"The US recovery must overcome the European divorce and the China slowdown in order for the US to grow more than 2%" is how JPMorgan's Michael Cembalest describes the reality of an un-decoupled world. There is some divergence as while the US economy if only growing at 2.0% and regional manufacturing surveys have rolled over, other economic indicators (JOLTS, railcar loadings, even select housing markets) are picking up. His point being that these trends will need to coalesce into more household spending (not just on cars) and capital spending in order for the US growth to grow more than 2%.
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For that to happen, some clarity may be needed on both the “2013 fiscal cliff’ and the “long term entitlement bomb”, which unfortunately calls for opposing fiscal measures to mitigate them. One question: what policy mix could unleash the mountains of corporate cash? I doubt it would involve more help from the Fed. There’s a debate about whether the Fed should engage in more securities purchases (QE3), but that seems odd when policy rates are already zero and the 10 year Treasury is less than 2%. Instead of looking to the Fed, aiming for a repeat of the 1950’s seems like it might work better. From 1950 to 1960, the US federal debt fell from 80% to 46%. The US did not inflate its way out, and there was no austerity program. The US grew its way out. As a result, following the example of Eisenhower, it’s tempting to think that an aggressive pro-growth agenda signaled from the White House could be more impactful than QE3.
Wrapping up
It will be hard for the world to grow if China depends on Europe which depends on China which depends on the US which depends on China and Europe. It’s an odd market: in the US, 98% of the S&P 500’s cumulative 27% return since January 2010 occurred either during corporate earnings season, or right after QE programs. The rest of the time, the S&P 500 is flat, since the economic news has not been that good. As we have been writing, current circumstances call for modestly less risk than normal, and allocations to distressed residential and commercial real estate, long-term energy projects, private lending and other investments with less exposure to the current macro/business cycle.