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

First, I would like readers to know that we are wrapping up our first quarter webcast this week and encourage all of you to stay tuned for our webcast invitation to follow soon.  For those of you who are not regular listeners, Jeanie Wyatt, CFA, our CEO & Chief Investment Officer, Fred Labatt, CFA, our Director of Equity Research, and I will be reporting on the previous quarter and offering our outlook for this quarter.


Most of the data was better than expected last week for the U.S. and for key Eurozone economies like Germany and France. Home sales in the U.S. came in strong, consumer spending accelerated, and durable goods orders excluding aircraft/defense were stronger than expected. That’s also consistent with today’s ISM manufacturing index reading of 53.4, which beat last month’s 52.4 as well as expectations of 53. Germany also reported strong data across the board last week (retail sales, employment data) as did France (consumer spending). Even Japanese retail trade and household spending beat estimates. All in all, it was a week in which the worst seemed to be behind us rather than ahead of us with regard to the global economy. We need more of those kind of weeks!


As promised, below are my notes from last week’s Washington policy conference of the National Association for Business Economics:


Ben Bernanke: Fed Chairman Ben Bernanke’s keynote speech focused on two things. The first was his ongoing contention that, despite the vast opinion to the contrary, today’s high unemployment rate is more cyclical than structural. In other words, high unemployment is not so much a mismatch between jobs and skills, or a housing construction crash, or other structural causes, but rather weak growth/aggregate demand. The average growth rate of the U.S. economy during expansions (post WWII) is about 4.1%, while the current expansion has been in the 2% growth range. So Bernanke argued that we need stronger growth.


The other issue that Bernanke discussed was the more recent paradox (given the assertion above) of improving labor markets in the face of ongoing sluggish growth.  Here’s what I think is happening: Kee Points readers will recall that the number of jobs lost during this past recession, relative to the decline in GDP, was historically high. For example, total job loss was more than 6% of all jobs (previous post-Depression record was 5.2%). So a lot of strategists felt that companies were probably running “too lean” with respect to employee count, hence some were calling for an upside “hiring surprise” over the past several years. That never happened, but with GDP (total output of market valued goods and services) now at an all-time high, but with 5.5 million fewer workers than the previous GDP peak, I’d say companies are finally giving into hiring pressure. That’s pretty much the case that Bernanke made as well. He felt that this positive labor market surge would be temporary unless or until the pace of growth really picks up. Alan Blinder, a Princeton Democrat, agreed with Bernanke (a Republican) that today’s high unemployment was largely cyclical, not structural. He argued that structural factors always get exaggerated in downturns, but then during expansions they seem to dissipate.


Europe: Speakers from Europe included economists from the Bank of England, Deutsche Bundesbank (Germany’s central bank), the Official Monetary and Financial Institutions Forum, and Joh. Berenberg Gossler & Co. (Berenberg Bank, one of the oldest in the world). The one thing these speakers had in common was that they were surprisingly bullish long-term for Europe and the Euro. Here are some points I jotted down: We are a bit beyond half-way through the European debt saga – the worst is behind us; a reformed Eurozone can emerge stronger from the crisis; popular support for Greece staying in the Euro/European union is strong, about 75%. That’s stronger than, say, support in Canada for Quebec staying in Canada(!); 3  tiny members have worse problems than the U.S., namely, Greece, Portugal, and Ireland, or 6% of European GDP. The rest of Europe is in better fiscal shape than U.S., Japan, or the UK.


The Europeans speakers also talked about how the Federal Reserve failed to act as a lender of last resort during the Great Depression, but did the opposite during the Great Recession (2007/08) and things turned out much better. They claimed that, going into the crisis, the European central bank was limited in its discretion, forcing them into the Fed/Great Depression scenario. But recent actions and ongoing deliberation are aimed at expanding the ECB’s role to be more comprehensive (and effective) like the Federal Reserve’s. Also, the speakers pointed out that 10 years ago Germany was the “sick old man of Europe.” But due to structural labor market reforms (less rigidity) and austerity measures enacted in 2004, Germany had a huge turnaround by 2006. That seems to be the overall blueprint for Europe going forward. All in all I’d say the European economists were the most attended lectures…a little kool-aid to be sure (i.e. everything’s great), but they made some pretty good points.


Elections Outlook: Charlie Cook of The Cook Report said that the presidential election would be decided by independents, but that you have to be more precise. Within self-described independents there are subgroups. “Independent-Left” tends to vote Democrat. “Independent-Right” tends to vote Republican. In the middle are “True Independents.” They determine the outcome. Overall Cook said to forget all of the polls and just focus on the President’s approval rating. Less than 50% means he’s in trouble. Greater than 50% means that he’ll probably be re-elected (I’ve mentioned that “50% rule” in Kee Points before). Greg Valliere, who will be speaking out our STMM 2012 Energy Conference, argued for a 75% chance of the Republicans keeping the house, and 50/50 chance on the Senate. He felt that “wealthy” would probably be redefined upwards to about $500,000 or more for tax purposes, and that dividend taxes might go up, but not all of the way up to the maximum personal rate.


Finally, Federal Express CEO Fred Smith outlined his view of what needs to happen in the U.S. going forward: (1) reduced dependence on foreign oil, (2) deregulation, and (3) tax simplification. Interestingly, Lawerence Lindsey, who with Smith was among the most conservative of the conference’s speakers, argued in favor of a broad value added tax (VAT), echoing the Harvard econ department’s alleged token conservative Robert Barro. I’ll probably talk about taxes more as the election develops and specifics emerge.