On Inversions on Page 54, one of the reasons the government got so exercised about inversions is that they were soaring and the government didn’t want that to happen and I think they — maybe not put a stop to it but certainly slowed it down.
Now taking a look at Europe. Europe came out of the recession when we did. Went back in the recession because of austerity and came out of the recession and now it looks like it might go back so that is why it is imperative that Mario Draghi try to provide some good amount of stimulus in order to keep Europe growing in at least a 0.50%.
On Commodities, it looks like it might be bottoming. That is on Page 58. I’m not convinced that that’s the case yet but there are some signs of it. Why would they bottom? Because the standard of living continues to rise in the developing world and the first thing you do is you eat better. So will it be to industrial commodities because I think the manufacturing in the emerging markets is slowing but it will, it could be to agricultural commodities but I am not ready to make that call yet.
Turning to China and the Emerging Markets, the Price-Earnings ratio of the emerging markets has risen but that is because of earnings disappointment. The markets — this is all in Page 60 — the emerging markets themselves have not done much. I think we may have another year of non-performance which is why I reduced my percentage there. The one I do like is India. I think India is going to be growing at a pretty good rate at 4% in high-tickets market. It has room to run. So of all the emerging markets, I’m most favorable to that one which is shown on Page 61.
Now turning to China, the big question on everyone’s mind. Let’s never forget that China is a miracle. It has shown more ability to grow with virtually nothing when Mao died in 1976. When Deng Xiaoping introduced his reforms in 1978, it was about 1 or 2% of World GDP but it is about 12% of GDP now. No country has made that kind of economic improvement for over a period of less than 40 years. How has he done it? He has done it by increasing credit 15-20% a year. It can’t do that forever. Eventually, the economy has to take over by itself but it has to become more of a self-sustaining economy. Now it spent a lot of that money in improving the infrastructure and on housing — housing in first tier cities has come down a lot as shown on Page 63. I don’t think China is going to have a hard landing.
If you look at Page 64, its Debt to GDP ratio is about in the middle of the pack. In addition to that, property prices in the major cities are about where they are in other parts of the world. So we haven’t had a real bubble in China and you can argue that incomes are lower there but my belief is that housing is not going to drag China down into a hard landing. I think they are going to grow at 5 or 6% but if the second largest economy in the world grows at only 5 or 6 %, maybe it is the home to a lot of large numbers, that isn’t bad. It isn’t a mature economy yet. It’s per capita income is 1/5 of ours but it is an economy that has grown to the size where 10% growth is probably out of the question and even 7% growth is difficult.
