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

Markets are benefiting from “improving economic visibility” around the world with data indicating stability or improvement in China (PMIs and growth-oriented policy pronouncements) and Europe (most recently positive growth in Spain). But “challenging” is how many economists and CEOs are describing the environment here in the US. That’s consistent with last week’s jobs report and today’s Industrial Production report (disappointingly small gain). Today’s pending home sales report doesn’t help, as it shows a marked decline in the Pending Sales index. That’s an expected “pause” according to the National Association of realtors. Housing has rebounded fairly strongly over the past two and a half years, and with recent higher prices and mortgage rates bringing affordability down, I suppose a pause isn’t unexpected. But I don’t expect a really strong housing market until job and income growth improve – not likely in the near-term. One possible tail-wind being mentioned by more strategists these days is the highly progressed deleveraging process here in the US, implying pent-up demand.

 

My view: While it is common to describe things as always being either being “bullish” (positive) or “bearish” (negative), I would describe the economic data overall as “mediocre.” And mediocre means above average market sensitivity to data releases because they represent new information-- somewhat of a macroeconomic shock. A mediocre-growth economy is always at higher risk of recession because it is less resilient to the macroeconomic shocks that cause recessions. Of course, it is worth keeping in mind that we’ve had four years of mediocre data and a huge run up in stocks. That makes the case for staying with an investment plan rather than following a macroeconomic guru. Besides, following the week-in/week-out news flow and market reactions can be exhausting. I do it because it is my job, but peer-reviewed research shows that an excessive short-term focus tends to make people too active; they make mistakes, churn their portfolios, and their investment performance suffers dramatically.

 

So taking a step back and looking at the “big picture” or longer-term view is important. On that note, I attended a “Geo-Political Strategist” lunch last week (Bank Credit Analyst), and I thought Kee Points readers might enjoy some of the more interesting points:

 

1. “Front page news is properly priced or overly priced risk.” In other words, if it’s on the front page it is already priced in (so of no interest to investors) or overly priced in (meaning opportunity for contrarian investors).” My way of saying this is that it is unforecastable shocks that really matter.

 

2. “Parties in Europe that want to dissolve the European Union have not gained a single seat in parliament since the onset of the European debt crisis over three years ago. And in Europe people continue to vote for parties that advocate structural reform.” That’s what I see too, namely, that headlines aside, all of the tangible actions on the part of European officials have been to maintain the Union and the Euro.

 

3. “Biggest global risks are not the Middle East but tensions in Asia, particularly between China and the Philippines and Vietnam. Also rising nationalism in Japan. That’s where geopolitical risk is most mispriced, and a re-pricing is due.” I think we might have already seen some of that re-pricing over the past two years. One thing to keep in mind about China (in contrast to other global superpower regimes like the former Soviet Union) is the dramatically different degree of economic interdependence. China’s fortunes still very much lie in global trade. That’s a big difference – and a unifying one.

 

[Note: quotes are not exact direct quotes but are from my notes an indicate the gist of what I heard the strategist say]