Still Looking for That Silver Bullet
07/22/2010 3:35 pm EST
We’re in that stage of the recovery where modest growth feels like much too little, too late, making hardly a dent in the accumulated grievances and losses. What investors and workers have lost, corporate treasuries have gained. But the corporate cash just sits there behind bulletproof glass, trickling into some overdue capital spending at long last, but not yet into many deals, or jobs.
Does the Federal Reserve have any bullets left to crack this case? This seems like an odd question to ask given record low interest rates, a surefire long-term stimulant for investment of all sorts. It is being asked nevertheless by those who fear that slower growth signals the dreaded double dip—with the economy ultimately tracking the recent declines in consumer and investor confidence.
In contrast, hardly anyone seems to doubt China’s supply of ammunition. Because it would prefer not to use any on unemployed rioters, Beijing has a built-in growth bias that would put even the dovish Fed to shame. In response to the Great Recession, thrifty China opted for a lending orgy. It reaped soaring property prices, creeping inflation, and worries about promiscuous loans, finally necessitating a clampdown. And now that the cold shower has been administered, perhaps the mandarins will relent and let everyone get back to having fun.
At least that’s what Shanghai’s incorrigible optimists believe, despite the Shanghai Composite’s 23% haircut year-to-date. Notwithstanding better acquaintance with the joys of mutual funds, brokerage account openings are up and so was the Shanghai index this week, recouping 4% during a two-day rally. It won’t bring back the emerging markets mania of 2009 (or 2007, or 2006, or 2005), but it does suggest that local investors still respect Beijing’s firepower—and its demonstrated willingness to stimulate demand when the chips are down.
In stark contrast, the United Kingdom’s coalition government is wedded to the drastic belt-tightening necessary to keep a credit downgrade at bay. It still might borrow a page from Beijing’s playbook by dictating lending quotas to the partly state-owned banks. No one believes this is the answer. But it beats flying the Hoover flag of fiscal austerity.
The climate has been so much nicer in Brazil, where the central bank is expected to hike rates for the third time in as many months to keep inflation in check amid an economic boom. With a gain of 6%-plus so far this month, Brazilian stocks are leading the emerging markets pack, alongside Turkey, Peru, and Taiwan.
But while Peru is up 9% this year, Colombia 12%, and Chile 14%, Brazil is still down 8%. It also trails most emerging markets over the last year, perhaps on worries over the October election. If Indonesia, another booming economy with political insecurities, is any guide, those worries may be misplaced. Jakarta’s index is up 44% in the year since Indonesia’s presidential election.
Turkey belongs to the same economically dynamic but politically twitchy club, and Eoin Treacy finds hopeful signs in its markets’ recent displays of strength. He also notes the gains by Nordic equities and German exporters in the teeth of Europe’s credit crisis.
Canadian banks are also currently doing rather well, and should be able to outperform even if international regulators pinch them with higher capital requirements, writes Tom Slee.
Meanwhile, Yiannis Mostrous sees gains ahead for a big Chinese bank as well as a developer of underground malls.
Washington, Beijing, and other growth proponents have a powerful ally: time. The appetites checked by recent economic struggles will not be held in abeyance indefinitely, nor will companies continue to hoard cash that’s yielding less and less. They may spend more of it in China and Brazil, but they will spend it. Capital’s worthless if it doesn’t pay.