US Political Organisation
The US political system is as good as most by virtue of its strong voter participation and the general ethos of self-reliance that permeates the whole country, including the Democrat Party. The protracted political process is effective at rooting out dubious presidential candidates. The only disappointment is that its not a preferential voting system. The implication is that even if you are a Libertarian, you`d probably vote for George Bush to make your vote count.
Prior to WWII the US had no interest in global affairs, but it has since taken national pride in being the `global policeman` - in extending freedom to the rest of the world. Sadly this policy has lacked integrity and any strategic direction. It has been poorly executed.
The US Economy
The current economic cycle (1992-2005) has delivered the US an average GDP growth rate of 3.2% (?) per annum. Initially growth was soundly based on rising incomes and production, however in the late 1990s expansions monetary policy have created a `money illusion` that has artificially stimulated domestic consumption. Record low Fed rates, tax cuts and easy credit growth artificially pushed up housing & equity markets, giving Americans the illusion of wealth creation. On the east & west coasts property prices have risen by 120% over this period (compared to base line growth of ??).
The consequence is that the US is now recording record budget deficits of 6.8% of GDP and monthly current account deficits of $US60billion at a time when interest rates are at record lows. Its true that the US has a capacity to absorb more debt than any other economies because its debt is denominated in its own currency. But this debt poses a huge concern because the spending is being undertaken on the premise that income and consumption growth (and this housing & equity prices) are sustainable.
In Aug05 we are seeing the first signs that this boom is not going to hold. The risks posed to the market are:
- Oil prices: In current $US terms, oil prices in 1981 reached $93/barrel compared to $US70/bbl today. This is a rationalisation used to justify asset prices rising higher. But consider that oil prices are still rising, households are more indebted than the 1980s and the trade imbalance.
- Inflation: There are signs of inflation which will eventually feed into higher interest rates. Inflation in itself is not bad for asset prices, and it can be ignored by the Fed Reserve at the economies peril. Inflation has a nasty habit of running away as production slows and more money is chasing fewer goods. In the expansion phase inflation is countered by falling unit costs (productivity).
The US has record debt levels at a time when Asian economies are clinging to mercantilist policies. The EU is struggling to unite. Where is the prospect for future global growth when western markets are so indebted. There is no capacity for the Chinese to spend, Japanese incomes are flat, and it will be years before the LDP Party will be able to see the benefits of reform. The US is facing an aging population, however it has some capacity to easy this burden through increased immigration.
Whilst households are indebted, US S&P500 companies are sitting on $US621 billion in cash. There are several reasons for this. Since 2003, companies have been taxed directly on dividends, rather than having them taxed at the marginal tax rate. For this reason, some companies have adopted capital returns, but the majority are clinging to cash in preparation for a `correction`. This provides them with the funds to engage in takeover activity. Buybacks make alot of sense too because the add value to executive stock options, but not much longer as expensing options becomes a compulsory requirement. The S&P500 dividend yield is currently 1.7%, compared to an historic average of 4%. When the global economy slumps, earnings expectations will look highly unrealistic.
The US is facing a $US50billion clean-up bill relating to the New Orleans flooding. Thats on top of already strained public coffers. US retail sales plunged by 2.1% in Aug'05, even before the impact of Hurricane Katrina. This is the largest fall since Nov'01 (2.9%) in the wake of Sept 11th. The bulk of the fall was caused by a 12% fall in car sales, otherwise non-car retail sales were up 1%. Regardless the increase reflected higher petroleum sales (prices). On the positive side, the PPI fell in Aug'05 and the trade deficit narrowed. Might this however reflect the stronger $US.