Eye on the Market I June 20, 2011 J.P.Morgan Topics: The global recovery has to grow up on its own Helicopter Men, Grounded. Over the last 2 years, it has been hard to disentangle how much of the global recovery was organic, and how much was a byproduct of stimulus (monetary and fiscal). We are now going to find out how fast the world can grow on its own, relying on the private sector. Political and economic factors are bringing the era of the Helicopter Men (and not just Helicopter Ben) to an end. Markets are likely to be in for a bumpy ride as this takes place, with reduced return expectations for financial assets. How to adapt? As I said to my wife when we were discussing investments recently, my highest conviction portfolio idea may be this: let's spend less money. We still expect single digit returns for stocks, credit and hedge funds this year by the time it's over, but the current pace of private sector activity needs to improve for this to happen. In this week's note, we review constraints on the Helicopter Men in the United States, Europe and China. On the US Helicopter Men: out of bullets in both barrels The Fed would have a lot of explaining to do if it engaged in more quantitative easing now. As shown below, US inflation and inflation expectations have risen since August 2010 when Qe2 was surfaced. Qe3: off the table unless things get much worse. As for more fiscal stimulus, that looks like a long shot as well. Some research reports earlier this year put forth the cocktail napkin aphorism that "US equity markets do well in the third year of the electoral cycle, since Presidents spend money to get re-elected". Let's assume that this effect does explain the historical phenomenon of better stock market performance in year 3. The problem: as we first wrote a year ago, in prior electoral cycles, Federal debt/GDP did not increase by 20% in years I and 2, so incumbent administrations had ammunition to spend. This time, it did, and they don't