viernes, 6 de noviembre de 2015

viernes, noviembre 06, 2015

Up and Down Wall Street

China’s New Economics: Two for the Money

With few births and a graying population, China will allow couples to have two children, in the hope that reproduction will foster economic demand.

By Randall W. Forsyth        
  
Oh, Say, can you see this?

That would be Jean-Baptiste Say, the 18th century French economist famous for his law that production is the source of demand because income from output provides the wherewithal for spending.

China introduced a corollary to Say’s Law last week, which might be summed up as reproduction drives demand. The Communist Party ended its one-child policy and allowed all married couples to have two kids.

The change is supposed to alleviate the demographic squeeze seen in virtually every industrialized nation, that of an aging population with a stagnant or shrinking workforce. That trend will be even more severe in China in coming decades because of its longtime and draconian curbs on having more than one child.

According to Bank Credit Analyst, population growth has been slowing sharply around the globe, the result of an inverse relationship between per capita gross domestic product and fertility; as societies get richer, they have fewer babies. And China has been in the forefront of that trend, with population growth slowing to about 0.5% per annum, less than a third the pace of the late 1980s.

The effects of any uptick in China’s labor workforce, of course, won’t be felt for at least a couple of decades. For now, the only increase in labor will be on the part of new mothers. So, most demographers thought the change in the one-child rule was years overdue.

But there could have been another motivation. Beijing has been trying to engineer a massive reorientation of its economy, away from exports and investments in capital goods and property, and toward consumer spending. As any new parent knows, babies mean buying—lots of stuff.

Call it a different kind of quantitative easing. Even more than the six rounds of interest-rate cuts in the past year, the change allowing couples to have a second baby could spur spending in nine months, if not sooner. The stock market, being forward-looking, bid up shares of diaper makers, baby-bottle manufacturers, and skin-care product makers (although a condom producer saw a decline), say published reports.

From my recollection of when our kids were young, Chinese couples can look forward to their abodes being taken over by all sorts of colored plastic stuff. They then may be spurred to move to bigger living quarters, perhaps in one of those empty apartment towers in the ghost cities that have sprung up around the nation, which were based on the notion of build it and they will come.

But the prospect of shelling out for all that stuff—plus the other expenses that aspirational parents in China (and in lots of other places) can look forward to, such as tuitions, tutoring, sports teams, camps, computers, phones, and the list goes on—may prove a deterrent to bigger families. And that doesn’t speak to the more serious problem of the lack of affordable child care.

The economic implications of graying populations with shrinking workforces and increased ranks of retirees are dire, BCA concludes. Demand will be hurt by a shrinking consumer market, while supply will be curbed by a smaller workforce—unless there’s a surge in productivity, which has been going the other way. Resources needed to support an aging dependent population will be diverted from other uses. And possible tax hikes to fund social spending could further hamper growth.

BCA’s outlook, contained in a report cheerfully titled “No Way Out,” does have some positives: “The clearest investment conclusion emerging from the analysis is that the secular bull market in health-care stocks is in its infancy, and increased public spending on health care will crowd out investment in other sectors. Public spending on health care has been increasing for a few decades now, but if economic growth is going to be stuck in a slower growth pattern, then it is likely that individuals will concentrate on improving their quality of life, further accentuating this trend.”

Yet health-care companies continue to be hellbent on combining to fend off pricing pressures, competition, and taxes. Pfizer (ticker: PFE) last week reported it was in talks to link up with Allergan (AGN), which would effectively move its domicile to tax-friendly Ireland (see Pfizer feature). That comes on the heels of Pfizer’s acquiring Hospira, and Actavis taking over Allergan this year. (They kept the Allergan name.) Also last week, Walgreens Boots Alliance (WAG) said it is acquiring Rite Aid (RAD). And that’s just last week’s deals.

At least they’re all fighting over a growing pie. JPMorgan economist Daniel Silver points out that health care has been driving consumers’ outlays. Growth in health-care expenditures accelerated to a 4.7% annual rate in the third quarter from 3% in the corresponding 2014 period. Growth in spending on all other goods and services has remained steady, however, which suggests where some of the “windfall” from lower energy costs went. At the same time, “solid job growth in the health-care industry has corresponded with accelerating wage gains,” Silver adds.

Demographics is destiny, it’s often been said. China is trying to alter its demographically dictated future by letting couples have more babies, which could help its economy in the short run and couldn’t hurt in the long run. For the rest of the world, spending and investing will be increasingly about paying for health care for an aging population.

THE STOCK MARKET ENDED OCTOBER, a month best known for infamous crashes, with some nice gains. Wilshire Associates reckons that holders of U.S. stocks wound up the month some $1.8 trillion wealthier, on paper at least, a rise of 7.6%. Among the popular averages, the Dow added 8.47%, the S&P 500 tacked on 8.30%, while the Nasdaq 9.38%, all best showings since October 2011.

While the initial batch of third-quarter earnings released in the month matched the lowered expectations analysts had set, the real credit for October’s advance goes to, well, credit. Credit spreads narrowed after having widened sharply during the stock market’s summer swoon, allowing the capital markets to continue to fund massive deals and share buybacks. As our colleague Amey Stone noted in her Income Investing blog on Barrons.com, companies brought some $19 billion of bonds to market on Thursday alone, including a $13 billion megaoffering by Microsoft (MSFT) to help fund repurchases of its stock already at a 15-year high.

The benign interest-rate environment was abetted by the Federal Reserve’s decision in September to hold off on lifting rates anytime soon, which was joined by strong hints by the European Central Bank that it would probably expand its bond purchases, plus further cuts in interest rates and bank reserve requirements by the People’s Bank of China.

But the Federal Open Market Committee last week made clear that the first rate hike from its near-zero federal-funds rate target, which has prevailed for nearly seven years, will be on the table at its Dec. 15-16 confab. Assuming the Fed’s key economic markers—employment and inflation—make progress in reaching its targets, we should have liftoff.

That’s a big if.

Fed-funds futures contracts are giving about even-money odds on that happening, but Michael Darda, chief economist and market strategist at MKM Partners, remains skeptical about a December hike.

With the Fed’s quantitative easing having ended a year ago, growth in current-dollar gross domestic product has slowed to the low end of its five-year range—something that also happened when the Fed wound up its first two rounds of QE. And that also applies if factors such as trade, inventories, and government spending—things that depressed third-quarter real GDP growth—are stripped away. And inflation (based on the Fed’s favored measure, the core personal consumption deflator) is running materially below the central bank’s 2% target.

“Commencing a tightening process from the [zero lower bound] on short rates with 1) slowing nominal growth, 2) inflation below target, 3) expected inflation below target consistent levels, and 4) lingering credit stress seems like a strategy with considerable downside risk,” Darda writes.

Fed officials emphasize that their decisions depend on the data, which makes the next two employment reports crucial, with October’s numbers on tap this Friday. Forecasts are for nonfarm payrolls to return to trend, with a gain of about 180,000 after September’s punk 142,000 rise. The jobless rate is expected to remain at 5.1%—just above a key dividing line for investors, according to Jim Paulsen, chief investment strategist at Wells Capital Management.
When unemployment dips below 5%, he finds, stock and bond investors don’t do nearly as well as when it’s higher, even as workers fare better.

Looking back to cycles dating to 1948, Jim finds that stock returns were nearly twice as strong and long-term government-bond returns almost four times greater when joblessness was above 5% than when it was lower. Moreover, stock and bond investors tended to suffer monthly declines more frequently when the rate was below that level.

Historically, Jim explains, bond yields have tended to be on the rise once the jobless rate drops under 5%, and the next recession has been less than two years away. In other words, the economic cycle’s end was nigh.

An exception was the late 1990s, during the tech boom. That was accompanied by strong productivity gains, which he notes are conspicuously missing these days.

So, at full employment, risks in stocks or bonds aren’t well rewarded. Far from being a perma-bear, Jim was a steadfast stock bull until about a year ago. Since then, the major averages are little changed, even with October’s gains. That’s worth mulling.

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