Check out Guy Sorman’s latest article in City Journal: A Brief History of American Prosperity.
It will both soothe those fearing the demise of the US economy and inform of the dynamic American economic past.
Lately, there’s been a torrent of popular press refuting the notion that small business “drives” the US economy. This is sheer nonsense.
The only way to get a big company is for a small one to get big. Huge companies don’t just materialize out of thin air. (Occasionally there are spin-offs, but these are comparatively rare.) Of course big companies have more profits and do more hiring—they’re, well, a lot bigger. But no company starts out huge; they start small. You have to have lots and lots and lots of small companies come and go, with access to capital, hiring and firing, to get just one Facebook or Microsoft or FedEx, or Caterpillar, and so on.
The reason this is so important is because we need constant renewal of our big companies, they aren’t at all static in place or size—take a look at what was in the Fortune 500 just 20 years ago versus today…vastly different! Small companies become big companies and big companies falter or shrink (hello, Kodak?), and those are the things that drive growth, innovation, productivity, and jobs. Not a stagnant pool of big companies that expand and contract like an accordion with growth/recession.
Nurturing the real job creators – John Bunzel
With much hubbub about what a European recession might do to the US , particularly since exports are a significant portion of the economy, the analysts at Fisher Investments took a peek at US export exposure to the region (see below).
It’s pretty clear that—while there of course would be additional knock on effects to a recession in a region as big as the eurozone—the US is not headed for automatic economic doom as a result of its trade there. As of June, US exports to Italy were a little over 1% of total exports; Spain is even less, coming in at roughly 0.7% of total exports; even Germany (the healthiest of the bunch) is well under 4%.
US Leading Economic Indicators rose sharply, well more than expected in October. Why’s that important? Remember, just a few weeks ago, how recession not only seemed a foregone conclusion, but some experts even believed we were already in one? Through history, LEI generally needs to turn significantly negative in order to get a recession. That’s not where we are today.
Remember, stock investors should care greatly about the overall direction of the economy. But economic growth as measured by GDP is different than investing in the future profits of a company.
- S&P 500 Showing Record Sales Clashes With Slower Growth Rate
- Capital Spending Nears 2008 Level as U.S. Skates New Recession
This blog has made this point often, but it can’t be repeated enough.
Today’s first ever FOMC Chair press conference is certainly the start of something new—but having nothing to do with economic or monetary policy. That I could see watching from Fisher Investments HQ, virtually nothing interesting or heretofore unknown was said. It was all very…political. Bernanke was well spoken, he was empathetic, he was balanced, he was sensible. He was all the things you look for in a politician’s speech.
So what we have here is not so much a new era of improved communication between the Fed and the public, but more like a politicization of the Fed—Big Ben is now an inch closer to being the head of the US economy in the public’s eyes—in some ways almost more than the president. Think of what an evolution that is: just 30 years ago the Fed was barely thought of at all for macro economics, now Bernanke is speaking to everything from inflation to manufacturing to the Japanese earthquake. Said another way, people believe he is in charge, and—gulp—has some mighty control over what the US economy does and is. In reality he mostly sets monetary policy and governs the banks—a vital part, but just a part, of the economy. Ben now seems less interested in saying what is true or what he really thinks than he is in saying things that he believes will be good for the market, good for the economy, will instill confidence in the system, confidence in him, etc. Oh, and also he will talk and behave in ways that preserve his job and ego (recall that this is an appointed post by the president).
The Fed Chairmanship is now—as of today—more of a public figure-headed institution than ever before. Time will tell what that means—the Fed is one of the most evolutionary public financial entities in all market history, and they’ve never been static in their policy or function.
Maybe the most amazing thing about S&P’s announcement on the US fiscal situation is that anyone got riled up about it. Here is a good primer on the report, if you haven’t seen it firsthand. We’ve seen many similar declarations—and years ago—from 60 Minutes to The Wall Street Journal.
That I can see, the report didn’t include any new information other than S&P’s own opinion on the matter. S&P cites a relatively large deficit, rising debt, political gridlock—these have been known to bond investors for a long time, yet yields remain tame and government bond auctions are far oversubscribed. Notably, Treasury yields were down yesterday (4/18/2011), and the dollar was stronger (an ironic twist on the whole “risk on/risk off” situation I’ve before noted on this blog as nonsense).
S&P highlights entitlement programs (Social Security, Medicare, and Medicaid) as “the main source of long-term fiscal pressure.” But entitlements are not the equivalent of debt and can be changed by Congress. Government debt could reach troublesome levels at some point, no doubt, but not in a timeframe that matters to stocks near term. This, and eventual similar reports from other ratings agencies (they tend to move together), could even hasten the political response by enabling politicians to use the AAA rating as a rallying cry to push through unpopular measures like entitlement and other spending cuts…and possibly higher taxes (gulp).
Either way, stay cool: this report’s gusto shouldn’t sink stocks longer-term.
With the ebullient bond buying going on (near record low yields on Treasuries, record bond issuance for corporations, record low yields for long-terminvestment grade bonds), an interesting story has fallen through the cracks:
What!? Remember, just months ago, the financial world perpetually bemoaned Chinese ownership of US debt? And how, if the Chinese decided to start selling, it would be chaos for said US debt? Yields would spike, prices would plummet! And then the world would implode on itself. Or something.
Well, why isn’t it happening? One , China doesn’t hold as much US debt as you might think. In the neighborhood of 10%, which is big but not ridiculous. Actually the US —its citizens, its institutions—own way more…as in well over a third. Second, the sovereign bond market is one of the largest, deepest global markets in the world. There are many, many forces at work at any given time. Simply, there are other demand factors that are overwhelming Chinese US debt sales.
If China decided to dump all its US securities at once, of course that would bring big disturbance. But in reality, as China diversifies its holdings and works—in baby steps—to open its capital markets and un-restrict its currency, we’re much more likely to see this kind of measured action. It’s so benign it barely hits the popular media’s radar.
As is so often the case, “We worried about it, but nothing happened” never makes a good headline. This is a prime example.
|*The content contained in this article represents only the opinions and viewpoints of theFisher Investments editorial staff.|
I commonly hear that small businesses do not have access to credit and that’s hurting the economy. It’s true that credit is still somewhat impaired today, but the below chart demonstrates improvement—we’re much higher today than we were in 2008 and early 2009. (Source: Small Business Association)
Actually, with all the programs in place to facilitate small business loans, I’d bet that this says as much about improving access to credit as it does about improving demand for credit.