I've got to admit it's getting better (Better)
A little better all the time (It can't get moreworse)
I have to admit it's getting better (Better)
It's getting better since you've been mine
- The Beatles
The Beatles have it right. The economy is definitelygetting better.
Below is a list of my current themes including someprojections. These are the basis of the CIOVantage Point posts and lay the groundwork for prettymuch everything I write.
Please enjoy and don't forget to leave a comment!
Consumption drives economies, both in the U.S. andglobally.
- The traditional GDP equation (Y = C + I + G + (X-M) ) isbroken. It may be academically and mathematically correct,but over longer periods, increases in C, I, G, and (X-M) are notequivalent.
- Investment (I) is a reaction to expectedconsumption. Corporations only invest in order to fulfillfuture expected desires of consumers. If projections do notinclude consumption growth, investment will not occur on itsown.
- Government (G) spending is designed to boost privateconsumption, but hasn't worked consistently in any major developedcountry. Other activities in Washington have created enoughuncertainty to offset any potential benefits of governmentspending. This may change if we can get past today's fear of"unknown unknowns" but is unlikely to occur in 2014.
- Net exports (X-M) are largely rounding error.
- Consumption (C) is evolving, but remains the single drivingforce of long-term economic growth.
Employment will continue to grow, led by more full-timejobs
- Most of the growth to date has been part-time jobs, butemployers are reaching their limits and will begin hiring morefull-time positions.
- We are at the beginning of a secular shift toward smaller, morecreative and nimble employers. This means more full-timejobs, though those positions may be less stable.
- "Unknown unknowns" fade allowing greater commitment byemployers
The Housing sector will continue to grow even asinterest rates climb in anticipation of a Fed move in2015.
- A slowly improving jobs market and a rebound in new householdformation will help potential home-buyers keep pace with mortgagerate pressures.
- Investor interest continues both domestically and fromoverseas.
- Interest rate increases of 1-2 percent (should they occur) willhave only a marginal effect on home sales
The global economy remains fragile with greaterproblems outside the U.S.
- China must manage a slower economy while rooting outsignificant "shadow" banking activity, creating frequent liquidityissues and financial uncertainty in the nation.
- Japan's liquidity push moves beyond the "honeymoon" phasecreating the hope for benefits to shift from the short-term to thelong-term, which is unlikely.
- Europe will be focused on discovering and addressing bad loansin the banking sector through stress tests and centralregulation
- The U.S. economy remains mostly insulated from the abovechallenges with a clear, though steep, roadway ahead.
Monetary policy, globally, is inert.
- The "cost" of money is already as low as possible.
- The quantity of money is pushing against upper boundaries.
- Therefore, there is something else holding the economy back(see "unknown unknowns" below)
The Fed will stop QE, but will not do much else in'14.
- The Fed must wait on a sluggish recovery to pick up speedwithout the help of monetary policy (see above). Any signs ofhigher, healthy growth will provide cover for the Fed to steptoward a "normal" posture of zero QE and 3-4% rate target in thenext few years. (I know this flies in the face of anextremely dovish Fed, but I believe they will want to get out ofthe market manipulation business over the next few years)
- The Fed realizes QE isn't helping but is reluctant to admit itfor credibility reasons. QE will be pared back as positivesurprises in economic data (even small ones) arise.
- Employment may grow faster in '14, but inflation will remaintame allowing the Fed to keep rates unchanged for the year.
- The Fed may lower IOER (the rate paid to bank deposits at theFed), which could have material effects on the money markets, butis unlikely to affect the real economy. (Doves can't helpbeing dovish and doing dovish things!)
The Yield curve has troughed. Bias upward shiftand upward slope in '14.
- The Fed will keep rates unchanged, but markets may retain oreven push forward built-in hikes for 2015/16.
- Treasury issuance without the Fed as a buyer increases relativesupply in the long end vs. today's metrics.
- Growing consumption helps support a floor for inflation.
The stock market is "fully valued" meaning we shouldexpect "normal" returns in 2014 of 3-7% ballpark.
- P/E growth cannot be repeated without moving deep intobubble-like territory, especially given the prospect of higherinterest rates in coming years.
- Corporate profits or profit outlooks must improve significantlyto support today's valuation, but have plenty of time to catch upassuming progress can be shown in the near term.
- Taming of QE removes a pillar of support, but this action islargely already built-in.
A "Washington thaw" begins in 2014.
- Though an election year, fallout from the shutdown and (moreimportantly) "default" talk in 2013 pushes Republicans (and to alesser extent, Democrats) toward greater cooperation (beginningwith the Murray-Ryan deal). Continued challenges (surprises?)around the ACA rollout drive Democrats toward cooperation,too. The underlying motivation here is that neither partywill want to "go it alone" on major issues in the near future forfear of significant policy failure and voter backlash.
- A recovering economy, and more importantly a recovered market,leads to higher tax receipts, lowering the deficit enough to pushour fiscal problems toward the background. This has been thecase in every recovery associated with deficit challenges.
Fear of "unknown unknowns" begins to fade in'14.
- Beginning with 9/11 and continuing with falling home prices,reduced mortgage availability, zero/negative interest rates, etc.,consumers have developed a fear of the unknown unknown - that is,the potential for negative events that originally seemimpossible. This created the perceived need for retaining alarger capital and liquidity cushion for both businesses andconsumers.
- This effect was "turbo-boosted" with the creation of twounknown unknowns on purpose in Washington:
- ACA - a rewrite of 18% of the economy
- DFA - a rewrite of the financial system
- It is unlikely Washington will create other significant "U2's"in the near future.
The year 2014 will be "steady-as-she-goes" with Washingtonlargely on the sidelines, and markets focused on corporate profitgrowth. Difficulties in markets outside the U.S. will besupportive of markets here. As the year progresses, look foryields to rise assuming the current growth trend continues, butdon't expect any Fed action until at least 2015.