We see China’s economy as on stronger footing than typically depicted, in both absolute and re...
Global Storm May Swamp Safe Harbors
07/12/2012 2:23 pm EST
The better foreign markets may be vulnerable to more bad news out of Europe and China, writes MoneyShow.com senior editor Igor Greenwald.
Overseas news now comes in two flavors: bad and worse.
In Europe, the public spending cuts piled atop private-sector recession are proving predictably destructive. Spain finally unveiled the latest plan for bloodletting, as previewed here last week, and its fourth austerity package in seven months looks even more draconian than feared.
It will slice spending and raise taxes by 5.6% of the GDP over the next two-and-a-half years. The value-added sales tax will rise from 18% to 21%. A tax break for home buyers, public employee salaries, and unemployment benefits are on the chopping block as well.
As The Economist notes, it’s possible the measures won’t shrink the budget deficit at all, as the worsening economic downturn depresses tax collections. And if the aim is, as The Economist supposes, to win compassion from the stony Germans, the violent protests in Madrid suggest that Spaniards are quickly losing patience with that “strategy.”
Italy’s sales tax was already at 21%, and won’t rise to 23% for another year under the back-loaded cuts recently passed by Mario Monti’s government. Monti and his technocrats will have returned to academia by then, handing their prescription for more pain to whichever politician is unlucky enough to take over.
Elsewhere, China is about to report the by now well-documented slowdown in its growth rate, and the only question is whether the GDP number due tonight will be credibly lousy or buoyant enough to be dismissed as a fabrication.
This is another economic superpower hobbled by bad polices, as Beijing belatedly woke to the aftereffects of its long-running construction spree with a crackdown on real estate speculation. The trouble is that this has depressed Chinese stocks as well, and the combined wealth effect of dropping house and equity values is holding back Chinese consumers, as demonstrated by the slowdown in imports.
Tax cuts might be in order, but the inefficient and often corrupt local governments are in dire need of more tax revenue, not less, now that they can no longer finance themselves with land sales.
New stimulus spending is going to come nowhere near the 2009-2010 largesse, but seems just as likely to be misdirected into yet more steel mills. China’s rulers, beholden to overlapping networks of relatives and friends at state-owned behemoths and export-driven manufacturers, seem incapable of delivering the long-promised shift to a consumer-led economy reliant on domestic demand.
The US is hardly a model of good government. The countdown to the tax hikes and spending cuts due to take effect at year’s end has already begun to sour consumer and business sentiment. But, until the election at least, there’s the hope that a break in the political stalemate would forestall the “fiscal cliff,” which is anyway nowhere near as steep as Spain’s.
And contrary to what half of America believes, the US economy is not plagued by socialist central planners like China’s. It is plagued by the capital allocators from Goldman Sachs (GS) who are proud of the uneconomical sporting arenas they’ve helped build on the taxpayers’ dime, but that seems to be less of a worry for investors.
No stock market is an island, of course. This week’s warning by Cummins (CMI) about the diminishing global demand for its engines portends more bad news from the emerging world from manufacturers, just as Infosys’ (INFY) disappointing results this morning are a lousy omen for techs.
Still, US stocks are nursing a respectable 6% year-to-date gain, alongside such safe havens as Singapore (up 17% in dollar terms), Denmark (14%), and Hong Kong (8%; all figures are from MSCI Barra).
More impressively still, the new emerging-market leaders have remained buoyant, with Turkey (up 26%), Philippines (25%), Colombia (16%), Thailand (16%), and Mexico (14%) all up big in dollar terms this year, according to MSCI Barra.
Unfortunately, it’s a lot easier to see Europe and China bringing these upstarts down to earth than to believe that Thailand and Turkey will rescue Spain or China. Only better policy can do the job. And there’s little hope for that in the short run.
Related Articles on GLOBAL
Like Asia, European equities have gotten a lot cheaper compared to historical averages. Another simi...
Since bottoming at the end of October, the MSCI Emerging Market Index (MXEA) and MSCI Asia Ex-Japan ...
China is the largest automobile market in the world, and the country has a thriving group of domesti...