Good comments from Mohamed El-Erian in weekend Barron’s about the "recognition lag" in developed economies in finally noticing things aren’t going to be the same with respect to spending and entitlements:
The chief economist of Citi, Willem Buiter, has a very simple measure. He looks at the percent of global GDP that resides in countries running very high fiscal deficits of 10% of GDP and above. Today, 40% of global GDP resides in countries running deficits of 10% or more, and it’s dominated by industrial countries. You have much more robust earnings dynamics from emerging economies, Australia, Canada, than countries that relied on structured finance as the engine for growth, like the U.S. and U.K.
The U.S. is on the verge of an increase in regulation, which will inevitably lower the speed limit for growth. The rest of the world and emerging economies in particular are on the other side of that trade. They are looking to lower regulation.
In the U.S., the market is pricing in an easy handoff from temporary sources of growth, like the stimulus and inventory, to permanent sources of growth, such as consumer demand. That’s overoptimistic. The consumer faces headwinds in the form of income growth, credit availability and demonetization of home equity. People will worry about how the budget is financed over the medium term, about higher taxes and higher inflation, and they will postpone consumption.
Then people are overoptimistic about the global handoff from the finance-driven economies of the U.S. and U.K. to the emerging economies. The industrial economies must give up on entitlements. People also assume the emerging economies are both willing and able to handle their global responsibilities.