Will America Be One of the Best Performing Economies of 2011?

Three or four months ago, the U.S. was widely expected to slip back into a recession, from which we were saved, as most would remember, by Bernanke`s repeated comments that he will inundate the world in USD in order to ensure that the dreaded second recession does not occur. The response of the market has been positive, but beyond that, the necessities that would really sustain growth in the domestic market are still lacking. The U.S. consumer is unlikely to be dissuaded from saving more money when a large number of owners have their homes worth less than their projected payments, with no prospect of significant improvement in home prices, or the labor market in the short term. Exports provide the only real opportunity for reviving U.S. growth in consequence, but the main obstacle in this field is, of course,  China, and with the yuan remaining where it is, we find it difficult that this momentum will be sustained into the future.

At the same time, it is probable that the U.S. will be one of the best performing economies of 2011, although this does not mean it will regain its health, or that the government will find it convenient to withdraw the stimulus anytime soon. With China on the path to significant tightening, the Eurozone under pressure from speculation about sovereign defaults, and the rest of the developing world suffering from the impact of huge inflows that imbalance their economies, the U.S. appears like a true safe heaven. Nonetheless, the "bliss" of these days is being purchased at the cost of tomorrow`s happiness, so the outlook for America isn`t as shiny as it may look next year, if our assessment proves correct.

In any case, all this may not prove to be as good as it sounds, since if the American economy outperforms the rest of the world by considerable margin in 2011, the dollar will be boosted on anticipation of higher yield and returns, and in the absence of strong private demand, much of the boost will come from asset price appreciation, and paper profits, instead of growth in real sectors. This will not help the U.S. economy much, and instead worsen the situation in the long term, because it is obvious that the dollar must depreciate in order to allow a rebalancing of the East-West divergence, and the correction of the Asian growth model. If it turns out that U.S. capitalists are investing in the wrong fields just because they have a lot of cash which is not wanted outside of the U.S. (i.e. in Asia), the entire QE2 package will go to waste, as the dismantling of the existing severely deficient system will only be delayed for a short period of time.

The E.U. must make up its mind on what the most profitable choices are for both the periphery and the core nations that consitute the union, but they don`t seem willing to make the hard choices, and the sacrifices that are unavoidable. The Chinese need to move against speculation and bubbles decisively, and appreciate the currency so that they don`t keep accumulating cash for no reason other than hoarding it. But they don`t look like they are planning to do so any time soon. The U.S.  needs to recognize that the present track does not need anywhere, it did not work in Japan, and probably won`t work in America, and begin to consider seriously the future of the deficit, and public finances in general. The U.S. doesn`t seem to be planning to take any steps in this direction beyond cosmetic measures that are aimed to please everyone.

In short, we are faced with facts that nobody is willing to accept, and the desire to live like nothing has changed is overwhelming around the world. China`s rulers want to keep their subjects living hand-to-mouth in order to make sure that they don`t begin to think about the privileges of a democratic system. Americans want to borrow money without having any thought on how to pay it back. And the Europeans, as usual, just want to have consensus on everything, and in the meantime, keep doing nothing. It doesn`t sound like a great picture to us, and we doubt that you would find it very impressive either. That nobody is recognizing problems, and nobody is willing to address them until they are forced on them brutally by the markets is the main reason of our bearishness on stability. We are bullish on gold however, and bullish on the dollar vs. the Euro.

The lack of decision will not help the consumer, the worker, or the businessman, but it is arguably a genuine opportunity for the wise(!) speculator who knows how to exploit tensions and imbalances, while not getting carried away in the sentiment of the day. So now is the time to keep and maintain our positions, with a keen eye on the horizon for any sign that the hibernation of the world`s governments is going to end. When that happens, the markets will bubble up, and it will be the countdown for the get out for all those who have built their positions at times like these.