Stocks ended a bit higher last week after the release of the Federal Reserve’s April Open Market Committee meeting minutes. The Fed on balance expressed confidence in stronger (but modest) growth in the US going forward, and markets are pricing in a better than 50% chance of a second hike in the Federal Funds rate when the Fed meets in June. The US has led the rest of the developed world in recovery, and not surprisingly US stocks are about 32% above their 2007 peak levels. Looking internationally, concerns have continued regarding China and emerging markets, Japan, the Middle East, and Europe, and not surprisingly (fascinating, actually), global stocks ex-US are about 32% below their October 2007 peak levels. The point here is that there are no international secrets, meaning that it is pretty hard to find something to worry about that the markets don’t already know and have priced in.
Britain: There will be a referendum (vote) on June 23rd to decide whether or not Britain should remain in the European Union (they joined the European Economic Community in 1973). Expectations are that they will stay. I have a theory about these big global moves that I discussed some years ago during the onset of the European debt crisis. What it boils down to is the fact that the size of governments in general and social safety net programs in particular are far greater now than was the case a century ago when we saw dramatic country upheavals. That makes it far less likely that, when push comes to shove, the voters in the developed world will choose a course of action that would disrupt their day to day living too much. Unfortunately, this same “inertia” makes it hard for countries to implement much needed reforms on the fiscal side, like corporate governance reform (company restructuring) in Japan, wage and price rigidities in Europe, and the growing regulatory bureaucracy in the US. And speaking of upheavals, PollyVote continues to register a small but consistent narrowing of the Democrats' lead over Republicans in winning the White House this fall.
Chinese debt: Asian Times economist David P. Goldman, whom I have tremendous respect for, has argued that China has to reorganize its corporate debt sector, not its consumer debt sector, which needs to grow. Consumer debt in China is about 40% of GDP, versus say 80% in the US. The Chinese have a tremendous amount of consumer savings and a huge current account surplus (selling more to the world than they buy from the world). Goldman argues that countries with these kinds of savings surpluses don’t have crises, they have restructurings. He argues that this is more comparable to the US savings & loan problem of the 1980s/early 1990s than the financial crisis period of 2007-2009.
Posted on Tue, May 24, 2016
by Danny Aleman