Monday, November 11, 2013

Economic outlook and securities market sentiment are murky at present

Wilbur Ross, the billionaire investor in struggling industries, recently raised $100 million to buy four "Ultramax" ships, massive freighters with special loading equipment that allows effective use in smaller less sophisticated harbors and that deliver huge amounts of commodities, whether industrial materials or food commodities.  He has an option to order four more of these Chinese made vessels.  That is certainly a positive bet on both world economic growth and especially emerging markets.

For the U.S. and Europe that growth outlook is not as clear as this emerging markets play is to Ross.  The U.S. has aggressively used monetary policy to preserve stability and raise employment levels.  The question is whether they have used all of the arrows in their quiver with this solution and if pulled back what would happen.  From this perspective, it always seems like the Fed comes up with another new maneuver when necessary, but ultimately there is an end point to that.  When that time comes, what happens?

Fiscal policy has not been used aggressively.  The type of infrastructure spending or investment in research and development in many areas that would be a boost to the economy is not something that can get through the Congress without painful cuts to programs that benefit the poor and the elderly.  Some of these have already been made, most significantly the no interest rate policy environment that gives prudent elderly savers no return on their savings while shadow inflation definitely exists, especially on anything related to healthcare for them and education for their children and grandchildren.  At the same time the value of their homes, always assumed to be a nest egg, has diminished.

Members of Congress who support the no fiscal stimulus trade-off, almost all Republicans and most ardently those who identify with the Tea Party, use an incredibly flawed and simplistic metaphor to explain their case.  They say, as a paraphrase of them all, "families sit around the kitchen table and must balance their budgets so why shouldn't the government be held to that standard".  Are these entitled Fox news folks unaware that American consumer prosperity was built on the acceptance of debt, whether home mortgages of 15-30 year length, car loans of up to 6 year terms, and student loans with generally 10 year payoffs.  While these products were certainly abused by some in the lead up to the Great Recession, they remain fundamental to the growth of the consumer economy.   The country is no different.  It needs fiscal stimulus for short term jobs and long term viability of infrastructure compared to what is being built in many other countries.

The unemployment dilemma is beginning to seem permanent.  As has been written about everywhere, technology has led to a structural change in the U.S. economy that is ongoing.  Job training is not a quick answer.  Consumer spending is relatively healthy compared to few years ago but it is by no means robust and is definitely being held up by the wealthy who have been beneficiaries of strong financial markets.  What if those markets take a break?

With an almost completely dysfunctional Congress, an insular President, a new Fed Chairman on the way(which is not necessarily a negative but does add uncertainty), the U.S. stock market continues to edge up but not due to any seismic shift  into equities from other asset classes as has been predicted by many for the last two years.  According to Sanford Bernstein research there is no evidence of this oft-predicted phenomenon.  It sometimes seems that the stock market is just trading with itself, and any unexpected negative event could lead to a significant tumble.  That is not in any way expected here this year, but 2014 may be a year when caution will at some point be important, or a necessity.

Just looking on from the sidelines here,  we are watching what's already invested and looking for opportunities always and feeling cautious.  Those successful new opportunities seem to be getter more and more short term.  The longer term investments in companies with strong balance sheets and leading market positions have already been made but more could be added.  I am not sure that now is the time.

Going back to the title of this comment, the U.S. equity market outlook over the medium term is murky.


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