Eye onthe Market | July 11, 2014 J.P Morgan Topics: Portfolios, US corporate profits and the Twilight of the Gods (in the US, Europe, China and the IEA) Hourly compensation for production workers Share of US imports of intermediate goods from China, Share of US rate, 2005 vs. 2011 Malaysia, Thailand and Vietnam, percent 30% m 2005 14% 25% m 2011E 12% 20% Ios 15% 8% 6% 10% 4% 5% 2% Ow 0% Taiwan Mexico China Philippines 2000 2007 2010 Source: Bureau of Labor Statistics, Empirical Research Partners. Source: UN Comtrade, Empirical Research Partners. To summarize, we expect today’s margins to last a while longer, since relative costs won’t converge overnight. But we are not inclined to pay a high multiple for them, given their reliance on weak labor compensation, which in turn requires large government transfers. The good news: markets are not applying high multiples right now, which is why we own the equities we do. However, questions about the large but shrinking public sector toolkit knock 10%-15% off of our equity allocations, compared to where we would normally expect to be 2 years after a recession. We walk through 4 instances of this below, as it relates to US fiscal policy, oil prices, Chinese inflation and the European periphery. Twilight of the Gods, part 1: Limited room for fiscal policy to invigorate the US recovery Here’s what we know for sure about the US Federal debt ceiling debate: e The government is facing the unappealing task of having to increase the Federal debt ceiling above 100% of GDP for the first time since the end of WWII, and only the second time since the debt ceiling was established in 1917 e The government has already run out of money from traditional sources. As shown below, since May 16, 2011, the US Treasury has been raiding the cash, securities and borrowing capacity of government employee retirement and other funds. Of $270 billion of such balances which existed in May, around 75% has already been used up. There’s not much lee