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

Data in the U.S. continue to point to 2%+ annualized GDP growth for the first quarter of 2016. Markets rallied last week on a report from the International Energy Agency that global oil supplies declined last month (by 180,000 barrels per day), implying that oil prices might be bottoming. This conclusion seems to match that of many energy experts, and my interpretation is $40 per barrel seems to be the sweet spot for the stock market; below $40 and global stability concerns take over. (Brent crude is currently hovering right around $40/barrel).

 

Elsewhere in the world the big event was the European Central Bank’s (ECB) somewhat surprising announcement on Thursday of several monetary easing initiatives, which include cutting key interest rates, increasing the size of its monthly asset purchases, and adding corporate debt to the types of securities being purchased under its version of quantitative easing (debt purchases). Europe has some real problems to deal with, like reforming price/wage/regulatory rigidities as agreed to in prior ECB bail-outs, and the refugee crisis there, along with the strain it is putting on relationships among the Eurozone’s member countries. The European Central Bank’s actions won’t solve these problems (the problems aren’t monetary) but they certainly won’t hurt, at least in the near-term.

 

The press continues its long-term coverage of global events through the lens of possible “contagion,” as though countries are like biological organisms spreading bad events one to another, similar to communicable diseases. There’s a grain of truth to that to be sure, but resilient seems to be much more descriptive of the world, at least most of the time. That was a theme I pursued while working as a macroeconomist during the Asian crisis of the 1990s. The idea was that when a large country experiences a problem there are losses due to the reduced gains from trade. But there are also offsetting gains as capital and resources flow from the bad regions to the good. This is widely overlooked. The prediction was that the Asian crisis would not spread to the developed world, and it did not.

 

This idea was pursued further by economist David Ranson at H.C. Wainwright & Co., Economics (now HCWE) in 2011. Ranson looked at the five largest developed economies (U.S., Japan, Germany, Britain, France) using 31 years’ worth of data, to answer the question, “does economic failure in one country drag down the other four, or does it elevate them?” (HCWE). A test was set up to identify when economic growth in one of the five countries materially fell behind the other four (e.g. experienced a recession, etc.). According to the contagion theory, the subsequent growth rate of the other four countries should be below average, being dragged down by the poor performing fifth country. According to the persistence theory, the other four should benefit from the flow of capital and resources out of the poor performing fifth economy. What Ranson found was that when one country experienced a growth problem or shock, the other four tended to experience stronger subsequent performance. The research suggested persistence seems to be a better lens most of the time rather than contagion. This was proprietary research and not subject to peer-review, so you should never read too much into it - that goes for all so-called white papers and “surprising new findings” fodder - but it is an interesting result.