What a week!
August 30th, 2011
What a week! Western markets over recent days have decided advanced country growth is going to disappoint. As a result share prices were hammered around the world, whatever the prospects for individual economies.
There were two overriding concerns at the heart of the fears. The first was the US. The immediate collapse on Wall Street happened once a deal on raising the debt ceiling was done. All the political bickering has served to highlight the poor state of US public finances. The debt and deficit problems were no longer over there in Europe. They were in the US backyard. Forecasters started pencilling in more tax rises and spending cuts in years to come, and began to fear for the US growth rate.
The second rested in Euroland. The politicians went away for their summer break without putting in place all the needed legal and financial arrangements that followed on from their July meeting to reassure markets. Bond traders decided to test them out by selling Italian and Spanish bonds. The European authorities were forced into an interim solution of sanctioning European Central Bank buying of more bonds to prevent crisis level interest rates affecting the larger sovereigns. Now there is to be a follow up meeting between France and Germany, with further discussions of all Euroland members.
I have always argued that the western Credit Crunch will cast a long shadow. Most western countries borrowed too much. Some borrowed it in the private sector, some in the public sector, and some in both. Where a country has large private and public sector debts, allied to weak banks, the problems will be especially difficult. These countries have to work their way out of excessive debt. Governments have to raise more in taxes and spend less than planned. Individuals and companies have to earn more or spend less. Growth helps. Some of the actions to curb the debts and repay the borrowings make faster growth more difficult. Ignoring the debts is even worse, leading to high interest rates and possible collapse of credit.
So why did this all come to a head in recent days? There is an impatience now amongst investors with governments that seem unable to resolve their difficulties. Investors want action from Euroland. They do not believe that measures taken so far curb the debt and deficits of the troubled countries are enough, nor do they guarantee enough extra money from the rich countries to the poorer to take care of all the bills. Markets do not worry about Ohio or Northern Ireland running out of money to pay benefit bills because they know the US and UK states respectively stand behind them and send them cash for national programmes. They do worry about Greece or Portugal running out of money, because there is not the same commitment from the EU.
The recent crisis has reinforced the view that more of the world’s growth in future will come from emerging economies. They are getting through the period of retrenchment to tackle inflation. China acknowledges in her latest Plan that she needs to expand domestic demand. The opportunities for growth from exports will be less in the next five years than over the last ten, as the west makes more for itself and experiences tougher times for consumers. The Chinese market looks about the cheapest of the world’s majors. Either China leads world growth from here, or we are in for even worse times. Growth oriented longer term investors should go east, not west.
As published in Investment Week, written 15.08.11.
