VOL. 127 | NO. 183 | Wednesday, September 19, 2012
The Worldly Investor
Examining Unknowns, Certainties
By David Waddell
US Fed = Yes, ECB = Yes, US Government = Maybe, China = Unknown Last week’s announcement of “unlimited” easing from the U.S. Fed combined with the “unlimited” easing announcement by the European Central Bank extended the global rally in everything but Treasuries.
This central bank-fueled rally will lead to stock market multiple convergences worldwide. With the S&P 500 carrying the loftiest valuation, the international markets stand to benefit the most. For example, the group of stock markets within the Euro have surged 15 percent over the last three months, doubling the appreciation in the USA. With the developed world immunized by the U.S. and European central banks, analytical attention will now begin migrating toward U.S. election outcomes and the forward-looking condition of the Chinese economy.
The U.S. Fed Votes for President Obama Presidential approval ratings correlate with economic and military activity. If the stock markets are rising and unemployment rates are falling, it’s hard to dethrone an incumbent. If the country feels threatened by foreign insurgents, Americans will rally around the commander in chief. Bernanke, Draghi and the Arab extremists have added substantial momentum to Obama’s re-election ambitions in the last few weeks.
Be that as it may, I can’t pass up an opportunity to point out something a bit ironic. Yesterday Ben Bernanke unveiled his unilateral “Jobs Plan” by committing to print money at a pace of $40 billion a month, indefinitely, until labor conditions improve. Ironically, loose money disproportionately benefits the rich. Rising asset prices (stocks, oil, houses, etc.,) lead to gains in wealth for those who own them.
However, for those who do not own them, but consume them – ala filling up the gas tank or the grocery basket, it’s an inflationary penalty. Asset owners benefit while wage earners suffer. This is VERY regressive (albeit effective) stimulus. Bernanke’s supposition is that if asset holders feel richer, they will hire and spend more. In economics, this is known as the “wealth effect.” What an interesting time. President Obama may have just been re-elected thanks to Romney’s economic principles.
On to China Now that we have clarity on central bank policy and Obama has a suggestive military and monetary tailwind, it’s time to locate the next big story for the markets. With Europe recessing and the U.S. crawling, the growth rate of the Chinese economy becomes particularly important.
Unfortunately, some economists see China growing above their political target of 7.5 percent; some see no growth. For the Chinese economy to truly lead the world economy, it needs a robust domestic economy. A new Chinese leadership regime takes power by year’s end. Perhaps government-funded stimulus for domestic consumers might be an easy way to buy friends at home and abroad. If not, signs of slow demand growth in China challenge global growth assumptions.
Understanding the nuances of the domestic Chinese economy today will greatly advance our understanding of the state of the markets and the world economy for 2013. China is key for 2013, time to start digging.
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.