Lessons from the Pros

A Global Tide Lifts All Boats

Navarro’s Big Economic Picture

In a year or two, we may all be looking back at this moment with some nostalgia as the global economy is hitting on all cylinders and, contrary to recent past history, the U.S. is the caboose rather than the locomotive.

The biggest surprise is likely Germany and, more broadly, the Eurozone. Despite a steadily rising Euro that should choke off its exports, European growth continues to gather momentum and the EU25 countries’ employment rate has fallen below 8% which, for Europe, is all quite grand.

Of course, much of Germany’s prosperity is due to its activities in China. It’s done a much better job of selling services and capital goods to China than its neighbors, particularly France.

A similar phenomenon is going on in Asia, with South Korea and Japan both thriving on the capital goods China trade – even as they become at least slightly less dependent on selling exports to the U.S.

As for Latin America, the commodity rich countries – particularly Brazil — are getting in on the Asian boom as well, selling everything from soybeans to iron ore.

This all adds up to a lovely time for the financial markets. You can literally throw darts at the regional and country ETFs in Asia and Latin America and hit bullish targets. (Only Mexico and Canada are suffering a bit from the U.S. slowdown.)

Given the widespread global strength, it’s hard to see any impending market meltdown. Possible triggers for such a meltdown are few but important and include a possible collapse of the Chinese stock market, which is making Nasdaq 2000 look tame. There are also the usual geopolitical hazards in the Persian Gulf. Another possibility is $4 a gallon gasoline in the U.S. come this summer, which could sharply depress an already sluggish economy.

As for where to put your extra money next week, the risk-reward ratio favors cash or, for the most daring, the short side of the market. That’s because the market is due for at least some short term correction in the next month or so. The big imponderable remains the U.S. economy.

Was the ISM spurt a harbinger of a bounce back from sub-2% GDP growth in the first quarter? No expert can say with certainty – which is a point underscored by the fact there are as many people who think the Fed might raise rates as lower them.

Answers will be few this week as it is a very light economic report calendar, with the major reports backloaded towards the end of the week – trade, retail sales, and the PPI to be specific.

Accordingly, much of the market’s movement will likely hinge on a trio of Central Banks taking action. The Fed meets on Wednesday and both the European Central Bank and Bank of England meet on Thursday.

The smart money says that the Fed will stand pat. Ditto for the European Central Bank, which is expected to pass this month BUT raise the 3.75% rate in June by 25 basis points 4%. As for the Bank of England, the smart money here says it raises its rates to 5.5%, particularly after some recent hot inflation numbers. What’s interesting about all of this is that Europe’s economy and interest rates are both heading up while the U.S’s are both (possibly) heading down.