Job Growth Is Key to China ETFs, While Jobless Growth Problematic for U.S. ETFs

Includes: DIA, FXI, HAO, VB
by: Gary Gordon

Some called the U.S. economic recovery between 2002-2007 a jobless recovery. And that one produced 7 million new jobs.

Of course, the previous debate about the post-9/11, economic rebound had its roots in partisan politics. Unfortunately, this time around, we may indeed discover what a jobless recovery in the U.S. actually looks like.

Consider a number of harrowing realities:

1. The average work week clocks in at 33 hours. That's the lowest number in more than 45 years. With people being asked to work less, from forced furloughs to unpaid leave, new hiring is less likely to occur until the people who are working today are back to working at full strength.

2. Approximately 6% of the work force engages in part-time employment. Part-timers, who are not counted in unemployment figures, are the ones who typically fill future full-time spots before the unemployed.

3. Most of the $787 billion stimulus package went to cover things like jobless benefits and Medicaid. While one may believe that you have to stop the bleeding before the healing can begin, job growth typically comes from new spending on things like infrastructure. Some estimates show that only 5% of the $787 billion went to infrastructure projects.

A jobless recovery does not mean that company stock couldn't surge, however. Streamlined, highly efficient companies that produce goods and services worldwide may actually thrive. Depending on how investors look at 10%+ unemployment that could easily last into 2011, the domestic markets may yet respond favorably. (In other words, much of the damage to company share prices may already be accounted for.)

That said, I am more inclined to feel good about a country like China, where 75% of its stimulus package went directly to infrastructure and / or rebuilding the earthquake-rattled Szechuan province. Granted, there's evidence of civil unrest in provinces where laid off migrant workers couldn't find employment and ethnic clashes broke out. Yet the Chinese seem very clear about the task at hand... create work, and the people won't complain about its government.

Moreover, the middle class in China as well as Brazil continue to grow and spend. Our middle class has gone from a 0% after-tax savings rate to a fear-induced 7% savings rate.

Again, one can't simply tie a country's GDP or job growth to future stock prices. But if you had to place your money down on China ETFs or U.S. ETFs?

Think about it. If you had to go with the iShares China 25 (NYSEARCA:FXI) or the Dow Jones 30 (NYSEARCA:DIA)? Would you prefer to capitalize on consumer spending and job growth in China via Claymore China Small Cap (NYSEARCA:HAO), or would you prefer Vanguard Small Cap (NYSEARCA:VB), where the companies themselves may be forced by the government to pay for healthcare and other benefits?

Fortunately, investors are rarely asked to pick one or the other. Fortunately, we can diversify. Fortunately!

China etfs versus dow 2009

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