This commentary originally appeared on Real Money Pro on Sept. 1 at 8:09 a.m. EDT.
Last night, the August Chinese Manufacturing Index was reported at 50.9 compared to 50.7 in July and with expectations of 51.0 In response, S&P futures immediately rose by six handles, though futures began to trend down as the evening matured. Over the course of the past 12 months, this index has slowly dropped from 54.0, and many observers now see a soft landing of about 8% GDP growth for China in 2011 vs. 10% last year.
As a consequence of slowing growth but a soft landing in China, several bullish strategists now envision slowing inflation and the end of tight money in China. Those same bullish strategists have pointed to the eurozone's much weaker economic growth prospects, coupled with austerity and slowing inflation, as an indication that the ECB, similar to China, is likely moving away from tightening policy.
Finally, those same bullish strategists have chimed in that, over here, the Fed may continue to ease.
So, with global monetary policy becoming more accommodative, the argument now being made by bulls is that global easing is a plus for risk assets.
But I would like the bullish cabal to respond to the following concerns:
- Why is the need for global easing (and the need for pro-growth fiscal policies) a good thing only two years into a recovery?
- While the consensus has moved down to looking for a relatively weak worldwide economic recovery, when does a weak worldwide economic recovery dependent on generous policy (with the promise of economic reacceleration) become a bad thing as it underscores (among other things) the long tail of deleveraging and the structural issues that will likely continue to weigh on growth?
- After all, in the past, many optimists have observed that rising interest rates would be healthy for risk assets, as it would be a reflection of improving growth prospects, yet rates have not risen.
Nevertheless most market bulls now cite low interest rates as a valuation positive and contributing to the appeal of risk assets.
There seems to be some hypocrisy in this view.
Some rise in interest rates, owing to better economic growth, is what is now needed to extend the market rally. In its absence, I recognize that the option of easing by the Fed and the ECB can serve to stabilize equity markets from the effect of slow growth, but there comes a point in time when the failure of monetary policy to produce a reacceleration of economic growth will become more worrisome to investors. This is particularly true without any sense that pro-growth fiscal policies will be adopted by the November 2012 elections.
From my perch, that point in time is soon approaching when investors will begin to more seriously struggle with the realization that more monetary easing (and cowbell) will fail to produce more meaningful economic growth prospects around the world.
Perhaps the first shot across the bow and recognition of this risk was already seen in the weakness in equities during the first half of August.
Doug Kass writes daily for RealMoney Pro, a premium service from TheStreet. For a free trial to RealMoney Pro and exclusive access to Mr. Kass's daily trades and market commentary, please click here.