Be Careful with China
Steven Roach's weekly reports at Morgan Stanley are required reading for our research team at Innovest. His thoughts about the Washington's path toward protectionism is worth noting. The U.S. has enjoyed a long ride of disinflation thanks to globalization and import penetration which Roach says is 38% of our consumption - up from 22% a decade ago. Mexico and China have had 60% increases in imports to the US since 1995. There is no refuting the pressure that this has put on American labor, but at the same time, there is no greater tax on consumers than inflation. In an effort to fix globalization, Roach makes the point, "the odds are that the most extensive damage will be inflicted on the very constituency in the US economy that the politicians are trying to assist - America's middle-class."
The stock market has had a nice ride in 07. Don't be surprised if the markets tumble with a legislative "remedy". Roach is no dyed in the wool conservative, and wouldn't be surprised if he votes a straight democrat ticket, but he warns Congress that they are "playing with fire."