The good news is the positive trends in the credit markets I noted last week seem to be getting stronger. Thanks to the continued massive effort by the world’s governments and central banks, the London Interbank Offered Rate, or LIBOR, is now noticeably rolling back toward levels that bear some semblance of normality. Volume in the US commercial paper market, which had almost completely evaporated a couple weeks ago, is surging. And borrowing rates are coming down, at least for stronger corporations.

There’s still a lot of work to be done. But the authorities are definitely on the case–and will be until global lending has definitely thawed and the markets no longer need the helping hand.

The bad news is credit concerns have now been replaced by very real worries about the global economy. Last week, the big news was the decline in China’s growth rate to 9 percent, and the accompanying expectation that the world’s most populous nation would log something like 8 percent next year.

This week, the US finally slipped into negative growth, with third quarter gross domestic product sliding 0.3 percent. That was against an expectation for positive growth of 0.3 percent and is yet another indication that the world’s biggest economy is still definitely contracting if not heading for its worst recession in decades.

For much of the post World War II period, the US consumer has been the mainstay of global economic growth. That trend, however, likely reached its logical extreme this decade. Despite largely stagnant wages, consumers have ramped up spending to virtually all of their income and then some, as evidenced by continually rising debt leverage.

In one sense, the mortgage/housing bubble was the ultimate expansion of leverage, as consumers borrowed against the future value of their homes and maximized mortgages in expectation of continually rising values.

US consumer demand not only drove businesses here, it also drove industries in Europe and the developing world that were able to grow in large part by selling here. That’s why it’s no surprise that the great deleveraging here is having such as great impact elsewhere. And it’s one reason the historic drop in the US Conference Board Consumer Confidence Index to just 38 percent is so disturbing to global markets.

Clearly, not every consumer franchise is toast. But it’s going to be a long time before we return to the good old days of runaway consumer spending, if ever. And borrowing is certain to be a good deal more conservative on both ends for some time to come.

Fortunately, there’s one area of spending that’s not dependent on the US consumer: infrastructure. In fact, it’s one of the few ways governments can both help private business and directly inject badly needed new money into the system to create jobs.

Already this week, the US Congress has been holding hearings on how a renewed burst of US infrastructure spending can be best achieved. There’s certainly no shortage of vital projects screaming for dollars, from decaying roads and bridges to corroded water mains. And that’s just the tip of the iceberg, as a New World of 21st century infrastructure becomes reality in coming years, with implications for everything from energy and communications to national defense and healthcare.

Washington will definitely be a key player in the spending wave, and so will other governments the world over. China, for example, has been announcing steps to continue its massive infrastructure build out over the next year, as it attempts to create a bigger domestic economy and industry that’s not so dependent on exports as it is today.

Although falling oil prices are hurting inflows to energy producing economies in the Middle East and Russia, plans there also remain on a very grand scale. In fact, governments literally have no choice but to spend the money.

Governments are the only entities big enough and able to mint the money needed to fund many projects. But it’s private enterprise that will do the heavy lifting and benefit from the spending.
 
Bringing to your attention the companies that will create the great infrastructure buildout is, of course, the sole purpose of this advisory. Since our inception a little over a month ago, we’ve been steadily building the New World 3.0 Portfolio with companies tapped into a wide range of needs and projects.

Each week, one of our editors has featured a recommendation in a fresh On the Beat 3.0 article, which we’ve added to the Portfolio. This week’s offering is defense technology pick Aerovironment (NSDQ: AVAV), which you can read about in GS Early’s piece The Green Revolution Hits the Military.

Our plan is to continue to build the Portfolio in the same way over the next few weeks. To be sure, the global stock markets remain highly uncertain and historically volatile. Our recommendations thus far have reflected those ups and downs, with the overall portfolio down about 5 percent at last count.

It’s no exaggeration to say that’s a pretty steep outperformance relative to what’s been happening in the overall environment, and we’re happy about it. But that’s hardly the objective here. Rather, our strategy is to take advantage of the current washed out, fear-driven state of the markets to buy the players of New World infrastructure on the cheap. And we’re willing to weather the ups and downs now for the reward of big returns going forward.

As I stated at the outset, we’re not dogmatic about our recommendations. No matter how much we like a company and want to bottom-fish, there’s a limit to what we’ll tolerate in the way of disappointment, even in this environment. Sooner or later, however, the market’s focus is going to return to the numbers–i.e. on the companies that are still moving ahead as businesses as they tap into the great global rebuild.

That’s what we’re playing for here. And as much as it may seem like trying to carve a pumpkin with one hand, history shows persevering will be more than worth your while. 

Roger Conrad
Editor, New World 3.0