Stock market jitters are not surprising. I have been shamelessly straddling the equity fence, saying rising earnings and low rates would enable stocks to “grind higher” but nevertheless the “risk of a correction” is high due to excessive complacency. Investors are spooked by weak global growth, which is driven less by debt-driven “secular stagnation” than by terrible economic policy. You know the world is in trouble when Obama’s economy looks relatively robust. Consider:
Europe: The Eurozone’s single currency and seventeen fiscal policies are an absurdity only a cabal of bureaucrats could dream up. There have been no structural reforms in Italy or in France (which still has a 35 hour work week). Choking on bad debt and cramming for their stress tests, banks are deleveraging rather than lending. Oblivious of deflationary risk, Germany refuses to recognize that A) countries can’t cut their sovereign debt to GDP ratio when GDP is stagnant and B) it is impossible for all countries to run trade surpluses simultaneously. Meanwhile Germany’s high-cost energy program slows growth and strengthens Putin. The ECB is out of bullets; still lower rates would not help much in any event.
United States: Corporate CEOs deserve combat pay because they have to fight Washington every step of the way. Obamacare has created a part-time economy, exacerbating poverty and inequality. Banks’ shake-down fines constrain lending and business confidence. Obama nixes corporate tax reform that could repatriate $2 trillion. We have no immigration reform to attract tech talent. We have not ended the ban on oil exports—a “no brainer” on both economic and geo-political grounds. Obama opposes the Keystone Pipeline, a “shovel ready project” costing taxpayers nothing, even though pipelines are safer than oil-by-rail.
Japan. Abenomics is worth a try, and it has succeeded in depressing the Yen. But exports are still down year / year, because many firms have built capacity outside Japan. And a weak yen increases the cost of imports, including energy, which depresses consumer spending power; so do big hikes in the sales tax needed to manage Japan’s huge debt load. Still no sign of structural reform or immigration reform that would grow the labor force.
Submerging markets:
- Following a huge credit bubble, growth in China is being dragged down by a real estate slump.
- Russia is a kleptocracy with a cunning leader but a plunging currency.
- Brazil has an inflation problem (over 6%), and the economy is in a slump; real GDP will only grow about 0.5% this year.
- Argentina: don’t ask.
- Venezuela: don’t ask.
- In India, Mr. Modi is a big improvement. But will he really reform a corrupt socialist bureaucracy that keeps hundreds of millions of people in poverty? Two tells: Will he reform India’s corrupt food subsidy program (which wastes billions and blocks international trade deals), and will he build enough electricity capacity to end frequent blackouts?
- The Middle East is in turmoil from Libya to Pakistan; Israel is a lonely island of sanity and stability.
- Africa is growing but from a very low base. The tragic situation in West Africa highlights the fragility of its civic infrastructure, not to mention the feckless incompetence of the global elite. On August 8 the UN announced that the Ebola outbreak was a PHEIC (“Public Health Emergency of International Concern”). But Obama was about to go on his Martha’s Vineyard vacation and didn’t get around to sending troops to Africa for another 38 days. Pathetic.
The Bright Side
Pervasive econo-imbecility has produced the “secular stagnation” that Larry Summers blames on the global credit cycle rather than on policies he helped to put in place. Aside from the fact that the problem is deflation not inflation, we are actually in a situation similar to the late 1970s: global economic policy is so terrible that there is ample room for improvement. A Republican Senate would ameliorate the U.S. situation; a Republican in the White House could work wonders because the underlying economy is sound (unlike the 1970s). France and Italy may rediscover capitalism. Germany may figure out that it cannot prosper as an exporter when most of its customers are in recession. Stronger global economic growth would not necessarily be extremely bullish for stocks, however, because it would eventually lead to higher interest rates. But that’s a high-class problem we can all learn to live with.
Copyright Thomas Doerflinger 2014. All Rights Reserved.
