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ECONOMIC COMMENTARY

| September 04, 2017
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When I started telling clients that we were going to be putting out a quarterly newsletter, the first thing people asked was, “Are you going to be doing it yourself or is someone else going to do it for you?” 

I could tell that what you were really saying was, if you write it, I’ll read it with interest If someone else is going to do it, then it’s just another piece of junk mail.  I can understand why you would say that --we all get tons of mail, some of it we really want, and some of it not so much.  Well, to address your concerns: yes, I am the one writing this section and providing you with my own thinking.  I hope this will be something you look forward to reading every quarter and not just another piece of mail.  I value your comments and questions, and if there are specific topics or issues you would like to see me address, send me an email or give me a call.  I would love to hear your feedback. 

Global growth has been softer than I anticipated so far this year.  Here in the U.S., the great “freeze” has been well documented and I have read many reports showing reduced economic activity due to the cold, but the markets reacted as if there was more to the slowdown than just low, low temperatures.  I believe there still remain structural vulnerabilities and balance sheet issues that contributed to the downshift in growth seen in Q1,but I maintain my vision for 2014 & 2015 of accelerated growth in the US as well as Emerging Markets. 

Around the globe, central banks are continuing to expand their balance sheets.  This expansion puts upward pressure on property values, stock markets, and credit markets.  This is all done in an effort to lift consumption via the associated wealth effects.  Here in the US, according to the Federal Reserve, consumption made up over 2/3 of our GDP in 2016. Nevertheless, I believe a normalization of bank balance sheets is approaching, as global banks cannot hold rates down forever without some side effects. 

In the US, Q2 is off to a positive start.  I am looking for sustained growth acceleration into the 2nd half of the year as the Federal Reserve slowly brings quantitative easing to an end.  This environment could be supportive of stocks and economically sensitive investments, and mildly negative for bonds and interest rate sensitive investments. 

So, what are the risks to my vision of sustained growth acceleration into 2014 and 2015?  The main risks are:

  • A) An economic hard landing in China.  Currently markets are pricing in a slow down, but a more severe hard landing would cause a re-pricing of global assets and future growth expectations.
  • B) A lack of continued monetary reforms in Europe (you thought this was behind us, huh?).  This European Crisis 2.0 would come to bear if anti-Euro Populist parties continue to gain parliamentary seats, bringing down the more moderate reformist governments currently in place.  This has particular importance in the peripheral European countries like Portugal, Spain and Italy
  • C) US growth surprises to the upside.  Why would this be a bad thing?  Because it could spark an inflationary acceleration of wage growth leading to a faster/earlier unwinding of Federal policy, causing a rapid rise in yields that the market is unprepared to accept.
  • D) Geopolitical shocks coming from worsening relations between China and Japan or an escalation of the Russia-Ukraine conflict.

I think no matter what the future holds, we always need to remember that as we exit the “Zero Rate Environment” which has been with us for the past five years, we are in uncharted territory from a historical perspective.  We have never seen such low rates for such long periods of time.  Increased volatility should be expected as the Fed unplugs its life support systems, but at least we are breathing on our own now.

The economic forecasts set forth in the communication may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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