Global Economy: Most of the economic data outside of the US has been pretty challenging lately, although I would say that the bulk of proprietary (i.e. Wall Street) research still points to global GDP growth in excess of 3% for 2014. Specifically, OECD (Organization for Economic Cooperation and Development) leading indicators are increasing for the US, Canada, Mexico, and India, and declining for Japan, Germany, Australia, China, and Chile.
China’s economic numbers in particular (i.e., trade data and industrial production) continue to disappoint, suggesting that officials there need to act quickly to cut interest rates and bank reserve requirements (i.e. increase borrowing/lending) if they want to hit their 7.5% growth target. And slower growth in China means lower demand for energy and commodities —one reason why those prices have come down. Oil is below $100/barrel, and that includes both Brent and WTI (West Texas Intermediate). As Daniel Ahn pointed out at our STMM energy conference, lower growth in China means an end to the commodity “supercycle” (back to a more normal cycle) and tough times for commodity-based economies.
Bull Market? And yet US stocks were up yesterday and up above average (about 8% thus far) for the year on an annualized basis. In fact, yesterday’s Wall Street Journal had an article on market pessimists throwing in the towel and expecting further gains before year-end (“Bears Turn Docile as Market Keeps on Roaring”). Examples include well known strategists David Bianca at Deutsche Bank, Barry Bannister at Stifel Nicolaus & Co., and Adam Parker at Morgan Stanley. Former JP Morgan strategist Thomas Lee, now at Fund Strat Global Advisors, gives three reasons to be bullish (1) stock valuations relative to bonds are two standard deviations below average, (2) that means money should continue to move out of bonds and into stocks, and (3) pent-up demand for business investment spending. On that last point Lee argues that investment spending, which is currently 23.2% of GDP, rises beyond 27% of GDP before bull markets peak.
Scottish independence? Finally, Scotland votes this Thursday on a referendum to leave the United Kingdom after 307 years (Scotland comprises less than 10% of the total U.K. population). Thursday’s vote is the 51st independence referendum worldwide since WWII (many occurred when the former Soviet Union broke up). The move to independence would be bad for Scotland, at least in the near-term. Financial institutions and other firms and noted individuals have already said that they would relocate to England with its established central bank and other institutions if the vote is yes to independence. Most analysts expect that a recession in Scotland would follow. That would be bad for the U.K. near-term, and it would certainly would occur at a bad time for Europe in general. I don’t think it will happen.
Posted on Tue, September 16, 2014
by Alyssa Torres