Fiscal Austerity and the Growth Scare

• After unleashing unprecedented monetary and fiscal stimulus to avert systemic financial system collapse and global depression, the "right" thing to do?for individuals, for companies and yes, for countries is to ensure a full recovery is a period of austerity, balance sheet repair, real structured economic reform and serious financial/accounting reform. This path is not the path of least resistance, nor, unlike the previous stimulus measures, is it politically popular or stock market friendly. But it is the only path toward ensuring the long-term health of success of deeply indebted economies.
• It looks like Euroland governments have moved to embrace austerity, despite wails of protest from their workers, because they perceive they simply have no other choice if they want to keep the Euro and their economic union together. To survive, however, the union will have to evolve further, into a monetary and fiscal union.
• While not technically in bear territory (i.e., having dropped 20% or more from secular highs), the S&P 500 as the bellwether for global equities has shown a classic breakdown below its 50-day and 200-day MAs after a massive rally in 2009. This consolidation, as we have previously pointed out, is likely to continue through the summer, setting equity markets up, for the "Halloween Effect", i.e., a rally beginning in October and continuing into the new year.
• As goes the S&P 500, so goes essentially all risk trades, including Japanese equities and global commodities. While we are seeing a lot of constructive comments about the new Kan Administration in Japan, foreign investors as a whole are still voting with their feet. They have been net sellers of Japanese equities for the past five consecutive weeks, as the Kan Administration fleshes out its version of Japan's fiscal austerity. Japan's GDP in 2010 looks to grow 2%~3%, but most are forecasting slower growth for 2011 as the global austerity wave begins to bite down on GDP growth. Further, JPY/EUR rates remain well above company assumptions, and while the Kan Administration is supposedly a weak yen factor, JPY/USD continues to trade close to JPY90/USD and represent a strong headwind to Japanese company export profitability.
  

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