Bourses have been doing very well today, as European stocks outperformed U.S. equities. Asia is also showing a strong performance, with Japan being the main weakness in the region. Low volumes, and lack of meaningful data has been exploited by those few who are active in the market in order to drive prices higher. Bigger actors are probably evaluating the year and keeping trade volumes to at a minimum.
Data from the U.S. continues to be positive in line with our generally U.S.-positive outlook for next year, although this does not imply that the USD is a good choice for safety and stability. The U.S., like Japan, is going through a period of recuperation and readjustment, which, by definition, does not involve radical changes and upheavals. The shocks and scandals are mostly over. The GSEs are nationalized, Madoff is in jail, investment banks are no more, government intervention is ubiquitous, the private sector is continuing to cut costs, while the consumer is cautious about risk taking, after seeing what happened to the foreclosed neighbor, or the laid-off worker. None of this is good from a growth perspective of course, but slumber is better than panic or intoxication, two states between which the rest of the world seems to oscillate as a great deal of effort is made to place events and actors into context.
In many ways, the U.S. is benefiting and will benefit from being the first to suffer the consequences of the global speculative bubble that developed, in large part, after the goobal interest rate cuts at the beginning of the century. Yet there can be no doubt that no nation will be isolated from the consequences. Imbalances are not troublesome for those in deficit, they are also troubling for lenders, as the spate of foreclosures in the U.S. has demonstrated to great effect.
No one has ever thought that big banks would be fine while borrowers defaulted just because they happened to be on the opposite side of the mortgage transactions. What would convince us, then, that just because China and the Asians are creditors, they will fare better than the borrowers in the Western World. If Citibank or Bank of America suffer when homeowners default, why do we believe that the Chinese will be fine, when they are the real lenders, after all, to cause all the massive bubbles and balloons on this side of the ocean?
The Chinese can no longer inflate America and its markets in order to create demand like they did in the past, so the wise government there is now applying its addictive medicine to its own economy in order to create the same fake demand that all but destroyed the U.S. economy during 2007Q3-2009Q1. Just like most speculators were blind to the mortage bubble back then, they are blind to the domestic Chinese bubble now, believing that, because the Chinese have huge cash reserves and a strong export sector, they can weather any storm. This argument is in fact very similar to that advanced in defence of Merril Lynch, Lehman Bros, and others, when they had almost incredible profits during the boom years. Yet those profits did not prove sufficient to save them from bankruptcy, because of the crucial term, "leverage". And so, what makes us believe that the Chinese will be able escape the cataclysmic consequences of their own bubble blowing, once their gigantic edifice of leverage and monetary inflation collapses, as it inevitably will?
The developing world story is a real story, and in spite of all the risks, the gains that have been made over the past two decades are real and will lead to a real convergence in performance around the world. We are convinced that the days when certain parts of the world were permanently backword are over for now. The immense improvement in communication technologies, the widespread availability of information at all levels has accelerated the pace at which knowledge is shared around the globe, and, as most people believe, permanently improved the growth capacity of the world as a whole. But none of this excludes the possibility that bubbles will develop, and none of it implies in any way that people, investors, or voters have become any wiser. All that it means is that they have become more similar, and their actions and choices are easier to analyze with a single set of data that is applicable to very different geographies and cultures. The fact that few nations, perhaps with the exclusion of sub-Saharan Africa, for now, will be left behind in technological and scientific advancement of the human race does not mean that the human race as a whole cannot go through difficult and turbulent phases. Indeed, the basic law of oscillations makes us think that the more momentous the upward swings are, the more momentous the downward movements will be.
These facts remain facts as long as the global economy is run by people who are delighted to see citizens enjoy the fruits of temporary bubbles and dreams. Emotional approaches towards economic issues is bound to yield disastrous consequences, as history has shown us time and again, but let`s allow our hearts the freedom to have more hope these days, as the year approaches its end.
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