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

Quick housekeeping note: South Texas Money Management’s fourth quarter webcast will be released this week, so look for an email and accompanying link. CEO Jeanie Wyatt will give our overall view of the investment landscape, I will make a few economic points, and Hutch Bryan, our Director of Fixed Income, will talk briefly about bond markets, and in particular, address concerns regarding municipal bonds. Also, congratulations to Jeanie for making wealthmanagement.com’s “Top 25 Women Investment Advisors.” More information on her latest honor is available in the news release section of our website.

Stocks: Overall, global stock markets are neither expensive nor particularly cheap: The “big 4” that are on everyone’s mind - China slowing, European debt crisis, U.S. fiscal cliff, and Middle East tensions – have been closely watched and telegraphed to the markets for several years now. It seems inconceivable that the market hasn’t priced in what’s knowable.

Economies: Slowing or bottoming? There is a difference. Global PMIs (purchasing managers indices) appear to be inching up, suggesting that global growth may be moving modestly higher (J.P. Morgan). And central banks in Australia, South Korea and Brazil have all lowered rates, joining the overall monetary policy easing of the European Central Bank (ECB), Bank of England, Bank of Japan, and the U.S. Federal Reserve bank.

So, the key characteristics of the global economy: Global monetary easing characterizes the monetary side of the “policy mix” equation, while fiscal policy uncertainty (tax, spending, regulatory, regime change) characterizes the fiscal side of the global policy mix. The monetary policy impact is probably overestimated by strategists. The effectiveness of monetary policy varies from situation to situation, depending upon whether “tight money” (often indicated by high/rising interest rates) is a binding constraint on economic activity. I would describe global monetary policy at this point as being pre-emptive, that is, making sure that tight money is not a binding constraint, so it will facilitate expansion but won’t, in fact, create it. This is exactly how Fed Chairman Ben Bernanke describes U.S. monetary policy.

On the fiscal side of the policy mix: Uncertainty is the defining characteristic, whether it is uncertainty over which political regime will dominate, over what taxes and regulations will be, and/or over what government spending and its composition will be. I sense that a lot of people are getting agitated with the “policy uncertainty” moniker, but it is the defining characteristic of fiscal policy not just in the U.S. but globally. The impact of uncertainty on the fiscal side is probably understated.

A case for optimism: That’s where the case for optimism lies - more certainty over the next 6-12 months on the fiscal side, with continued accommodation on the monetary side.

In the U.S., just about all of the data (jobs, GDP, consumption, etc.) point to continued moderate growth but no deterioration from that. That’s probably because the drivers of U.S. recession – housing and autos – have already crashed or come down and are starting to turn up from low levels.

Also, there’s the “wealth effect” of rising equity markets and real estate values ($>3.5trillion increase in equities; >$1.5trillion in home prices according to J.P. Morgan), which helps explain why the U.S. consumer continues to drive positive spending growth. Today’s retail sales numbers for September confirm that Americans increased their purchases of everything from cars to electronics (Reuters) and is consistent with Friday’s stronger than expected consumer sentiment reading (the highest reading since 2007).

Europe: I continue to see modest declines in global risk indicators, like the St. Louis Fed’s Financial Stress Index and from various data-points like declining CDS (Credit Default Swap) spreads for key
European economies (that means it costs less to buy insurance against European debt defaults). This is due to things like the ECB’s recent OMT (“outright monetary transactions”) bond-buying program and German Chancellor Angela Merkel’s recent assurance against a Greek bond default or Greek exit, moves that continue to defy many skeptical knee-jerk (and not so knee-jerk) strategists.

Middle East: In the months prior to Operation Desert Storm (1990) and the Iraq War (2003) the price of oil increased over 50%. Currently oil is up about 20% from June lows. So apparently the market is a little less concerned about an immediate strike on Iran than the headlines.

U.S. fiscal cliff note: Most expectations are that the 2012 “lame duck” session of Congress will mostly extend the status quo for 6 to 12 months in order to work out a “mega deal” of budget reform for 2013 (McBee Strategic Insight). Reasons for this being the most likely scenario include fatigue on the part of policy makers on both sides with “re-litigating” the same issues related to Bush tax cuts and defense and entitlement cuts, as well as threatened rating agency downgrades by 2013/early 2014 if more permanent plans aren’t in place.