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

  • Quick Global View
  • Investment Thoughts

Quick Global View

Taking a quick trip around the world, the central near-term issue for the US and China is progress on trade agreements, and discussions will probably go into “overtime” and extend into April (New York Times). Longer-term, I would say the big issue for China is dealing with the social unrest that comes with slower economic growth, while in the US I would say the big issue is how to more effectively raise revenue to fund programs that voters demand. Japan is slipping close to recession, and inflation there is half of what was targeted six years ago with the Bank of Japan’s unprecedented monetary expansion (central bank asset purchases). Near-term, Japan also needs global trade issues resolved, but its longer-term demographic and capital allocation problems seem more intractable. In Europe, the short-term issue is Brexit, which will probably come down to a request by British Prime Minister Theresa May to the EU for a postponement of the March 29 exit deadline. Longer-term, Europe has some seemingly intractable issues of its own, not the least of which is the tax avoidance culture in Greece and even Spain and Italy that causes deficits which causes Germany to effectively have to back their bonds. Europe also has demographic issues (American Affairs). As an aside, by demographic issues I mean aging work forces and with heavy retirement demands and fewer younger workers to take their place. As for emerging markets, I still find it useful to see them in terms of the more natural resource intensive Latin America and Eastern European economies versus the more trade/digital oriented economies of Southeast Asia (Vietnam, Indonesia, Philippines, etc.) plus India (Asia Pacific). I do not see the resource intensive economies going through another boom-bust commodities cycle like the one characterized by China’s entrance into the World Trade Organization in 2002 and its aftermath. Nevertheless, that also means I am not very sure how useful data from the last 10-15 years is for forecasting those economies going forward.

Investment Thoughts

Looking at stock market returns over the past 10 years, the pattern that emerges is consistent with the paragraph above. The US has outperformed international indices, with Europe and Japan about the same, and the resource-based economies (and commodities in general) lagging the overall emerging market indices. I find comfort in this, as it tells me that markets are fairly rational and well-informed. It also tells me that making broad global macroeconomic bets that pay off, i.e., knowing things that the market does not already know, is pretty difficult. However, the narrative above (typical of global commentary) leaves out the jaw-dropping dynamicism that continues to characterize the global economy. It all just happens at the company level, or the level “of the individual enterprise,” as global economist Arnold Harberger (UCLA) would say. That is a good way to think about investing globally going forward: start at the company level. It reminds me of a story that economist Phil Demuth tells about a lunch that he and entertainer Ben Stein (who’s dad Herb was a noted economist) had once with investor Warren Buffet. Stein asked Buffet what the single most important lesson for investors to learn was. Buffet replied, “Stocks are not pieces of paper. You are buying a business.” That is the perspective we take at South Texas Money Management, and it is why we produce our year-end book, which details each of our holdings for our clients.