The inherent vice of Capitalizm is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries.– Winston Churchill
We live in a relativistic world; one in which toleration is the highest form of virtue. While we could wax on eloquently about the profound bankruptcy of such a worldview, we’ll spare our readers and simply note one perhaps unforeseen element of the “code of toleration”. If nothing is truly “bad” then nothing is really “good” either! Since we don’t subscribe to this particular worldview ourselves we will draw your attention to the fact that this truth can also be applied to our current economic situation. The U.S. economy with its corresponding debt load, significant level of unemployment, and anemic rate of growth can hardly be called good. But when compared with say, Japan or perhaps various countries in the European community suddenly our situation looks a trifle less grim. For the sake of simple comparison let’s consider unemployment. Following the most recent payroll data, the U.S. unemployment rate dropped by 2/10 of 1% to 7.4%. Hardly a stellar number one might say, but when compared with the latest “improvements” to the labor situation in the Eurozone where unemployment across the zone remains at 12.1% or to a country like Spain where the primary rate of unemployment exceeds 26% it looks almost dazzling. One could also consider the statutory debt burden of major developed countries. Japan’s public debt is expected to hit 240% of GDP under the new economic stimulus programs of Shinzo Abe while debt of the United States at approximately 100% of GDP, although not a trivial number, is still less than half that of Japan. When one throws in other economic and demographic factors the U.S. looks like the proverbial knight in shining armor. We will conclude our summary with a quick review of GDP. Preliminary U.S. 2nd quarter growth of 1.7% may seem anemic at best and barely above stall speed at worst, but when viewed in the light of a continued contraction in Italy and six straight negative quarters of growth in the Eurozone it becomes the growth engine of the developed world! Some engine you say, but of course that is exactly the point.
The market bereft of a really good growth story has certainly settled for a pale reflection of the real thing. Recent concerns regarding the bankruptcy announcement by the city of Detroit notwithstanding, interest rate concerns settled down during the month and the bond market regained a bit of lost ground. However, despite the improvement most of the broader bond indexes remain in negative territory for the year. The Fed’s carefully crafted statement provided little fuel to accelerate the “Taper”, and the bond markets seemed reassured that regardless of the Fed’s intentions there was no need to panic. In fact, it was the very lack of an imminent approach to the taper coupled with relative economic improvement and decent earnings that led to a massive rally in global equities. Virtually every area of the market moved higher in July. Small caps led the way up over 7% during the month of July with large cap indexes like the S&P 500 and the Dow following closely up 5.09% and 4.12% respectively. Global equities jumped on the bandwagon as well as foreign investors determined that monetary stimulus is after all that most relative of all commodities and since the U.S. Federal Reserve was in no hurry to remove the punchbowl undoubtedly their central banks were not too keen on moving in that direction either. The MSCI EAFE and World Indexes both rose approximately 5.25% in July. We might sum up July by saying that we saw little real improvement, but who cares about reality, relative improvement was all that market participants were looking for and it was enough to cause a very real rally. At this point it would seem that a dose of reality in the form of real economic improvement or real earnings growth would be required to support the continuation of the current rally.