Slow growth or outright contraction in Europe and in Asia will negatively affect US industry, but this will be offset a little by falling commodity prices, which will be beneficial to the domestic economy in that imports will be cheaper.
Let’s get something straight though: A year ago we were hearing about a dominant China or a dominant Europe. Both Europe and China are dependent upon a robust US economy for success. The world economy will not get better without the US as the driving engine of recovery. In order for the global economy to be jumpstarted, the world needs regime change in the US of A.
Let’s look at some figures:
China’s GDP is expected to be just under $6 trillion with per capita income of about $4,500 per year compared to the US economy at $14.6 trillion and per capita income of $47,000 per year. The EU combined GDP is $16 trillion, but has per capita income of about $32,000 or about 68 percent of the US. From 2008 to 2009 as our economy tanked, the imports from China shrank $41 billion. Currently, US purchases make up about 6 percent of China’s GDP. Imports from China made up about $365 billion as of the end of 2010 and will approach $400 billion this year. $365 billon is equivalent to about 2.4 percent of our GDP. A sustained hit from slower imports would be devastating to China.
It’s important to realize when looking at any economic and market forecast that the economic side represents what the economy will actually produce and the stock market side represents market sentiment for what will happen in the future.
Market sentiment will improve the second half of the year, as two significant things happen: 1) We’ll stop digging a hole on debt; 2) The election will draw nigh.
I forecast that the stock market will rally a little through the first of the year, but by the end of 2Q I expect prices to go to depressed levels with bursts of “irrational exuberance” based on short-term signs of an improving economy. To sum it up, the market will reflect anemic growth prospects through the summer until Obama looks like he could lose, at which point the market will rally on the expectation that a new, economic-friendly administration will be sworn-in in January.
However a systemic failure of the Euro (or elsewhere) could change things quite dramatically for the worse. I consider that a remote possibility however. I think that the Obama administration will ship as many suitcases of $100 bills to Europe as necessary to keep the Euro going until things stabilize. This increased liquidity is one reason why I think the market will rally. It’s also why I think that ultimately the US will grow disappointed by the summer. After a while it will become apparent that the liquidity measures taken here and abroad were little more than a magic trick, more apparent than real. After a period of inflationary activity that will mask economic weakness, the market will reverse course until after Labor Day.
At the end of the year, I expect that the market will remain little changed from its open at the beginning of the year, despite projected spring and fall rallies
Conclusion: The problems we have in the country are political, not economic. Solutions will come only when the Gordian Knot is cut politically. The GOP needs to look for a watershed. Voters will vote in 2012 for a Brand New Deal, with Obama and the Democrats playing the part of Herbert Hoover, if the GOP is wise enough to offer it.
So beside the political side where Democrats won the seats in the Senate and successfully defended Obama, the market forecast has been pretty reliable. In truth, the GOP fumbled the ball not offering enough contrast between the two parties.
But we have seen a slowdown in the second half, with a June swoon and a fall rally. Unemployment has been very close to my forecast, dipping just a tad under 8 percent. China- and Asia in general- along with Europe have been as bad as I predicted. New liquidty measures have failed to produce anything other than a short-term pop in prices for things.
And of course the change of party rally has now failed on Obama's reelection.
Oh, so now you want to know the rest of the story?
Well you'll have to get the book, which is coming soon. It's called How to Survive the Obama Economy's Second Term.
And guess what? Unlike the rest of us, it's free.