VOL. 127 | NO. 159 | Wednesday, August 15, 2012
The Worldly Investor
Economic Outcomes Remain Up in Air
By David Waddell
Fedcasting With the markets and the politicians currently co-dependent, vacation for one implies vacation for the other. Trading volumes have collapsed. For those who are manning their trading terminals, daily market activity amounts to position-squaring ahead of September’s central bank policy proclamations.
The majority of players seem inclined to bet on the central bankers as treasury yields, oil prices and stock indices have all moved to new higher equilibrium.
Now that markets have signaled belief in the signals from the U.S. Federal Reserve and the European Central Bank, pressure mounts even further for action. Some caution that the approaching election in the U.S. will constrain Fed policy, and that may prove true. However, the impact player in the drama is the ECB. Here are the current permutations, the likely outcomes, and the investments that stand to benefit most:
I considered placing probabilities on each scenario, but they change each day. I will reveal that our portfolios contain a positive bias. The markets truly will be caught off base if both central banks disappoint. At the moment, I would place the odds of no action rather low as the expectant move in the market may force a self-fulfilling prophecy.
How Do You Start This Thing? The Fed and the ECB can reduce systemic threats and lower borrowing costs, but they cannot crank the jobs engine. The global economy needs a jump. European structural reforms will come too slowly to provide immediate torque. China’s miracle stimulus from 2008 cannot be repeated due to overcapacity issues. With Europe slowly remodeling and China constrained, the global economic jumper cables reside in the U.S.
Unfortunately, our economically challenged policymakers can’t find the manual. The ignition switch is investment growth, not consumption growth. The ruling Keynesians keep hooking the cables up to the exhaust pipe (consumption) and wondering why the car won’t start. During the 1983 recovery through the end of 1984, quarterly investment growth averaged 26 percent, powering GDP growth by an average of 6.7 percent. During 2010 and 2011, quarterly investment growth averaged 12 percent, while GDP growth averaged 2.2 percent. Unemployment fell from 10.8 percent to 7.3 percent by the end of 1984, contrasted with a fall from 9.9 percent to 8.5 percent by the end of 2011. Both periods saw increases in consumption, which contributed to GDP growth, but without job and wage growth, consumption gains are temporary.
Today, we see little job or wage growth, and consumption gains have stalled. To stimulate the world economy, we must stimulate U.S. investment activity (the battery) and not attempt to re-stimulate consumption activity (the exhaust). It can be done, and the economy has the latent potential, we just need better mechanics.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.