DJ Greenspan & Barman Bush

Consumption replaces investment.

Carrie: I don't buy stocks and bonds

Samantha: I prefer stockings and bondage

Charlotte: I prefer my money in my closet where I can see it

Carrie: Or on your feet where you can feel it

The above scene from tv series 'Sex in the City' illustrates the extent to which consumption has replaced investment in the minds of the American consumer.

The fact that the Economist magazine recently chose to illustrate on its cover the ascent of man from ape to man, and then into an overweight human carrying a soft drink, further illustrates that the US consumer is currently in both the worst physical and financial shape in decades.

This consumption has been driven in part by a belief by the American consumer that the US Economy is the greatest in the world and therefore any weakness is a temporary state of affairs, which can be borrowed through.

As a result, both the deficit and debt levels continue to deteriorate as the US consumer demands (and consumes) more and more!

The party's over

Last year I wrote how Greenspan and Bush, with their rate cuts and tax relief, were effectively trying to cure an economic hangover by giving investors a little bit more to drink!

And it worked. Markets rebounded and the economy is back on its feet, but is it sustainable?

Think of the Nineties in the US as one huge party, which effectively ran out of booze at 1am (March 2000). Guests (investors) were disappointed and angry as the hangover started to set in.

Then DJ Greenspan and Barman Bush found some more booze (monetary and fiscal relief) and the party resumed. Now however, it's 5am, the booze is finished (monetary and fiscal policy is exhausted) and there are two choices to guests:

*Go home and sleep it off (i.e. stop borrowing, slow spending, markets drift sideways); or

*Go out, drink more and throw up (borrow more, consume more, markets correct).

And given that US confidence levels are as high as 1999, the latter behaviour is probably more likely.

The potential / threat of offshoring

Another area where the developed world, in particular the Americans, will be under pressure, is that of outsourcing/offshoring i.e. where jobs migrate to those countries where production is cheaper.

This is of course a massive opportunity for developing nations. Traditionally, goods go to China and services to India, however, from a services perspective South Africa is becoming increasingly competitive.

Whilst not as cheap as India, we are nevertheless still a lot cheaper than the US/UK; we are in a similar time zone to the UK; we have skilled labour to service in particular financial services outsourcing; we have a similar culture; and it's a great destination for management to visit on business trips.

The US consumer needs to realise that the mighty dollar has rendered them uncompetitive and their jobs vulnerable.

The buck stops where?

"The mighty dollar" has retraced significantly over the past couple of years. It has been a fairly predictable retracement, and despite the shrieks of pain from European and Japanese industrialists, we believe the US dollar will still weaken further, as the Americans continue to consume more than they produce.

According to currency traders, there are not enough positives to buy the dollar, but similarly, there are insufficient negatives to short the dollar. This indecision will effectively slow the dollar's slide, and could even provide some short-term stability.

We believe however, that the underlying imbalances will probably fuel further weakness. We do believe, however, that the US dollar collapse is roughly ¾ over.

In summary then, expect a synchronized global recovery, as the US, Europe and Japan recover simultaneously, albeit slowly because of the weaker dollar. Watch the US carefully though: the future of the world remains in the hands of their economic recovery and thus the US remains the single biggest threat for 2004.