finding a place to stand (iii)

the macroeconomic situation: recession on the cards?

As a stock market investor, given the possibility of owning companies in the major developed economies, as well as the fact that about half the earnings of US-based companies come from outside the US, a key high-level question in portfolio positioning is whether I want to have exposure to the US economy (either through US-based or foreign-based companies) or to the rest of the world. Where will growth be better?

Looking outside the US…

China, the largest economy in the world, is being slowed by three major difficulties:

—a housing lending crisis that I think falls somewhere in severity between the US savings and loan crisis of the early 1980s and the mortgage loan crisis of 2007-08

—movement to bring fast-growing companies like Alibaba and Tencent more directly under the control of the Communist Party–slowing their expansion in the process, and

—failure of locally-produced vaccines to bring covid under control.

All this implies that for a while at least China will no longer be the growth engine for the world.

Japan is in its fourth decade of stagnation, the result of adhering to: protection for industries of the past, no immigration, marginalization of women and members of minority groups–policies whose negative effects are offset by low interest rates and a weak currency. Essentially the economy Trump was trying to create in the US. The largest economy in the world in the 1980s, it’s now an afterthought.

Europe, though younger than Japan, is another fast-aging area with, generally speaking, the similar long-term economic problems as Japan. Same roots, too. Its current issue, however, is that it is paying for Russia’s invasion of Ukraine, and the implied threat to the rest of eastern Europe, by buying Russian oil and gas. Sanctions against Russia are making hydrocarbons more expensive. Making the positive assumption that current hostilities end at worst in stalemate for Ukraine, weaning itself from Russian fuel will be an expensive and disruptive task. Italy appears to be perking up for the first time in decades; on the other hand, the UK, lost in dreams of past naval glories, is only beginning to work out how badly it damaged itself through Brexit.

To sum up, China is unlikely to take up its pre-pandemic role of engine of world growth. No help from Japan. The Russian threat may end up reinvigorating Europe economically, although that area also has greater exposure to possible negative fallout from the war in Ukraine. From an earnings momentum view (meaning without considering whether high risks are mitigated by low valuations), then, it seems to me that the US could be the only game in town.

PS. When I look at media worries about possible recession, it seems to me that a large part of the argument (assuming there is any rationale for reporters’ posturing) is that the situation outside the US is not that cheery.

more on Monday

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