After the recovery, higher interest rates will hurt growth: Gottliebsen

The American stock market is having difficulty deciding whether the dramatic July 27 doctrine announced by President Obama heralds a genuine change in direction.

On that date, Obama called for a reduction in the spending of American consumers and an increase in the spending of Chinese consumers.

On the President’s side are the two great securities houses Goldman Sachs and Morgan Stanley.

Goldman Sachs has tripled its forecast for real economic growth to a 3% annual rate for the second half of 2009. But then it believes that the debt burden of American consumers will cut back the growth rate which will decline to 2% in the first half of 2010 and 1.5% in the second half of 2010.

Morgan Stanley economist Manoj Pradhan says that there are “painful adjustments to household and corporate balance sheets” ahead as a result of the borrowing-based expenditure of the past. Morgan Stanley says that the medium-term economic recovery will be “a slow and tenuous one”.

Despite last night’s minor US sharemarket fall, the Goldman and Morgan Stanley messages are not being embraced by Wall Street, which is up more than 42% from its March low.

People like Michael Darda, chief economist at brokerage firm MKM Partners, are calling the Wall Street shots at the moment because they correctly predicted the huge rally.

According to the Wall Street Journal, Darda now says: “We continue to believe the consensus view of only 2% real [gross domestic product] growth for 2010 is far too tepid”.

“The conventional wisdom has coalesced around the idea – which goes virtually unchallenged – that higher average savings on the part of households will ipso facto reduce the average rate of GDP growth during the impending recovery cycle.”

Dada says the pessimists once again are ignoring clear economic and financial signals, such as the continuing recovery in the corporate-bond market, which typically precede a recovery in stocks and in the economy.

Where do I stand? I go back to New York-based Glenn Rufrano, CEO of Centro, who lives and breathes the spending patterns of Americans. At the moment they are not spending because they are worried about their jobs (Rufrano the Reasonable, August 6). There is no doubt that the rise on Wall Street will herald greater employment and will help spending, but longer term the demand for cash globally will cause interest rates to rise and limit the recovery growth pattern. In other words Obama, Morgan Stanley and Goldman Sachs will be right.

But Michael Dada is likely to be right for the next six months. His tea leaves are grown in the stock market and he is in effect saying that the recovery in corporate bonds will drive shares higher – and these two events will give companies the money they need to get growing again. In effect, that is what’s happening in Australia, although here it takes the form of large equity raisings.

But that takes us only so far. The Commonwealth Bank has lifted its long-term fixed mortgage rate because it can see a world money squeeze sending interest rates higher.

This article first appeared on Business Spectator.