Sunday, January 19, 2014

Positive Economic Views Mixed with Deflationary Concerns

Last week, International Monetary Fund (IMF) Managing Director Christine Lagarde's comments about the world's economy included: 
  • momentum strengthened in the latter half of 2013, and should strengthen further in 2014—largely due to improvements in the advanced economies, 
  • global growth is still stuck in low gear
  • with inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery
  • overall, the direction is positive, but global growth is still too low, too fragile, and too uneven.
  • it is not enough to create the jobs for the more than 200 million people around the world who need them and benefits of growth are being enjoyed by far too few people. Just to give one example: in the United States, 95% of income gains since 2009 went to the top 1%. This is not a recipe for stability and sustainability.  
Note: Deflation concerns are driven by declining inflation rates in the European Union (1.0% in December 2013, down from 2.3 % in December 2012) and in the U.S. (averaging 1.5% during 2013, down from 2.1% during 2012.)


While others have shared many of Lagarde’s comments before, central bankers rarely discuss deflation.  When prices fall, consumers tend to postpone purchasing new items hoping they can obtain a better deal in the future. Businesses are likely to cut prices to attract customers, but will likely lose revenue.  This cycle, known as a deflationary spiral, is hard to manage and difficult to get out of. With stimulus efforts by central bankers likely reaching the point of diminishing returns, let’s hope fundamental growth kicks in.  

Note: recent research from the Conference Board, a widely followed think-tank, reported that global labor productivity grew 1.7% in 2013 and expects it Increase to 2.3% during 2014.

Sunday, January 12, 2014

Where will U.S. Job Growth come from?

  • Last Friday, the U.S. Bureau of Labor Statistics (BLS) said that 74,000 jobs were added during December (significantly below economists' estimates of about 197,000), with growth primarily in part-time and lower paying jobs.  In addition, the unemployment rate fell to 6.7%, down from 7.0% in November, with the decline mostly a result of 525,000 people dropping out of the workforce.  Notably, the labor-force participation rate declined to 63.2%, the lowest since March 1978).  (This rate measures Americans employed or looking for work)
  • BLS also recently published its Occupational Outlook Quarterly with projections through 2022 and cites that “the health care and social assistance sector and the construction sector are projected to continue growing more than twice as fast as the average for all industries. In construction, projected rapid employment growth represents the continued recovery of significant job losses that occurred during the 2007–09 recession” and “construction is to regain jobs that were lost during the 2007–09 recession, but these 1.6 million jobs are still not expected to be enough to return construction employment to its pre-recession level … industries projected to gain the most jobs are related to health care.”
  • Top areas for news jobs (presented with May 2012 median wages) are projected to be personal care aids ($19,910), registered nurses ($65,470),retail sales ($21,110), home health aides ($20,820), fast food workers($18,260), nurses assistants ($24,420), administrative assistants ($32,410),customer service reps ($35,580), janitors and cleaners ($22,320) and construction laborers ($29,900).
  • Regarding the jobs estimate miss - as economists cite that cold weather conditions may have impacted their estimates, it may also suggest that the profession suffers from too much “group think” and not enough “independent analysis”.
  • Regarding the U.S. occupational outlook - the BLS report supports the view that, lacking initiatives driven by innovation and infrastructure spending, the U.S. economy will be driven by the need to care for an aging population.  

U.S. Labor Participation Rate - Lowest since March 1978

Sunday, January 5, 2014

As a New Year Begins

  • Each New Year brings many predictions about how markets will perform.  For 2014, the consensus view among many strategists is that equities will continue to deliver positive performance, with the potential for a 10-15% pullback along the way, while interest rate sensitive assets, such as bonds, will continue to struggle.
  • Several popular investment themes of 2013 will likely remain in focus this year including the evolution of 3D printerswearable technologydrones,roboticssolar and other alternative energy solutions, as well as demand for housing and services in support of oil and gas exploration.
  • Also, with concerns increasing about income inequality, it will be important to track activism in this area by a broad set of players including New York City Mayor Bill de BlasioPope Francis, the City of Richmond, CA – which is attempting to use eminent domain to restructure home mortgages for some of its residents, and Kshama Sawant, a Socialist that joined Seattle, WA’s nine-member City Council on January 1. (Note: Seattle is home to AmazonBoeing and Starbucks.) 
  • Finally, as Colorado expands its legalization of marijuana, estimates suggest that annual sales could be about $578 million and generate more that $65 million in state tax revenue.  While marijuana remains illegal nationally, it is often cited as the largest cash crop in the U.S.
  • Regarding global markets – Because the U.S. Federal Reserve’s stimulus efforts significantly affect the performance of many markets. its leadership transition from Ben Bernanke to Janet Yellen is an important event. Given the fragile nature of the economic recovery, a honeymoon period is unlikely and signs of economic weakness could reverse it current view for reducing stimulus.  Such a move could trigger increased market volatility.  
  • Regarding popular investment themes - many investors search for the “the next big thing”, but 2014 will likely be a year of incremental improvements to products and services.
  • Regarding income inequality – It have been suggested that several developed economies are going through a structural change, this challenging environment will likely trigger increased citizen activism.
  • Regarding marijuana – as Colorado continues to release official data on its sales and tax revenue, it will reinforce the view that marijuana is big business. It seems only a matter of time before other states move forward with similar initiatives.