China has the world's fastest growing major economy. It surged 11.5% in the third quarter. But China's economy still pales in size compared to the U.S. Even though China's population is more than four times larger than America's, it's economy is only about one-fifth as large. In fact, with a gross domestic product of more than $13 trillion, the U.S. economy is about four times larger than Japan's, which has the world's second-largest economy. The U.S. accounts for about one-fourth of total world GDP.
This is why an economic slowdown in the U.S. could have dire consequences for the entire planet. California's economy alone accounts for about 13% of U.S. GDP. California, of course, is literally on fire. According to the latest accounts, the wildfires are finally under control, but the damage to the economy has yet to be fully assessed. About a million people have been displaced and approximately 3,000 homes have been destroyed or damaged. I doubt, however, that even the home builders thought this was a good way to get rid of excess inventory.
Most forecasts for U.S. growth are still positive, but they are shrinking. It is becoming increasingly difficult for economists to argue that the U.S. will avoid an economic recession. Investors are still hoping the Fed will come to the rescue. In fact, stocks rallied yesterday on rumors that the Fed was about to cut the discount rate once again. I'm not betting on it. And I'm not betting on a Halloween rate cut either. I continue to expect poor returns for U.S. equities for the near future. While investing abroad may seem riskier, investors should keep a healthy exposure to foreign stocks. The lower correlations should provide diversification benefits.
For a more in depth discussion of some of the world's hot spots, watch Pricing Political Risk. It's a short interview with Ian Bremmer of the Eurasia Group, a leading political risk consultancy that caters to many of Wall Street's top investment banks and hedge funds.