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

Last Friday’s jobs report showed payroll employment increasing by 271,000 in October, well above September’s 137,000 and bringing the prior month average (which is most important statistically) to 187,000. That’s pretty decent, and right in line with estimates of US GDP growth in the 2.3% range (Atlanta Fed). Other positive data included the ISM Non-Manufacturing (“services”) index, which is a survey of purchasing managers conducted by the Institute for Supply Management. The 59.1% reading in October corresponds statistically, according to the ISM, to GDP growth of 4.5%. Unfortunately, forecasts based upon these relationships have tended to be overly optimistic during the current expansion. Consumer credit growth also surged in September (a positive), particularly revolving or credit card credit growth. Non-revolving credit (i.e. autos and student loans) has been pretty constant, as student loan growth declines over the past five years have been offset by increases in auto loan growth. Autos have been a big beneficiary of low energy prices, which is reflected in recent high auto sales numbers. Student loan indebtedness is one of the current concerns of the week, and as a former college faculty member I put as much blame for these loan amounts on the grownup beneficiaries (the colleges) as I do the kids (who rarely even see the money…goes straight to the colleges). As the Late Nobel Prize-winning economist George Stigler put it, “The typical university catalogue would never stop Diogenes in his search for an honest man.”

 

Globally things are a bit murkier. The Organization for Economic Cooperation and Development (OECD) recently lowered its global growth outlook amidst slowing global trade data. Current expectations are for 2.9% global GDP growth this year (2015), which is down from last year’s 3.3% growth rate. The group cites global trade growth in the 2% range, and I might add that prior to the financial crisis global trade was growing twice as fast as global GDP. As the OECD states, “World trade has been a bellwether for global output.” Stocks should reflect this, and they do. The late Robert Bartley (WSJ) colorfully stated that “prices move up and down wires, while volumes move on ships,” a variant of the axiom that “prices lead quantities.” Slowing global growth certainly explains the poor (negative) price performance of the Materials, Energy, and Industrials sectors this year, as they are most levered to global growth. The OECD concerns mirror last week’s highly publicized comments from global shipping firm Moeller-Maersk CEO Nils Smedegaard Anderson, who essentially stated that global growth was slowing, and that consensus forecasts for global growth are still too strong. Not a crisis, but not great, according to Anderson. In summary, what we are seeing is decent growth in the US and UK, modest at best in Europe, and disappointing (relative to expectations) in Asia/emerging markets (Reuters).

 

Finally, the most interesting thing I heard recently was a radio interview with former Securities and Exchange Commission Chairman Theodore Levitt. Levitt was discussing the rather dismal performance, relative to publically traded equities, of alternative investments like hedge funds. This has been particularly topical in light of the recent collapse in the stock price of Valeant Pharmaceuticals (from $262 to $82) and the fact that Valeant had the second highest hedge fund ownership of any company in America (Bloomberg). Commenting on this striking herd mentality, Levitt discussed studies showing that not only are hedge funds and other alternative investment vehicles opaque with respect to what they own, but also with respect to the all-in fees they charge. It has always been a little perplexing to me why people who are afraid to invest in a well-diversified portfolio of high quality, publically traded (i.e. highly liquid) stocks and bonds, for which we have decades and decades of risk/return data, and for which fees are crystal clear - will nonetheless make big allocations to highly illiquid and opaque asset classes, often with very little historical data and very obscure fees.