What It Means When U.S. Economy Is Too Strong

|
Includes: CAJ, HMC, SAP, TOT
by: Dana Blankenhorn

Summary

Relative to its trading partners the U.S. is in great shape.

The cures that worked for our economy can work elsewhere.

When other countries take those cures, invest in them and profit.

The U.S. economy is getting into a position it hasn't held since the 1950s. Compared with the rest of the world, we're just too strong.

China is slowing and growth across Asia is off the rails. Japan remains in the woods, and not in a Sondheim-ian way. Europe is said to be weakening "massively" and the hopes of nations around the world to replicate the U.S. shale revolution are collapsing in a growing glut of oil.

To read headlines like this you would think things are terrible. In fact things here are great. Unemployment is down, market interest rates are super-low, and the dollar is strong.

Why, then, are so many analysts wringing their hands?

In part, it's because that's what they do. If you read commentaries from the last time the U.S. was this strong on a relative basis, in the 1950s, you'll see the same doom-and-gloom you read today. In part, today's gloom is popular because the world is far more interdependent - if there are no markets for what we have then we can't grow no matter how good things seem to be.

Mainly, it's because as in the cartoons, you don't fall until you look down. What needs to happen in the U.S. today is that people need a raise. Higher wages in the U.S. raise would ripple "negatively" through the economy at first, but the money would be recycled quickly in the form of demand. Not just demand for what we make, but demand for what others make. And that's what the global economy needs right now.

Unlike the recovery of the 1950s this has been a capital-led recovery, not a demand-led recovery. The rich are flush as never before, and the good they seem most anxious to buy with that wealth is power. In fact wealth is meant to be shared. The way you get more buyers into the market is for those buyers to have more money.

They do, in a way. Falling energy prices have given the suburban middle class its first raise in years, and those benefits are just now starting to ripple outward from the gas pump to the shopping centers. They will ripple out further, in terms of lower costs and (as gluts of goods require it) lower prices. Lower costs offset the impact of the rising dollar. The threat today is deflation, not inflation.

The cure for the global economy is to do just what the U.S. did six years ago - forgive debt and create new money. Investors should remain fully committed to the market, but be on watch for our trading partners to do the right thing, and then invest in their recovery.

Current imbalances have put foreign assets on sale. Other governments are gradually awakening to the trouble and, I believe, taking action. So it may be time to start nibbling on European and Japanese stocks that have been beaten-down of late, like Honda Motor (NYSE:HMC), Canon (NYSE:CAJ), SAP (NYSE:SAP) and Total (NYSE:TOT). These are not badly-run companies. Their stocks are cheap mainly because their domestic economies are in trouble. But they are just as international as our companies. They will either recover or become vulnerable to takeover.

Don't go overseas wholesale. Balance your portfolio. Buy only the strongest players. But you buy things when they're cheap, when everyone is down on them. Sell them when they're dear, when everyone wants them. Right now international equities are dirt cheap and investors are shirking even the strong players. That's a good time to get in.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.