I've been struggling to reconcile my market view (stocks up) with my economic view (mortgage/housing/consumer Holocaust).
Yesterday's Barron's brings an interview with someone who shares my views and explains it better than I could, David Richards, retired portfolio manager from Cap Research ($).
For the first time since [...] 2000, I have no shorts. I believe the growth potential of the international economy and the potential for higher rates of inflation are not fully appreciated in the current valuations of stocks and bonds.
What gets overlooked are two major developments that have occurred in the last 10 to 15 years, but really got going in the last five or six years: One, the whole world has adopted the notion that market-economy-oriented policies are correct [...] There are 3.5 billion people from Eastern Europe to the Pacific and from the Indian Ocean to the Arctic that were living under socialism or communism, where it was not possible to trade and not possible for entrepreneurs to get rich -- and they have been transformed. [And two,] there has been a total collapse in the cost of communication and computation.
The logic says subprime goes down so consumer spending goes down [...] therefore consumption is going to go down or slow down, and it is going to affect the rest of the world. That's wrong. The U.S. is as most 25% of the global economy. The housing area at the peak was about 6% of U.S. gross domestic product. It can drop by half. It is insignificant in terms of the global growth of the economy.
Grab a copy from your local library and read the whole thing. Bottom line: the U.S. consumer is screwed, but the global economy doesn't depend on the U.S. as much as it did in the past. Buy global stocks and commodities.