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

Last week the fourth quarter 2015 GDP growth number was revised upward from 1% (annualized) to 1.4% as more complete data became available (according to the Bureau of Economic analysis, which releases the GDP numbers). Looking at more recent economic performance, estimates from the Atlanta Fed’s GDPNow model for first quarter 2016 GDP came down last week from 1.9% to about 1.4%. That’s at the lower end of consensus estimates like those from the Wall Street Journal’s Economic Forecasting Survey. All of these numbers are pretty low, as I expected, creating somewhat of a “growth scare” that should fade a bit as the year progresses. I agree with Allen Sinai at Decision Economics that the possibility of recession is fairly remote because job growth, income growth, and consumption spending appear too strong. That also happens to be the view of other proprietary research shops with decent track records, like High Frequency Economics (WSJ). Growth in the US is being negatively impacted by poor performance abroad. But that also seems to be leading to an increased demand for US assets from abroad, particularly from Europe, Japan, and China. As for possible Fed rate hikes, the futures markets are pointing to a very low probability of a hike this April, and only one 25 basis point hike by December.

 

Political odds: PollyVote, a model I respect that combines multiple election forecasting methods, continues to show increasing odds of Democrats winning the White House. From dead even at the beginning of this year, the odds in favor of Democrats have steadily increased to 53.2%, leaving the Republican’s odds at 46.8%. I came across some interesting insights regarding elections and polling data last week. For one thing, only about 17% of eligible voters turn out for the primaries. And as for “why polling doesn’t work anymore,” one reason is because landlines are dying. Few millennials have them, and as the use of landlines (the primary tool for pollsters) shrinks, so does the validity of polling because the samples are increasingly not representative of the general population. And polling surveys have a 75% lower response rate than they did just 20 years ago.

 

Geopolitical concerns: Last week I attended the Barron’s Annual Top Independent Advisors Summit, one of the few annual conferences that I find consistently insightful. Last year’s geopolitical speakers expressed their deepest concerns over increased militarization in the Pacific and a possible rise of conflicts between China, Japan, Taiwan, etc. This year’s speakers were General John Allen, former head of NATO forces in Afghanistan, and Kenneth Pollack, of the Brookings Institute’s Center for Middle East Policy. Their worries were focused squarely upon the Middle East. Multiple civil wars were cited as concerns, as civil wars were regarded as “the most dangerous things that humans do.” That was certainly true of our country, and as divisive as politics seem now, it was pointed out that we aren’t involved in the wholesale killing of one another that characterized our own civil war. Neither speaker was particularly pleased with the current administration’s efforts, but both conceded that it is very hard to pursue forward-looking, multi-generational strategies when elections and possible political turnover occur every four years. Concerns were raised that Vladimir Putin is becoming the “go to guy” in the Middle East rather than the United States. Nuclear proliferation was also a concern, citing a senior member of the Saudi family stating that “Saudi Arabia wi­ll never be number two with Iran in a nuclear arms race” (i.e. that’s why it’s so important that Iran not develop a nuclear bomb). The pacific regions were not ignored, as the speakers cited 5 “go to war” treaties or pacts that the US currently has with various countries in Asia. They also cited as a concern Chinese leaders stating that they have learned that geopolitical influence is determined by force. Geopolitical strategists always sound pretty gloomy (!); remember, these are individuals whose entire careers have been spent trying to identify potential risks, and potential risks have been ever-present more or less forever.