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


  • US Economy
  • North Korea
  • Policy-Based Evidence


US Economy: Here in mid-September, in the third (and final) month of the third quarter, it looks like we are not going to see a repeat of the second quarter’s 3% growth rate. The most recent calculation of the Atlanta Fed’s GDPNow model for third quarter GDP is 2.2%, with the New York Fed’s model estimating 1.34% (“Blue Chip Consensus” reported by the Atlanta Fed in the 2.25%-3% range). Estimates from both models have come down through the quarter as new data has come in. Although most people don’t believe it, statistically one quarter’s GDP growth rate tells you very little (i.e. is a poor predictor) about what the next quarter’s growth rate will be. With a 1.2% first quarter number and a 3% second quarter number, what I see is an economy still growing below its long-term 3% average.


North Korea: I am seeing an increasing number of people citing a quote attributed to Lord Nathan Rothschild, that, “One must buy to the sound of cannons, sell to the sound of trumpets.” Rothschild was one of the richest men in the world at the time of the Napoleonic Wars (early 1800s), and this would seem an apt description of today’s strong market in the face of rising global tensions with North Korea. Many US markets closed at all-time highs last week, something the S&P 500 has done 33 times this year, which is twice the annual average since 1945 according to Sam Stovall at Standard and Poor’s. As an aside, I think an important point from Stovall’s work for investors is that the market averages over 15 record closes a year, so obviously they are not sell signals! In truth, I think Lord Rothschild was speaking to buying opportunities when markets sell off because of war, and that is not what we are seeing today. Certainly, low yields or returns on other investments continue to enhance the attractiveness of equities (Financial Times). And so have the prospects for tax reform, which have increased some in recent weeks (CNBC).


President Trump addressed the United Nations (UN) today, and as expected issued a condemnation of North Korea and a restatement of Trump’s “America First” agenda. The UN has exercised limited use of force (including Naval blockades) several times over the past 25 years (for example in Iraq, Haiti, Somalia, Democratic Republic of the Congo, Kosovo). Unfortunately, UN documents are pretty clear on the legal basis for using force in the case of self-defense for member countries (i.e. in the event of being attacked), but a little vague on rules for pre-emptive military action. Of interest with regards to North Korea is the fact that China and Russia can effectively veto or limit NATO actions (BrookingsInstitute), and those are the same countries that are alleged (but not proven) to be providing technology to North Korea. I think Kim Jong-un sees this playing out with two possible conclusions. Namely, that it comes down to either the US launching a pre-emptive strike which unavoidably kills innocent people, or North Korea develops nuclear missile capability, and I think Jong-un is betting on the latter.


"Policy-based evidence" is the name of a clever journal article I saw last week (National Affairs), a play on words to the politically fashionable “Evidence-based Policy” (who can be against that?). The gist of the article was that social scientists can and will manufacture evidence to support policies, rather than the other way around(manufacturing policies supported by evidence). I see this in my field(economics) all of the time, and I think a little of it will always be inevitable. For example, in being familiar with the work of many academic economists I can guess their conclusions on newly published research (i.e. trade good/grade bad; tax cuts good/tax cuts bad; deficits good/deficits bad, etc.) before reading the articles. I am sure many of you see this in your own fields. 


I hope Kee Points doesn’t come across that way. What we do at STMM is consistent and fact-based, not fact-blind. We don’t get completely in and out of the market because we know that such attempts at market timing have been among the biggest threats to investors reaching their goals, as much as we would like it to be otherwise. Narrow, large-cap growth markets like the one we’ve been in don’t surprise us; we expect them, we just can’t predict them (nor can anyone else). That’s why we aren’t 100% invested in value stocks, or growth stocks for that matter, but rather always own both. We know that the term “bubble” can be overused-code for “I don’t know.” But observation and research at firms like McKinsey have shown that where actual market bubbles are most common is at the sector level, i.e. the Technology Sector, or Financials Sector, or Energy, etc. So, we always control our exposure to any one sector. We don’t own too much stock of any one company (i.e. too much company-specific risk), or in any one country (always own some international stocks). On the bond side, it is a low yield or interest rate environment, but bonds are rewarding investors more than cash. And owning individual bonds helps control risk and to guard against some of the more unsettling properties of bond funds. For example, when bond holders pull money out of those funds, and the fund managers sell their highest quality bonds first- because they have held their values the most- leaving the remaining bond fund investors with a portfolio of lower quality bonds.