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Thanking our European Friends . . .

05/18/2013

One of the reasons that the U.S. stock market is doing so much better than the U.S. economy is that the U.S. economy is doing so much better than the European economy.  The latest data from Europe is not good, with GDP decreasing 0.2% last quarter.  Over the last 1.5 years, the GDP has decreased 1.5%.

The European GDP is now 3.3% lower than its peak in the first quarter of 2008.  By comparison, the U.S. GDP is 3.0% higher than its peak in the fourth quarter of 2007.  That’s a huge 6.3% difference!

A slowing GDP doesn’t need as much capital as a growing GDP.  “Capital always goes where it is treated the best.”  European capital is now migrating to the U.S.  Logically, some of it should be migrating to China as well.  However, don’t forget there are many restrictions on foreign capital in China and regulation can be arbitrary, to put it kindly.  Despite our terrible corporate tax code, capital is still treated better here than in Europe or China.

Of course, this in-migration of European capital is less important than competitive quantitative-easing (QE) by the central banks of the U.S., Japan, and, to a lesser extent, Europe.  Pundits in this country are already worried about what happens if Bernanke slows down quantitative easing.  I am less worried about this.  Bernanke may be many things, but stupid, he is not!  The end of QE will not be sudden and the period of tapering will be left undetermined by design.  There will be some initial disruption, but it will not be significant.  Don’t forget, Bernanke has set a goal of reducing unemployment to only 6.5% before cutting back on QE, and that is no time soon, unfortunately.  But, when it gets here, the U.S. economy should be even stronger than it is now.

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