"Kee" Points with Jim Kee, Ph.D.

Well, there is no getting around the fact that the big news last week was Bill Gross’ departure from PIMCO. Last spring our fixed-income team issued a piece to clients entitled, “What’s Wrong with PIMCO?” and this week they will be releasing an update on the current situation with all of the numbers and implications. Money is flying out of PIMCO including PIMCO’s Total Return Fund, the largest bond fund in the world. It is also under investigation by the Securities and Exchange Commission (Wall Street Journal).

 

Geopolitical turmoil continues with US-led coalition airstrikes in Syria against IS (Islamic State), which controls large portions Syria and neighboring Iraq. Russia, now the world’s largest oil exporter, is still a concern, although there is currently a ceasefire agreement between Ukrainian authorities and pro-Russian rebels. Elsewhere, pro-democracy demonstrations in Hong Kong are being met with some police resistance, but the turmoil is not expected to last. Finally, independence movements similar to the recent Scottish referendum to break-off from the United Kingdom (it was voted down) are becoming more frequent. In my opinion – and this is just a gut reaction that began several years ago with talks of Greece leaving the European Union – countries with large social welfare/assistance programs in place, at the end of the day, are unlikely to vote for their disruption. And disrupting social services is a given under realistic independence scenarios.

 

Looking around the world economically, I expect global GDP growth of around 2.5% to 3% for 2014. Back in 2007, economist Robert Mundell gave a series of speeches around the world pointing out that, for the first time in human history, most of the world’s countries were hitting on all cylinders. That’s not the normal state of the world; the normal state of the world is for some countries to do well while others are doing poorly. Mundell advised looking at the world in terms of the Big Four (Europe, US, China, Japan) and BRIM (Brazil, Russia, India, Mexico). I find this thinking template very useful, and here’s what I see today:

 

With respect to the Big Four, the US will probably grow north of 2% for all of 2014 and possibly average more than 3% for the final 3 quarters. China has slowed undeniably with a growth target for 2014 of 7.5%. I think it will hit 7%. Europe is expected to grow at about 1%. I am increasingly less optimistic about Europe – perhaps that will be next week’s Kee Points, and I think anything positive for 2014 will be a win. And that goes for Japan as well. So basically half of the Big Four are doing ok (US and China), and half are struggling (Europe and Japan). Looking to BRIM, I see the same thing. Brazil is in recession (though possibly pulling out of it), and Russia is pretty much there as well. India, however, is projected to grow 5%+ and it is one of the more exciting potential growth stories in the world. Mexico’s growth is positive as well. So I see a mixed bag among the Big Four and BRIM, which is a little more normal when you take a longer-term perspective.