Thursday, July 28, 2011

Great Britain: The Expansionary Austerity Canary in the Economic Coal Mine

When it comes to Expansionary Austerity, the UK has had a full year head start over the US, having implemented a series of cuts advertised to produce fiscal order, which will then produce a robust economy and jobs growth. So, it seems quite logical to look at how that's going in the real economy and, more importantly for investors, how the market perceive the situation.

From a real economy perspective, the most recent data from the St. Louis Fed shows quite clearly that the "cut to grow" philosophy at the heart of Expansionary Austerity has yet to deliver as promised. Half of the indicators tracked (industrial production, real retail sales, real compensation, real private final consumption expenditures, and real gross fixed capital formation) are all headed in the wrong direction (down), with the other half not exactly exuding the robust economy and jobs growth advocated for.

From a markets perspective, as the accompanying chart shows, the picture is fine - for now. If, however, price crosses to the downside and the two key moving averages (50 and 200) head in the same southerly direction, it will be hard for the bulls to draw any conclusion other than a bear market has begun.

Investment Strategy Implications

The conservative government in the UK adopted its version of Expansionary Austerity a year ago. Therefore, investors would be well served to consider it a test case (both economically and in the markets) for what the US may experience. Based on the record thus far and considering the global macro implications that the much larger US economy is likely to have the global economy, the prospects do not look encouraging.

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