What's Troubling Investors {Three Things}

From the economist.com: 

A Big Hairball of Risk {Excerpt with my highlights}

"......What.....preys on the minds of financial and business-world risk takers is not a single threat but a multitude of them, regurgitated in one big hairball of risk. And all are about policy.

1. The easiest to understand is China. The fall in credit, property prices and industrial activity are the result of a deliberate government effort to corral inflation and rebalance from investment towards consumption. The downsides of China's tiáo kòng  (”macro control”) are well known.....But the upside is that when the taps are opened, the effect is almost immediate......Investors have learned to put enormous faith in tiáo kòng: as quickly as the authorities put the brakes on, they can release them.  “Weak data to prompt effective support,” is how Barclays headlined a typical report Friday. 

There are two problems with this optimistic take. The first is about will: authorities may be more willing to tolerate a slowdown and less enthusiastic about stimulus of the kind used in 2008 since it would delay rebalancing away from investment.  The second is about ability......the policy that guarantees 8% growth with no booms or busts has yet to be invented. If China suffers a hard landing this year, it will only prove its leaders are human. Odds of a good outcome: 80%.

2. The most insoluble is Europe. It has faithfully followed Robert Feldman’s CRIC cycle: crisis, response, improvement, complacency. The European Central Bank bought the euro zone valuable time with its long-term loans to banks earlier this year; that time has been wasted. ....To fireproof the euro zone, most everyone outside Germany thinks euro members should share responsibility for each other’s banks (via common deposit insurance) and sovereign debt (via Eurobonds). Germany has refused to countenance this, and presumably won’t until Greece is in the process of leaving the euro. The optimists are convinced that Germany will bend if that’s the price of saving the euro. What they may not appreciate is that there is no single “Germany” to nod his head when some line is crossed; the country is a mosaic of competing power bases who may not coalesce around a solution in time to save the region. Odds of a good outcome: 60%.

3. The most perplexing is America. The fiscal cliff at the end of the year is a problem in itself, and symptom of a larger problem. If all the tax increases and spending cuts programmed to take effect at year-end do so, GDP will suffer a 5% hit. Neither party wants this to happen. The larger problem this symptomises is the parties' inability to agree on any sort of stable fiscal policy that would take the place of the cliff. If they could, there wouldn't be a cliff in the first place. Optimists love to quote Winston Churchill’s line about Americans always doing the right thing after exhausting all other possibilities. Yet Congress and the administration have precious little time and incentive to do the right thing......Odds of a good outcome: 70%.

The key takeaway is that while a good outcome is the likeliest scenario for each, the combined probability of all three turning out well is only one-third. And by the way, that’s without throwing in all sorts of other risks......Is it any wonder that the marginal investor or business would prefer to hold Treasury bonds or sit on cash? And that sort of disengagement can make economic pessimism self-fulfilling.

My comment.  My guess is that the easiest one of these problems to game is the US.  Last Friday's economic reports and the ensuing negative coverage over the weekend probably put the White House in panic mode regarding the economy.  It would not surprise me to see the Obama Administration to become much more conciliatory regarding budgets and taxes for next year sometime this summer.