Markets rallied this week. Investors took cheer from signs of better growth in China, and from bumper profits at Goldman Sachs. The stories ran that the world economy is going to get a boost from Asia, and Western banks can now make some money again.
It all goes to show what wonderful things low interest rates and easy money are. The Chinese stimulus package has apparently produced quick results, unlike the packages elsewhere. The Chinese have certainly been able to stimulate their banks much more than the West, with Chinese money growth now accelerating dramatically.
We need to be somewhat careful of the official figures for GDP growth, in an economy still very dependent on export earnings at a time of weak international trade. The figures may be overstating the reality on the ground, where many are laid off or on short time working owing to weak export markets.
The Chinese can get their banks to react more quickly thanks to the degree of state control and the absence of a sub-prime crisis. Money is now pouring into shares and property, driving prices higher. It is going to take longer to stimulate internal demand sufficiently to make up for the loss of export orders, but there will be some favourable momentum even in the real economy from easy money.
The good results from Goldmans do not mean the US banking crisis is over or the problem solved. The many state interventions allow banks to write profitable business today, and to pick and choose which business they want. It does not mean that all the past problems of the major banks are resolved or that we have seen the last of the write offs. Goldmans and JP Morgan are not representative of US banks. We should expect some more bad news before the banking crisis is over.
The big imbalances in the world economy are going to take time to sort out. It is true that the weakened dollar and sterling will help adjust the big balance of payments deficits of the US and UK, but more by limiting imports. China will gradually increase internal demand more and save less, but she is still very geared to her old export-oriented model of success.
Amidst all the uncertainties, one thing does seem to be clear. Asia is going to grow faster than the US and UK in the years ahead, just as it did in the last decade. More people are coming round to our view that there will be a permanent diminution in the UK growth rate during the years of sorting out the debt overhang. All this continues to point to placing much more emphasis on Asian equities than is traditional in UK portfolios.
The pension deficits in the UK are also something to worry about. More companies will close their funds to existing members as well as to new members, and explore other ways to cut the liabilities. The poor performance of many of the portfolios in recent years has added to the gloom created by liability inflation. These will be another set of claims on the UK which will prove difficult to pay for or to sort out. The least bad asset class for mature funds appears to be the high grade corporate bond.