Tuesday, June 9, 2009

Green shoots ... or bust

Equity markets, both international and US, seem to have taken to heart the signs of bottoming of the world economy and the rebound seen in Asia. The Brazilian, Chinese and Indian stock markets are at least 50% higher than the lows in Q4 2008. The DJIA went down to the 6500 for a while but has since rebounded to gyrating around the 8500 market and has on occasion, flirted with the 9000 level.

The rates of job-loss is falling in the US and despite a glut in world oil supply, crude prices are nearing the $70 mark after crashing down to the $30s only recently. Are we past the worst then? Despite the lingering weakness in W.Europe (something seen arguably since the start of WW II!), the signs of economic recovery seem to be unmistakable.

Is the US consumer then going to go back to his/her free-spending ways? While we seem to have come up a fair bit from the Q4 depths, at least from a consumer confidence standpoint, there could be a few big obstacles to growth.
1. The budget deficit. With the famous American aversion to taxes and the growing burden of entitlements (driven mainly by healthcare costs) as the baby-boomer generation retires, the deficit is only going to get worse.
2. The cost of borrowing to feed the deficit. The US Treasury's place of pride as the investment of the highest quality could be under threat as the domestic debt as a % of GDP grows. The US government will need to increasingly borrow more and pay higher interest rates for the borrowing. The higher interest burden is going to crimp the ability to make productive investments.
3. Finally, with increasing protectionism and government involvement in the economy, the vitality of US business enterprise to identify and capitalize on opportunity looks to be suppressed for the next several years.

A number of prognosticators have made some long-range predictions of the US Economy in this article. An interesting read, as the forecasters have taken a 5-10 year view rather than the 6-12 month view typically taken by realtor types. Another interesting article, about the long term speed limit of the US economy from the Economist. Summarizing the article,

According to Robert Gordon, a productivity guru at Northwestern University, America’s trend rate of growth in 2008 was only 2.5%, the lowest rate in its history, and well below the 3-3.5% that many took for granted a few years ago. Without factoring in the financial crisis, Mr Gordon expects potential growth to fall to 2.35% over the coming years.

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