VOL. 127 | NO. 90 | Tuesday, May 8, 2012
The Worldly Investor
Up and Down, Economy Sign Of Indecision
By David Waddell
The consequence of living in an economic and political environment that can’t seem to make up its mind is a market that also can’t make up its mind, both surging and sinking last week. Signs of indecision abound. In November, the U.S. must decide between the Romney and Obama policy portfolios. Polls approximate a tie. Our economic growth rate of 2-2.5 percent also amounts to a tie, as it’s the mid-point between recession and true expansion.
April’s slower than expected jobs growth reinforces the malaise. At a 4 percent GDP growth rate, a weak data point is a hiccup, at 2 percent, it’s a cough. With political and economic opponents equally matched, the patient take comfort in rising earnings and low valuations. The impatient will harvest winnings and wait for resolutions.
Europe also suffers from decision-itis. The French election contest between the center right Sarkozy and the center left Hollande represents more than a political contest; it’s an economic melodrama. Complying with Germany’s desire for immediate deficit reduction, EU nations agreed to a fiscal compact essentially requiring balanced budgets.
This “pound of flesh” fiscal mandate has now tipped 11 European nations into recession, as governments quickly raise taxes and cut expenses. Economies in recession generate little tax revenue, which simply exacerbates the situation.
Long-term fiscal issues cannot be solved with short-term austerity unless there is a stimulus offset. The European economic authorities applied austerity but forgot to promote growth. Oops! No wonder the masses of unemployed in Europe have revolted. If growth oriented structural reforms don’t accompany austerity measures, then Europe’s fiscal strategy is all take and no give.
Voters who backed Hollande support a more comforting retreat to the “deficits for benefits” economic model of yore, the Grecian road to prosperity. Hollande’s victory also ends the marriage between Merkel and Sarkozy, altering the European balance of power. With Germany running right and France now running left, the remaining European members must pick sides. Add Europe to the ranks of the undecided as the debate over the relative merits of capitalism vs. socialism begins anew.
Odds are that Hollande’s socialist bark will be worse than his bite as the funding source for his spending fantasies remains the fickle bond market. Market discipline will direct policies and force structural reforms in Europe over time.
The austerity quick fix didn’t take because it didn’t contain an offsetting growth strategy. Structural deficits require structural reforms, but they take time. When fears flared in 2011, we expected to see centralized support emerge either fiscally through Eurobonds or monetarily through quantitative easing. We received the latter and world markets rallied considerably.
It’s possible that if fire alarms sound again, the emergency crews will not respond, but that’s unlikely. What’s more likely is that the pattern of failed attempts to modernize the European economic system will continue until they no longer fail. In the meantime, the fire crews remain vigilant.
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.