Elliot Gue PFNewsletter .com
Who are the surprise winners and losers in today's market reality? Click here!

L’AQUILA, Italy--Climate change and the economic crisis topped the agenda at the Group of Eight (G8) summit this week in Italy. While the carefully worded G8 declarations were intended to show consensus among member states and developing “G5” countries, crucial rifts remain unresolved.

The G8 summit itself is evolving; it’s become obvious that any summit that excludes countries such as China, India and Brazil is completely toothless. Developing countries have been the key drivers of economic growth in recent years, and it appears that these nations are bouncing back more quickly from the recent economic crisis than the developed world.

Moreover, China is a key lender to the US; China’s massive buying of US government bonds in recent years has allowed the government to spend well beyond its means. Any economic discussion that doesn’t include the world’s growth engines is meaningless.

As for climate change, China is currently the world’s largest emitter of carbon. And countries such as China and India are also the key sources of growth in global carbon emissions. Any discussion of a global framework for cutting carbon emissions that doesn’t include the developing countries is equally meaningless.

Leaders of the G8 countries seem to recognize these facts. As has been the trend in recent years, the L’Aquila summit kicked off with a meeting of the G8 itself, consisting of the US, Britain, France, Germany, Italy, Canada, Japan and Russia. There were parallel discussions ongoing among G5 nations China, India, Brazil, Mexico and South Africa. Starting on the second day of the summit, the G8 and G5 met and issued statements jointly.

In addition, the official declaration of the G8 included language noting the importance of developing countries in leading the world out of the economic crisis. The rising importance of developing countries as economic and political forces is the prevailing theme of my colleague Yiannis Mostrous’ free e-zine, Emerging Markets Speculator. As Yiannis has noted, it’s likely the G8 will need to be permanently expanded if it’s to remain relevant.

Here are some of the key issues discussed at this year’s Summit and my take on what it all means.

Economic Crisis
Statements issued by the G8 itself reveal a growing rift among developed countries on the issues of economic stimulus and fiscal stability. The G8 statement indicated that there are growing signs of economic recovery across the G8 but downside risks remain. However, the statement, Responsible Leaderships for a Sustainable Future, also noted:

We note some signs of stabilization in our economies and we believe that the turnaround will be reinforced as our measures reach their full effect on economic activity and contribute to improving confidence and expectations. However the economic situation remains uncertain and significant risks remain to economic and financial stability. We will take, individually and collectively, the necessary steps to return the global economy to a strong, stable and sustainable growth path, including continuing to provide macroeconomic stimulus consistent with price stability and medium-term fiscal sustainability, and addressing liquidity and capital needs of banks and taking all necessary actions to ensure the soundness of systemically important institutions.

This suggests that some G8 countries may be thinking about another round of fiscal stimulus or perhaps may feel the need to take further steps to shore up the banking system.

In fact, some US economists have already called for another fiscal stimulus package in the US after the June non-farm payrolls report, even though it’s estimated that only 15 percent of the February package has been spent so far.

Interestingly, the very same statement included language about the need for countries to develop strategies for rolling back the unprecedented stimulus and financial stabilization measures taken over the past year.

The statement indicated that exit strategies would need to be developed by each country individually but that countries needed to consider the impact of all these stimulus measures on long term fiscal stability. Talk of exit strategies seems to be a nod to countries like Germany that have expressed concern about ballooning deficits in the developed world.

The joint statement by G5 and G8 countries also included similar language about exit strategies. Although there was no direct mention of the US dollar and the need for a new reserve currency, this was undoubtedly a topic behind closed doors for both the G8 and G5. Clearly, countries like China are rightfully concerned about the fiscal stability of the US because they have huge holdings of US Treasury bonds and dollars.

All of the talk about financial stability, deficits and exit strategies suggests a few key long-term investment strategies.

First, every investor should own some gold and gold mining shares. Gold is the ultimate hedge against crisis and inflation and a sort of globally accepted currency. We highlight the case for owning gold and our favorite plays on the yellow metal in the July 22 Personal Finance, available online Saturday, July 18.

Second, as I noted above, this is yet another indication that the global economy has changed. The US is still the world’s biggest economy, but it’s no longer the only growth engine. As I’ve suggested, the coming recovery won’t be as robust as prior cyclical snap-backs.

The US consumer is saving more and focused on paying down excessive debts. And there are legitimate worries about the size of the US deficit and recent massive fiscal and monetary stimulus packages. It’s likely foreign governments will become less willing to lend to the US (buying US bonds), and that spells trouble for the dollar and suggests interest rates will begin to rise to attract investors. Rising rates will be another brake on growth.

Investors absolutely must allocate more of their investment dollars to developing countries and to sectors such as energy that are leveraged to growth in the developed world.

Climate Change

Long-time readers know that I don't enter the global warming debate in this space. I’m not here to save the world or make judgments about whether global warming is real, caused by humans, or the extent to which it will affect the global climate. However, this doesn’t mean we can afford to ignore the issue; energy policies aimed at controlling carbon emissions are already having a major impact on your investments.

The main headlines to emerge from the G8 were that the developed countries accepted that in order to avoid the worst impacts of climate change, global temperatures cannot be allowed to rise more than 2 degrees Celsius above pre-industrial levels.

Second, the G8 countries agreed that they would need to work toward a goal of a 50 percent reduction in global carbon emissions by 2050 and an 80 percent reduction in the US.

President Obama and other leaders hailed these steps as major advances in the fight against climate change and suggested that the US is already doing its part via the climate bill that passed the US House of Representatives late in June. I discussed this bill and its prospects in the Senate in the last issue of The Energy Strategist.

But this agreement isn’t exactly as sweeping as it might seem. First, the G8 countries didn’t agree on a base year; in other words, they didn’t say if they were targeting an 80 percent reduction in carbon emissions from 1990 levels or from 2005 or 2009. Since global carbon emissions have risen significantly since 1990, changing the base year gives countries a great deal of wiggle room in meeting their targets.

Second, these huge reduction targets aren’t likely to ever be achieved. As I noted in Wednesday’s issue of The Energy Letter, achieving some cuts is relatively cheap--companies can often actually save money by undertaking energy efficiency enhancements.

But the deeper the cuts, the more expensive those targets become. Of course, before this becomes an unbearably expensive problem, the G8 leaders at this year’s summit will be long out of office.

Nonetheless, carbon-emissions legislation is a boon for nuclear power and natural gas.

Of course, developing countries balked at such targets. The joint statement of all countries at the summit included a mention of the importance of the 2-degrees-Celsius goal and pledged to work toward policies that would help reduce emissions as compared to a “business as usual” case. But there were no specific targets outlined.

China and other developing nations aren’t going to agree to any major carbon reduction targets in the near term. The reason is simply that such measures would hamper their economic growth and development potential; economic growth pulls millions of citizens of the developing world out of poverty every year.

Don’t be tempted into thinking that demand for fossil fuels like oil and, more importantly, coal, will be negatively impacted by climate legislation being passed in the developed world.

Elliott H. Gue is editor of Wall Street Winners the premier monthly growth newsletter designed to manage investor’s portfolio risk. Mr. Gue examines the market sector by sector to find the industries with big tailwinds and avoid investing pitfalls. Mr. Gue uses both top-down and bottom-up approaches to search the global stock and currency markets for strong intermediate-term trends, picking investment vehicles accordingly.

Mr. Gue is also editor of Trading Floor Pro and a research analyst for Personal Finance, where he specializes in global equity and debt markets and also has broad interests in technology and sector investing.

He has worked and lived in Europe for five years, where he completed a Master’s degree in Finance from the University of London, the highest-rated program in that field in the U.K. He also received his Bachelor’s of Science in Economics and Management degree from the University of London, graduating among the top 3 percent of his class. Mr. Gue was the first American student to ever complete a full degree at that business school.