The Lowdown on Davos

 | Jan 25, 2012 | 9:00 AM EST
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At this time of year of year in Europe, the newspapers and financial television channels swarm all over the World Economic Forum at Davos, Switzerland. The annual gathering has established itself as the must-attend conference of government leaders, multinational CEOs, economic gurus, and the world's richest businessmen.

Davos has always acted as a barometer of global sentiment, a measure of the global "one percent's" conventional wisdom. I've always preferred to view Davos as a global contrarian investment sentiment indicator. Sell whatever Davos is buying, and buy whatever it's selling.

If that's an accurate way to look at Davos, it should help you feel better about the U.S.

Although the conference is only getting started this morning, a couple of broad themes for this year's summit are already clear.

First, the overarching mood is sober pessimism. Maybe it's due to the backlash against the global elite. Populism and soaking the rich have become dominant themes in Europe and the U.S. Davos has become more serious over the past few years. Notably absent are Hollywood stars, like Angelina Jolie, who've graced the snowy slope of Davos in the past. The global elite today have bigger concerns than to bathe in the glory of the reflected light of the likes of Bono and his entourage.

Second, the world's leading economists are uniformly negative on the global economy. Their dour mood reflects the International Monetary Fund cutting its estimates of global growth this year to 3.25% from its 4% forecast in September. The world's economists are also uniformly disaffected with the European Union's efforts to address Europe's sovereign debt crisis.  Moisés Naím of the Carnegie Endowment for International Peace put it best in the Financial Times, calling it "the most over-diagnosed and under-acted upon" crisis in financial history.

Third, there is a notable absence of the triumphalism of the BRIC (Brazil, Russia, India and China) countries. Brazil's economy grew little, if at all, in the past six months. Russia is now experiencing its own version of the Arab spring, with unclear consequences. Last year China was at the center of the discussions at Davos, with the Chinese sending their largest delegation to Davos ever. This year, the Chinese failed to send their highest officials to Davos for the first time since 1979, ostensibly because Davos this year fell in the middle of Chinese New Year festivities. A couple of years ago, Davos was all about the rise of India. Coincidentally, that marked a peak of "brand India," as interest in India has faded after a couple of years of sub-par stock market performance.

So if you view Davos as a contrary indicator, as I do, what's the takeaway from this year's summit so far?

First, bet against the pessimism. Just look at a poll of CEOs conducted by PricewaterhouseCoopers and released the eve of the summit. Almost 50% of 1258 CEOs surveyed by PwC said that they expect the global economy to decline further in the next 12 months. At the same time, 40% of the CEO's were "very confident" of revenue growth for their companies in the next 12 months. That may be a Lake Wobegon effect, where every CEO thinks his company is above average. But to me, it suggests that the current pessimism in Davos just might be overdone.

Second, as in the famous Sherlock Holmes story, look for the dog doesn't bark. Notably absent from any coverage of Davos is news of the nascent economic recovery in the U.S., whose economy still remains larger than China's, Germany's, and Japan's combined. If the U.S. economic recovery is sustainable, the theme of Davos two years from now will be all about the remarkable resilience of the U.S. economy. That's when I'd start to worry.

Until then, the U.S. is likely to remain your best investment bet.

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