularly when the US dollar starts to fall against the yen.
The decision of most Asian monetary authorities to float their currencies spells a new era - the end of the US dollar bloc in east Asia. Competitive devaluations in the region have already increased the overvaluation dilemma of the Hong Kong dollar immensely. The Hong Kong dollar peg to the US dollar may be a political rather than an economic arrangement, but economics will undermine it. The Hong Kong dollar will be pegged to the renminbi before the millennium and Hong Kong interest rates will be a real 4% to 6% (versus zero today and 14% in China). The Singapore dollar is the long side of this equation. The country will continue to play its role as the hot, flat and steamy Switzerland of the region.
Europe will probably be the centre of cosmic volatility by the time you read this. The key governments of the European Union - Germany, France and Italy - must present their 1998 budgets by the end of this month. The ability to sustain, rather than just meet, Maastricht convergence targets has now become the benchmark for the credibility of Europe's monetary union project. Financial markets will make their judgement on that sustainability. Meanwhile, the German and French electorates may decide the pain of more austerity is too much to accept and so pressure the politicians into delaying Emu. If Emu is delayed, bonds in the SCC will dive.
And I would be out of Brady bonds and global telecoms stocks. Strange bedfellows perhaps, but tightening global liquidity will add to the woes of many an emergent economy with a high external deficit, and shove up yields on these overbought instruments. Brazil is my pick of the shorts on Brady bonds.
Global telecoms stocks seem almost certain to lose all their pricing power, but not their capital investment commitments and costs over the next decade. And many emerging-market portfolios, when subjected to forensic analysis, turn out to be undiversified telecoms, banking and utility hotchpotches, and with rising interest rates they could prove highly volatile.
Stronger economic growth is good for people, but bad for capitalist running dogs. And the stronger growth is, the weaker will be financial assets, because the last thing financial markets need is a synchronized and powerful world economy. But that's just what 1998 looks like delivering.
David Roche is president of Independent Strategy, a London based research firm.