V Q Tran

April 6, 2010 -- My mind has been full of bright thoughts in the last few weeks. I think about the possibilities of a world at peace, a strong economy with plenty of jobs for young and experienced people alike and most of all, mornings of sunshine and warm air and little kids running around. Have I too much time on my hands or gone senile?  Well, my daughter is getting married to a nice young man and they make a handsome couple full of hopes and plans for their future. So, I join them in their dreams and hopes and indulge myself in these thoughts.

However, I know soon I will have to get back to reality and face up to the risks of bubbles that are brewing in the global stock markets amid forecasts of economic recoveries at breakneck speeds both at home and leading emerging markets like China.  In the U.S. the strong GDP growth forecasted for the first quarter following a strong fourth quarter now have lulled many pundits to believe that the bounces fueled by temporary government jobs, stimulus measures and zero interest rate policies are here to stay. Likewise, the March employment report has been greeted with cheers by the stock market. Although payroll gains were short of expectations, quickly pundits hailed the gain of 162,000 as a sign that the labor market has turned the corner. Little mentioned were the facts that if you include the long-term unemployed and involuntary part-time workers, the under- and unemployed as percent of the labor force has reached a modern time record of 19.9%. This structural slack in the labor market is only one of many indicators, which I have discussed in Market Upside Down, of the questionable sustainability of the economic recovery. In China, a real estate bubble is well percolating that many analysts predict an end of unhappy consequences. Yet its economy is expanding at double-digit rates. I can’t help conjuring an image of an 18-wheeler hurtling down the road at 100 miles an hour. The driver, aka the Chinese government, is well aware of the risks. However, it is quite reluctant to apply the necessary monetary brakes for fear of crashing the property market, which has been leading the Chinese economic rebound, as well as its economy at large. Will the steamroller slow down gently or come crashing to everyone’s professed surprise?