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

Turmoil in the Middle East has dominated the recent headlines, with an Arab coalition fighting to repeal Iranian-backed rebels (who are sacking the country of Yemen) on one hand, and a possible nuclear deal between the US and Iran this Tuesday on the other. As I write this, US stocks are up big and oil is down…not what I would expect. I file this under the “ongoing lesson of the last five years;” namely, that you cannot invest according to the headlines! Here’s a quick look at the rest of the world, or at least the Big 4:


Eurozone data – particularly Germany – shows improvement as measured by PMIs (Purchasing Managers’ Indices), the mid-March ZEW (Centre for European Economic Research) current situation index (a sentiment survey), and IFO business climate index (Munich-based Institute for Economic Research-Information and Forschung-“research”). No doubt that reflects the impact of the ECB’s (European Central Bank) asset purchases and the declining euro. A year ago it cost almost $1.40 to acquire a euro. Today you can buy euros for $1.08. For now at least, this “policy response” is over-shadowing the potential negative impacts on European sentiments from the on-going Greek debt negotiations and from Russia/Ukraine tensions (a peace deal or cease fire was agreed to in February).


Japan: Data on industrial production, consumption spending, and inflation (zero) all paint a pretty anemic picture for the Japanese economy. Japan fell into recession last year and is not doing much better this year. Japan has large debt and demographic (aging/shrinking population) problems, so it is hard to get excited about it from an investment perspective. Stocks are cheap there, but Japan has been “the land of false rallies” for over 20 years. There is something in Japan worth watching, however: the move underway to pass legislation that improves corporate governance in Japan and forces companies to manage for shareholder value. Historically Japanese companies have not been managed this way, and as a result they have had the lowest ROIs (return on investment or equity) in the world. But a new law requires at least one independent director on corporate boards (an improvement); and a new stock market index, the JPX-Nikkei 400, which excludes companies with low ROIs (WSJ - hence its nickname “the shame index”). That’s a start, and it is worth watching.


China: Markets have been bullish on China this year, but certainly not because of the economic data, which continues to disappoint and confirm continued slowdown there. Stocks are up in anticipation of strong policy responses. That means looser monetary policy, like lower bank reserve requirements to increase certain types of lending and/or interest rate cuts. Stimulative fiscal policy involves stepping up government investment spending, like the current plans to improve connections with Asia, Africa, the Middle East and Europe with roads, ports, railways, etc. (WSJ). But stocks in China are also up because of policies aimed at encouraging more equity ownership by the Chinese (e.g., lower minimums required to invest, lifting mutual fund restrictions, discouraging other types of investments).


US: The data points to a slow patch for sure, though jobs data and even new housing starts have surprised on the upside. How about some numbers? The National Association of Business Economists (NABE) just released its outlook based upon the macroeconomic forecasts from a panel of 50 professional forecasters. They forecast 3% real GDP growth for the US in 2015 (I’m closer to 2.5%) and below 1% inflation, with the Fed hiking rates in the third quarter of this year. Interestingly, they expect short-term rates to go from basically zero today to 2% by the end of 2016. 10-year Treasury yields are expected to remain pretty low (2.6% by end of 2015, 3.25% by end of 2016) because of strong global demand for them. I think the strong dollar might influence and delay the Fed more than many would think, and 25% of the NABE panelists agree. The panel expects crude oil (West Texas Intermediate) to be $61 per barrel by the end of 2015 and $69 by the end of 2016. The dollar is expected to continue to strengthen against the euro for 2015.


Addendum: The Most Interesting Thing I Saw Last Week

Former Fed Chairman Ben Bernanke has started a blog at the Brookings Institute that is open to all. There is no reading I would recommend more highly. Here’s a quick catch-up on Bernanke’s thoughts from a recent interview (NABE):


On widespread distrust of the Fed: “Some people are just very disposed to believe the worst of the Fed no matter what…that the Fed is somehow a mysterious institution that is not working in their interest, which I think is exactly wrong.”


On the current state of the financial system: “We are safer now, and the system is stronger and more resilient than it was before the crisis. Banks have much more capital and liquidity; and there is more transparency – in derivatives markets, for example.”


On how markets will initially react to changes in Fed policy (i.e. tightening): “I do not really know the answer to that question. I think that there is always some trickiness involved whenever the Fed goes from lower rates to a more normal level.”


On current Fed Chairman Janet Yellen: “Janet Yellen comes into the job with considerably more experience at the Fed than I had when I took the job. I have every confidence in her and am delighted to turn the reins over.”