Bears Turn Bulls as U.S. Gains From Roiling Markets

The U.S. may come out ahead in 2011 as policy makers from Federal Reserve Chairman Ben S. Bernanke to Chinese Premier Wen Jiabao jockey for advantage in the world economy.

U.S. growth is accelerating as the year ends, with economists, consumers and companies such as General Electric Co. becoming more confident about next year’s outlook after President Barack Obama struck a tax-cut deal with Republicans this month. Europe, meantime, is stuck in a sovereign-debt morass, while China and other emerging countries are struggling to cap an economically costly run-up in inflation.

“The new, new, new normal is for the U.S. to be looking in pretty good shape,” said Jim O’Neill, the London-based chairman of Goldman Sachs Asset Management.

That’s prompting investors to take another look at the country, O’Neill, who helps manage $823 billion, said last week in a radio interview on “Bloomberg Surveillance” with Tom Keene. It’s “raising issues about the whole allocation of capital between so-called emerging markets and the U.S.,” said O’Neill, who popularized investing in developing nations by coining the BRIC moniker for Brazil, Russia, India and China.

Robert Doll, chief equity strategist at BlackRock Inc. in New York, agrees. He said the improving economy and tax-cut compromise Congress passed last week strengthen the case for investors being overweight U.S. shares in their portfolios.

Stocks Outperform

“The U.S. will continue to outperform the rest of the developed world” and will “probably do pretty well versus most emerging markets as well,” said Doll, who helps manage about $3.4 trillion. He sees the Standard & Poor’s 500 Index climbing to the “neighborhood of 1,350” by the end of 2011, compared with 1,243.91 at 4 p.m. in New York on Dec. 17.

The Standard and Poor’s 500 Index of U.S. stocks has risen 12 percent this year, compared with declines in emerging markets such as China and Brazil and exceeding gains in the MSCI World Index, which tracks developed-nation equities.

“The U.S. economy unquestionably has some momentum,” former Fed Chairman Alan Greenspan said. “The unemployment rate should start coming down next year.” Joblessness stood at 9.8 percent in November, a seven-month high.

U.S. chief executives polled in the fourth quarter by the Washington-based Business Roundtable were the most optimistic they’ve been in almost five years. Jeffrey Immelt, chief executive officer of Fairfield, Connecticut-based GE, called Obama’s tax cut and his Dec. 15 meeting with corporate leaders “real positives.”

‘Massive’ Stimulus

Even long-time bears on the U.S. economy are becoming more upbeat. Goldman Sachs Group Inc. chief U.S. economist Jan Hatzius lifted his 2011 forecast to 3.4 percent from 2 percent last month to take account of the tax-cut package and a recent spate of stronger-than-expected economic statistics.

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. in Newport Beach, California, said the “massive’ stimulus that U.S. policy makers are pumping into the economy will help it expand by 3 percent to 3.5 percent in the fourth quarter of next year from the same period this year. He previously saw growth of 2 percent to 2.5 percent.

El-Erian, a leading proponent of the “new normal” economy paradigm of sluggish growth for a post-crisis U.S., remains skeptical that the elevated rate can be sustained beyond 2011 unless the country also acts to enhance its long-term competitiveness and reduce its medium-term budget deficit.

‘Bond-Market Crisis’

There are limits to how much fiscal and monetary stimulus can achieve, he cautioned, pointing in particular to the rise in long-term interest rates since Obama unveiled his $858 billion tax-cut compromise with Republicans. The yield on the Treasury’s 10-year note was 3.33 percent at 5:29 p.m. Dec. 17 in New York, according to BGCantor Market Data, compared with 2.92 percent on Dec. 6.

“A bond-market crisis is likely unless we do something about the budget deficit,” Greenspan said.

Pimco sees the euro area expanding by just 0.5 percent to 0.75 percent next year, while the emerging world will slow as its leaders fight inflation, El-Erian said. The firm, which manages the world’s largest bond fund, forecasts combined growth for China, India, Brazil and Mexico will decelerate to between 6.5 percent and 7.5 percent in 2011, from 8 percent to 9 percent this year.

Flood of Money

The outlook for 2011 is taking shape as governments and central banks increasingly shift away from the united approach they used to tackle the recent recession and begin to work in their own self-interest, with one country’s gains potentially causing another’s losses.

Obama’s latest round of fiscal stimulus came after a mid- year slowdown, partly caused by surging imports, spooked the Fed into embarking upon its second round of so-called quantitative easing with a plan to buy $600 billion of long-term Treasury securities through June 2011.

The resulting flood of money is threatening to overheat already buoyant emerging markets, even as export-driven economies such as China resist letting their currencies rise in response. Their reluctance is stoking demand for commodities and boosting the cost of energy worldwide, including in the U.S.

“All this liquidity that they’re creating is not going back to grow the American economy and is going to Asia and other emerging markets where it’s not wanted,” Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York, said in Santiago on Dec. 10. “Unintentionally, QE2 is leading to a fragmentation of global financial markets, because each country takes actions to protect itself.”

Fanning Inflation

Oil has risen 11 percent in price this year, gold reached a record $1,432.50 an ounce on Dec. 7 and copper traded at an unprecedented $9,267.50 last week.

Such increases are fanning inflation in the developing world. November’s 5.1 percent annual gain in China’s consumer prices was the largest since July 2008, and people there are more concerned about rising costs than at any time in the past decade, according to the country’s central bank. Prices in Brazil rose by 0.83 percent in November from the prior month, the most since April 2005.

The MSCI Emerging Markets Index fell 0.4 percent to 1,110.89 as of 9:25 a.m. Singapore time today. The gauge ended the day at its lowest level in two weeks on Dec. 16 on concern that inflation in China and Brazil will accelerate and bank lending will slow in emerging countries.

Higher Rates

“All of this suggests further monetary tightening and the use of other policy tools,” said Gerard Lyons, chief economist at Standard Chartered Bank in London. Failure to tame inflation in the East could mean it boomerangs backs on the West as rising commodity prices combine with stagnant wages to inflict more economic pain, he said.

David Carbon, head of economic and currency research at DBS Bank in Singapore, predicts the 10 main Asian central banks outside Japan will raise rates 24 times by June after 21 increases in 2010, when “they could have and should have done more.” China boosted its key rate 25 basis points this year to 5.56 percent; South Korea raised by 50 basis points to 2.5 percent. Governments have also resorted to controls to slow the capital influx, with Thailand removing a 15 percent tax exemption for foreigners on income from domestic bonds.

Many emerging countries, led by China, are reluctant to contain inflation by allowing their currencies to rise, for fear of derailing their export-led economies. The yuan ends 2010 less than 3 percent higher against the dollar than at the beginning of the year, even after officials pledged in June to embrace more flexibility. That is drawing fire from U.S. lawmakers, who want China to do more to encourage domestic demand.

Euro-Area Spat

The risk is 2011 will “see a continuation and possible deepening of the so-called currency wars and, in particular, an exacerbation of existing tensions between Beijing and Washington, thereby risking a broad surge in protectionist actions,” said Alastair Newton, senior political analyst at Nomura International Plc in London.

Meanwhile, euro-area members are squabbling over how to share the burden of safeguarding their single currency amid a sovereign-debt crisis that’s forcing them to adopt demand- depressing fiscal austerity. The spat has left German Chancellor Angela Merkel seeking to impose her country’s economic model of budgetary prudence on its neighbors before coming to their rescue, while resisting continental demands to pivot her own economy away from exports.

‘Main Risk’

Merkel held out for two months before consenting to help Greece and spooked investors by suggesting they cover a share of bailouts. Last week she sparred with European Central Bank President Jean-Claude Trichet over whether to expand aid packages and with Luxembourg Prime Minister Jean-Claude Juncker about issuing a joint bond.

Andrew Popper, chief investment officer at SG Hambros Bank Ltd., identifies the region as the “main risk” to global recovery and market performance in 2011. Greece and Ireland already were rescued by their neighbors and the International Monetary Fund this year, and investors now are concentrating their sights on Portugal as economies throughout the continent slash budgets to appease investors concerned by fiscal excess.

“Policy makers are going to keep on running into each other,” said Stephen King, chief economist at HSBC Holdings Plc in London and a former U.K. Treasury official. The result is a “very uneasy, very uncertain” world.

Much of the tension will stem from U.S. efforts to pump up growth and the reactions to those steps elsewhere throughout the world economy, according to El-Erian.

“The basic premise is that you will see more of the same in the U.S. unless the rest of the system pushes back hard,” he said.

To contact the reporters on this story: Rich Miller in Washington rmiller28@bloomberg.net Simon Kennedy at skennedy4@bloomberg.net

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net John Fraher at jfraher@bloomberg.net

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