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VOL. 126 | NO. 27 | Wednesday, February 9, 2011

David Waddell

Contagion Hyperventilation


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In today’s interconnected world, the butterfly effect rules trading desks, meaning small events lead to massive capital flows. I am not diminishing the importance of the Egyptian situation (although markets rendered guilty and innocent verdicts within 48 hours), but I am suggesting that every global disturbance is not a return to September of 2008. Some are.

The subprime spark did ignite a financial powder keg hiding in the shadows, and the 1997 Asian financial crisis required emergency response. However, the tie that binds in these global financial panics tends to be excessive debt levels.

The European sovereign debt situation therefore holds legitimate spookiness, but what hurts us most is not the devil we know, it’s the devil we don’t. The European banking community has had well over a year to make preparations. With household leverage declining, corporate leverage low, and governments capable of printing and restructuring, the immediate leverage threat level is blue/green.

Furthermore, economic reports released globally last week show a high-quality economy spooling up to meet rising demand, not an inflated economy awaiting a pin.

In sum: be aware of geo-political risks, but when assessing true portfolio risk, focus your attention on your exposure to highly levered situations … waiting to exhale. At this particular moment, the world is debt averse, making the quality of this advance higher than its predecessor.

High-quality advances create opportunity for wealth and employment. Wealth has been replenishing, yet job growth lags. That situation should soon reverse.

First, corporations now have legitimate revenue growth. Second, low debt levels and high profits have created corporate cash stockpiles seeking productive uses. Third, U.S. workers are among the least unionized and most productive on the planet, and the weaker the dollar gets, the more discounted they become. Fourth, we have a justice system that protects property rights. With global manufacturing activity surging, the U.S. is actually well-positioned.

For calendar year 2010, the US manufacturing sector added 136,000 new jobs, the first net addition since 1997. The employment component within the recently released manufacturing survey was the highest since 1973. So the U.S. manufacturing economy may be in the early stages of a renaissance. Welcome to U.S. in-sourcing.

Adding a job and consumer recovery to an economic recovery that has been propelled by manufacturers and exporters signals a healthy maturing advance. The world will never be worry-free. But remember that the natural human condition is toward prosperity and at the moment more human beings than ever before have been liberated to pursue that mission.

While Egypt may remind us of potential threats, it should also remind us of the growing global appetite for higher living standards.

Years ago, we debated the merits of capitalism versus communism. Then we debated the merits of capitalism versus socialism. Now we are debating the merits of democratic capitalism versus authoritative capitalism. With capitalism gaining ubiquity, the prosperity aspiration will overcome. That is the active agent underlying the breadth and quality of the current global advance.

David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.

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PROPERTY SALES 77 435 9,569
MORTGAGES 104 511 11,314
BUILDING PERMITS 196 1,045 20,310
BANKRUPTCIES 44 275 6,437

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