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

Last week’s jobs report showed “modest gains” as the BLS (Bureau of Labor Statistics) put it, with employers adding 80,000+ jobs in June versus an average of 73,000 for April and May. For reference, think of 200,000 jobs per month as kind of an expansion norm. The 80,000 number is consistent with very modest U.S. GDP growth in the 1%-2% range, which is also the growth rate signaled by last week’s ISM manufacturing and non-manufacturing (i.e. services) indices. That seems to be the best the developed world has to offer right now! The unemployment rate remained unchanged at 8.2%. Overall, the employment situation is exactly as Ben Bernanke anticipated at the beginning of the year with his assertion that the relatively strong employment gains last fall would be transient, a one-time hiring binge effect of companies having cut to the bone during the 2008 downturn.

Indeed, most of the world’s central banks are easing (cutting interest rates) in response to declining growth, and that includes the European Central Bank (ECB), the People’s Bank of China, the Bank of England, and the Bank of Japan (through asset purchases). The ECB also cut its deposit rate – the rate that banks earn by parking money overnight at the central bank – to zero. The goal of all of this is to provide a greater incentive to lend and to loosen credit markets. But don’t let the headline churning leave you with the belief that this can accomplish more than it can. Wealth is created by production and exchange. Monetary (central bank) policy can facilitate that by assuring credit availability and currency stability, which then facilitates production and exchange. So monetary policy can facilitate wealth creation and growth, but it can’t create it. Think of these central bank actions as the monetary response to weak global growth, and in this there seems to be a global consensus on what to do. The other side of the coin is the fiscal policy response (tax, spending, and regulation). That’s where consensus is lacking as to what do, like whether to cut or raise taxes, or increase or decrease spending, or increase or decrease regulations.


This uncertainty is the defining characteristic of the world’s largest economies right now. In the U.S., there is tremendous uncertainty regarding sunsetting tax policies at year’s end (the “fiscal cliff”). In Europe, of course, there is entire “regime churning,” hardly an environment for committing capital to grow and hire. Japan, in my opinion, has abandoned earlier efforts to introduce market discipline (takeover/restructuring forces) to capital markets there, and that seems to be why they can only seem to muster a series of “false starts” with respect to enduring expansion. Perhaps the most policy certainty right now is in China (but the data is bad), where officials, while intentionally pursuing lower growth, will also intentionally do everything in their power to keep growth ahead of 5% or so for the near future. Of course, with their biggest export market (Europe) in recession, they can only achieve so much…a consequence of the export-oriented strategies that emerging markets like China tend to follow. So it would seem that, from an investment perspective, all of this uncertainty makes things kind of spooky. But a true investment perspective asks, “Where will uncertainty be 6 or 12 months from now, higher or lower?” I’d bet lower across the board (U.S., Europe, etc), but since I don’t really know (nobody does), I have to diversify across stocks (risk-on, uncertainty decreasing) and safe bonds (risk-off, uncertainty increasing).