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

Europe: Last week was a great example of what we have been talking about, both on our webcast and in Kee Points: Greece promises reforms in exchange for funds, the EU and IMF then pledge the funds, and Greece then starts to backslide on its reform pledge. In last week’s iteration, Greek Prime Minister Papandreou said he wanted to put the reforms to a political referendum or vote, which caused markets to sink. However, pressure from outside (EU and IMF) and inside Greece forced Papandreou to scrap the referendum a mere two days after it was proposed. Concern immediately moved to Italy, where Premier Silvio Berlusconi is under pressure to resign. Italy differs from Greece in that Greece falls under the sub-category of “countries that have borrowed money that they cannot possibly repay.” Italy, on the other hand, can service its debts through spending reforms and growth initiatives, as long as its funding costs do not rise too much. The problem is that bond yields in Italy have risen to their highest levels since the creation of the Euro (1999), with 10-year yields hitting 6.67 percent. Rising borrowing costs could push Italy into bailout status, which is why the European Central Bank has stepped up its program to buy government bonds. This strategy is designed to keep their borrowing costs from rising (more buyers will bid up the price which lowers yields/borrowing costs). Greece has been generating headline risk for two years. Let’s hope Italy does not let it go on that long!

 

US Economic Data last week continued to point to modest expansion: Both manufacturing and service PMI’s were up slightly over September’s readings and were in expansion territory (in contrast to Europe). There were also modest gains in factory orders, chain store sales, construction spending, and private payrolls. The unemployment rate fell slightly to 9 percent. There are very few longer-term optimists out there, which I find a little curious. Because monetary policy is extremely accommodating and likely to remain so for some time, fiscal policy - taxes and spending - will become the key determinant of US economic growth going forward. It is hard to imagine not getting more clarity on these over the next twelve months, which should be bullish. Markets are pretty nimble, and the US economy can adjust to any level of inflation, interest rates, taxes, and regulation. It is when changes in these variables are on the table and uncertainty is high that you get muted economic activity. I would not go as far as Art Laffer did recently in Lubbock, where he predicted that Republican victories in Congress and the White House will lead to an economic recovery and a bull market greater than that of the Reagan years (Lubbock Avalanche-Journal). In fact, the consensus of economists and politicos that I have seen, have President Obama remaining in the White House and a narrowly Republican Congress – a prescription for conflict. But a case can be made to temper the doom and gloom a little bit.

 

On that note, I was at a large West Coast investment conference last week where former British Prime Minister Tony Blair was the keynote speaker. I jotted down a few items that I thought would be of interest to Kee Points readers. Blair is an optimist but pretty conservative, so I hope this is not too offensive:

 

 “It is true that China will be a major force, but it is also true that it is doing so by opening up and becoming more like us and will continue to do so.”

 

 

“Yes, technology is changing everything at a breath-taking pace, but where’s the hub of that activity? Right here in California.”

 

“There are reasons to take heart. Ask yourself, are people trying to get into your country or trying to get out? That’s the measure of how a country is doing.”

 

“Democracy is a state of mind...the freedom to speak, freedom of religion, economic freedom. These are all at least as important as the freedom to vote.”

 

On Occupy Wall Street: “One of the things I learned as Prime Minister was that those who shout the loudest don’t necessarily need to be heard the most.”

 

“If you think investing is tough right now, try the Middle East Peace Process...we live in an era of uniquely low predictability.”

 

 “The dominant issue right now is not how to keep another financial crisis from occurring, it is how to get the economies growing.”

 

And here was the show stopper, which got a standing ovation – surprising to me given it was in San Francisco: “America wants to be liked. It should give up trying to be liked. Just be strong. People around the world might never say publically that is what they desire for America, but it is.”