 EU
Seeds .vs. US Harvest
Der Invest
Informant
Randy Buss
6 April, 2005
I had some visitors over the weekend, therefore I decided to
take a longer than usual break from my keyboard and writing of
my Latest Letter. In the meantime I've done a lot more reading
and it would appear there are so many opinions and experts and
gurus out there, that at times I simply don't know what I should
think or believe or trust or even incorporate into my analysis.
So, in the end, I always do the same thing : I trust my own
analysis and look at the markets through my own blend of experience,
intuition and evidence. I came across the concluding paragraph
in Stephen Roach's article entitled "Sputtering" where
he talks of the world economy wearing thin (sputtering) and looking
like it's tailing off rather quickly. To quote:
"An
unbalanced global economy is a vulnerable global economy. As
the world's imbalances have continued to mount - underscored
by the sharp recent widening of the US current account deficit
- those perils have only grown larger. A serious pitfall was
averted in 2003 when the authorities opted for a major reflationary
policy gambit. But the impacts of those efforts have now worn
off. That leaves an unbalanced world with little choice other
than to face up to the imperatives of global rebalancing. A
slower US growth dynamic is an integral part of that rebalancing.
It is up to the rest of the world as to whether there are any
compensating offsets. For the time being, that does not appear
to be the case. And so an unbalanced global economy is now beginning
to sputter."
In all fairness, I think Mr.
Roach has excellent thoughts and analysis, but I am often lacking
follow through from him, i.e. Ok, the world is sputtering, but
how or where do we go from here and what might be the outcome?
Let me try and give a short
answer to that.
His "global headwinds"
are listed as rising energy prices and a normalisation of real
interest rates. This I concur with. The US consumer having
had it "too good for too long", may start to feel the
consumption pinch as soon as these headwinds start to pick up
considerable speed and strength. Here I am thinking of the US
oil dependent economy and its asset-driven consumption, e.g.
housing, which has been a source of contrived wealth or a cash
extraction mechanism fuelling the consumption, to a large degree.
Equally he is right in pointing out that Europe does not, at
this moment, provide any positive data signalling an imminent
robustness within the Eurozone, and hence acting as a global
driver in the absence of the US.
My eyes are focussed beyond
the present. The Euro nations are currently in a massive "realisation
campaign" that business cannot go on as usual, ie. before
the EU was formed and before the recent expansion of the EU.
This has been a slow and grinding psychological and way-of-doing-business
process for the member nation states. But the reforms that most
nations have now embarked upon are certainly the seeds from which
a strengthened EU will emerge and which are slowly beginning
to bear fruit. Likewise, the EU citizenry is one more prone
to saving than pure consumption, regardless of real interest
rates. It seems ingrained in them, maybe even too much, at least
from the institutional side, i.e. that required for capital investment
and risk capital.
The US, is seemingly the exact
opposite. Having ridden the 90s high tech gone berserk dot.com
bubble, everyone thought it would never end. It did of course.
And since then the US Fed has been pumping money into the system
to keep things floating. This spilled over into all sorts of
things, but mostly it drifted into the housing complex as witnessed
by the current median home prices relative to income. With interest
rates dropped to near zero and hence real interest rates gone
negative, this encouraged consumers even further, and it encouraged
institutions to play the bond spreads. But what has not seemingly
happened at all is an accompanying psychological adjustment that
"this state of financial affairs cannot go on forever".
Neither the Fed nor the Federal government nor the individual
citizen has embarked upon a tightening or fiscal restraint policy
required in order to start the process of rebalancing the national
debt and current account deficits. It is still a relative fiscal
mess facing the US economy mid to long term.
This fiscal tightening may
be forced upon the US as it seems no less intent than on continuing
with current policy no matter the end it must surely perceive
as being ugly and ruthless, hence the psychological response
is to avoid it altogether. Although short term foreign Central
Banks may be supportive of the US dollar out of pure "stability"
considerations, I am relatively certain that longer term the
EU and its Euro may present the lesser of two evils for foreign
investors looking to diversify their (large USD) holdings.
That is why when looking beyond
the edge of the current fiscal plate, I see the seeds for recovery
in Europe being planted while in the US I see them hacking down
all the fruit bearing trees, instead of just pruning them back
a bit and waiting for a new generation to blossom. In short,
it amounts to destroying all your future seed for a short term
bumper harvest.
In conclusion, let me remind
you:
There are two irrevocable laws
on this earth: You cannot drink yourself sober and, you cannot
borrow your way to solvency. The longer either continues, the
more terrible the hangover.
More on this in upcoming issues
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to Der Invest Informant here.
4 April, 2005
Randolph Buss
email: editor@dinl.net
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