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

Many summaries of the key events from the past few weeks mention a strengthening of activity in the Eurozone, which is primarily due to a combination of lower oil prices, a weaker euro, and improving credit because of European Central Bank asset purchases or QE (quantitative easing). I’ve discussed the weak (and transient) patch in the US data, which has led to expectations of Fed rate hikes being fewer and further out. Markets have been more or less positive through all of this and are in-line with our expectations at the beginning of the year. Other quick facts: The euro has continued its fall against the dollar, standing at $1.05 per euro (it was $1.38 a year ago). Interest rates (10-year Treasury yields) began the year above 2% and have fallen slightly to 1.95%. And oil prices thus far appear to have bottomed in January, with WTI at $52 per barrel and Brent at $58 per barrel. The lows thus far have been $43 for WTI in March, and $46 for Brent in January.

 

Companies have started to report their first quarter profits or earnings, and expectations are low because of things like falling oil prices (hurting the energy sector), the strong dollar (hurting exporters), and a challenging global environment in general (WSJ). As always, there is plenty to worry about if you want to: Europe still contains a lot of political risk with the rise of fringe parties and stalled negotiations in Greece (UK general elections are May 7th); in China, slower growth is the “new normal” and concerns of a hard landing are never far away; Japan’s fortunes depend, in my opinion, upon badly needed corporate governance reform; the end of the commodity super-cycle (including oil) is challenging and destabilizing to many materials-intensive economies (e.g. Latin America, Canada, Australia, Russia/Eastern Europe, the Middle East); and finally, there’s no shortage of terrorist threats from the likes of ISIS, Al Qaeda, and Boko Haram (Africa), as well as uncertainty regarding Iran’s growing influence (La Jolla Economics).

 

Of course, there are always things to worry about and there always have been. That’s pretty much why investors get rewarded in the first place. Right now global risk measures are indicating “normal” amounts of risk. It is shocks out of the blue that affect assets negatively, and investors diversify because these shocks cannot be predicted – not well anyway. And shocks pass, which is why investors do best when they avoid short-term thinking and focus on the long view.

 

That’s not always easy to do, at least it hasn’t been for me. To take just one example (which I’ve discussed before), over 20-years ago I was surrounded by academics and think tank scholars that fretted daily about “what the government is doing to our money.” Currency collapses and safe-havens were all I heard about. I had invested in the view that disaster was always just around the corner. And yet the work of true experts suggested that this period in which “the government was destroying the currency” was the most prosperous in human history, by far. This was a fact corroborated by many leading economists. So my conclusion was that either money and monetary policy didn’t matter, or that the doom-and-gloomers were wrong about monetary policy actions. It’s the latter, and I even chose to write my dissertation on monetary theory. The whole subject was humorously summarized about four years ago by Berkshire Hathaway Chairman Charlie Munger when asked about the dollar depreciating 95% during the past half-century he said, “If you think the past half-century was bad, you will have serious problems in life.”

 

Not that currency crisis’ aren’t serious events. But as I mentioned in an earlier Kee Points, you could tell a fiat (unbacked paper money) currency-collapse horror story about the dollar every day going back at least to the Bretton Woods system of a gold-linked dollar, which ended in 1971. Many still do tell these stories. But the nail in the Armageddon-story-coffin came for me when I had access to one of the best global data bases in the world. I (with a lot of help) did research that supported the view that recent (early 1980s on) currency gyrations were better explained by differences in rates of return between countries, not monetary policy per se. Not to belabor the story, but that would predict, correctly, that dollar declines aren’t precursors to currency collapses. But I’ve never heard the currency collapse advocates show the slightest knowledge of exchange movements beyond “the Fed is printing money,” and I’ve never know them to predict anything correctly (even the near collapse of the global financial system in 2008 occurred as the dollar strengthened dramatically!)