Smallcapinvestor.com sat down with Donald H. Straszheim, vice chairman of Roth Capital, to talk about the outlook for the economy. Straszheim served as chief economist at Merrill Lynch for 12 years and also served as president of the Milken Institute. He is an expert on China and global emerging markets.
 
Q: What is your take on the subject of decoupling? Is the link between world economies — globalization — causing complications for investors who are looking to park their money in appreciating markets?

A: Decoupling is preposterous. Increasingly the economy is becoming global. Market activity is becoming increasingly integrated.

Investors increasingly think and behave globally, not locally. The idea that the economies were decoupled five to 20 years ago makes some sense, but not anymore. The current recession in the United State — I think we’re in a recession now — is the first time economic activity outside China, for example, is going to have a real impact inside China and accordingly on its markets. The decline in the economy now is transmitted more and more around the world and the equity markets are down in most places. China is down 20% from its peak a few months ago, India is down a similar amount, just like here.

Q: What is your outlook for China’s markets?

A: As long as the turmoil continues in the U.S. credit markets, China’s markets will struggle. I cannot imagine China’s market really taking off as long as the credit market questions in America and Europe and in the global financial institutions remain front and center.

Q: The Federal Reserve slashed the fed funds rate by 125 basis points in total in January and 225 basis points since September. Do you think the rate cuts will be meaningful for this credit crunch if banks are more risk averse and more concentrated on cleaning up their balance sheets?

A: The rate cuts will help. They’re part of the repair process. They’re also not over. I think the Fed will keep cutting rates and I think they’ll cut another 50 basis points at the next FOMC meeting — perhaps more than that.

Q: How low do you think the Fed will cut rates?

A: I would not be at all surprised to see 2.5%, maybe even as low as 2%. One of the things that worries me is that we will take rates so low and leave them there too long as I believe we did in the aftermath of 9/11, and the 2001 and 2002 recession.

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