The best returns on investment will be in the U.S. over the next decade. That’s the word from Louis Gave of Gavekal Research, a research firm that provides consistently smart, independent macroeconomic analysis to Wall Street.

The three defining trends of the past decade – skyrocketing U.S. spending on guns and butter, the economic rise of China, and the single European currency – are all coming to a screeching halt. That’s why, says Hong Kong-based Gave, “all of the clients we’ve seen on this trip have been exhausted and grumpy.”

Looking forward, according to presentations by Gave and his colleagues at the University Club in New York City on Dec. 15, the picture brightens in the United States. Government spending, for the first time in decades, has slowed to zero growth. Private job creation has resumed growing. Increasing automation in manufacturing will encourage factories to be located once more in the United States, to minimize transport costs. To get dollars in the future, countries will need to sell not manufactured goods, but assets, and the dollar will strengthen accordingly.

In the self-admittedly Panglossian Gavekal analysis, fears of a 2008-style disaster emanating from a freeze in European banking or a bursting bubble in China are overblown.

Despite all the noisy headlines about European foot-dragging, the European Central Bank has in fact been much more active than the U.S. Federal Reserve in assuring that no Lehman-like event occurs in Europe. The ECB’s decision to provide unlimited liquidity to the banking system for the next three years is the key, rather than any announced deals between Sarkozy and Merkel. The world is already moving ahead. Central banks are preparing for an orderly breakup of the euro. The downside risks have largely been discounted (and no surprises on the upside are possible, given Northern Europe’s unwillingness to assume the collective liabilities that would necessarily accompany a US.-style fiscal union.) The bad news is that European consumer and government spending will decline massively, according to Charles Gave, the senior member of the father-son Gavekal team. The good news for the U.S. is that Europe’s decline will bring about lower commodities prices, a change as significant as resulted from the fall of the Berlin Wall.

As for China, Louis Gave predicts that China will be able to keep its economy growing strongly by moving beyond fixed lending rates and credit quotas to develop a true capital market. The first step was the establishment of the renminbi-denominated “Dim Sum” bond market in Hong Kong at the beginning of this year. The government’s goal was to establish the Chinese currency in Asia as the medium for trade, displacing the dollar – a step as significant as the rise of the Deutsche Mark in postwar Europe. (The French idea of curbing German power by creating the euro has turned out to be less than happy.) The Dim Sum market had a shaky start, as China’s trading partners had a limited appetite for Chinese government bonds and Chinese corporate bonds to hold in reserves. Lately, a parade of U.S. multinationals has been doing $500 million bond issues in Hong Kong with, one assumes, gracious notice taken by the Chinese government.

The bottom line, from the senior Gave: “Buy Schumpeter.”


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