The sight of the world’s richest nation struggling to maintain food and water supplies

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Ballet Shoes Center.com

Published: September 7, 2010

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The sight of the world’s richest nation struggling to maintain food and water supplies, let alone law and order, has shocked perceptions. It is a normal market – and because of this it can take big blows in its stride. Useful that, especially as there may be quite a few more financial blows around the corner.. Markets have struggled to assess the dimensions and consequences of the destruction in New Orleans. There is a string of buyouts and buybacks, plus big dividends.The result is a prospective price/earnings ratio back to around 12, pretty much the level of the middle 1990s compared with 22 at the peak of the dot-com boom.Much the same arguments support the US markets – though partly perhaps because they offer worse value, they have not done so well this year – and most global ones.The big point here, surely, is that markets are back to “normal”, in the sense that the excesses of the 2000 boom have been worked off and, thanks to an easy money policy from the main central banks, there is a lot of cash around It is not a bull market It is not a bear market. The other is the extent to which equity is being replaced by debt. Thus companies making takeovers are paying off equity by relying on debt finance.

One is company earnings – these have been upgraded by 7 per cent for both this year and next. Global bond yields are low, too, despite unsustainable public deficits. It makes you wonder what markets might be doing were there not all this negative stuff around.One broker paper caught my eye last week. It was from Citi- group and concerned prospects for the UK stock market. The authors point out that the market has delivered a healthy return of 15 per cent this year, and they have increased their target to 6,000 on the FTSE 100 index by the end of 2006.There seem to be two drivers. Maybe the paradox will continue: wonderful products and companies but not enough jobs or money spent in the shops. Maybe, on the other hand, there will be a supply-side revolution and the economy will start to fulfil its true potential.

It would be good for all of us were that to happen.Shares strong enough to resist the blowsThe puzzle gets, well, more puzzling. We have just had the worst natural disaster in the US since the San Francisco earthquake of 1906. We have the oil price, in money terms at least, close to its all-time high, and with the prospect of staying high for the foreseeable future. We have the US Federal Reserve raising interest rates and, maybe after a pause, doing so again. And we have the underlying threat from all the various global imbalances that economists (including me) have rabbited on about for ages.Yet financial markets are calm, with shares climbing across the world this year and seeming utterly unfazed by all this bad news. The next downward swing in the world economic cycle, whenever it comes, would be serious indeed.For those of us here who know and like Germany, its politics are tantalising: so near and so far; so hard to deliver what the majority of the German people do want. That would not be an immediate catastrophe, just a loss of time because eventually the present model will become unsustainable.

The next French president, whoever he (unlikely to be a she) turns out to be, would have a tougher job on his hands.The likelihood would be that the big continental European economies would continue to under-perform relative to the smaller ones and to the rest of the world. That would not mean there could be no serious reforms, of course, either in Germany or elsewhere – just that they would be harder to sustain. What then?What it would mean, I suppose, is that it is very difficult in Europe to win an election on a reform ticket. The period of cold turkey could have run its natural course.Suppose, however, Ms Merkel does not get the clear majority and there is a grand coalition. Once the country has got its costs in line with its productivity and quality, the export sector could indeed start to stimulate domestic demand. Its present estimate is only 0.8 per cent but better to revise up than down.The second reason for optimism is that five years of squeezing down costs since Germany locked into the eurozone are at last bearing fruit That is why exports are doing so well.

The institute has been a noted (and accurate) bear of the German economy, so this is significant. It would be too much to say that the success in exports is at last spreading to the rest of the economy, but the Ifo Institute in Munich says it might increase its forecast for growth this year. If the policies were sustained and Germany did indeed emerge from stagnation, it would give a wake-up call to the rest of Europe.There are two reasons to be quite optimistic. One is that the very latest figures for exports and production are encouraging. Germany would press on with reforms that would make life tougher for most ordinary people at first, in the hope there would be a supply-side revolution leading ultimately to faster growth and higher living standards. Other changes – for example, trimming some social security payments – might actually cut demand in the short term.So the prospect would be for another two years of cold turkey. Saying you will do this is a pretty good way of encouraging people to bring forward big-ticket purchases, so in the very short run the programme would lead to a boost in demand But that would be a one-off.


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