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

Well, markets are pretty positive today. And while I get research from a very wide variety of sources from global Wall Street firms to proprietary investment “boutiques,” there seems to be similarity in the reasons for optimism. They include: (1) good global manufacturing PMIs sans China, which has articulated enough free market reforms to generate a consensus opinion of 7% to 8% growth there over the next twelve months, (2) Japan experiencing positive growth, albeit tempered by a pending consumption tax hike, (3) in the U.S., budget deals (lessening the chances of a government shutdown next year), (4) cheap oil, (5) good retail sales and (6) a sense that a portion of Fed tapering is already priced into bond markets.


Overall, the data seem to point to a less fragile global and U.S. expansion for 2014. All eyes now are on the Federal Reserve’s FOMC (Federal Open Market Committee) meeting that starts tomorrow and reports on Wednesday (there are eight regularly scheduled FOMC meetings during the year). I think the mindset for investors over the next 12 months should be, “expect a pullback or correction (historical odds favor this), and expect markets in 2014 to end higher.”


An impressive appointment: I am confident that Janet Yellen will be confirmed this week by the Senate as the new Fed Chairman, and I am impressed that Stanley Fischer may serve as Vice Chairman. That’s a lot of intellectual firepower, as Fischer taught Bernanke at MIT and was evidentially Bernanke’s dissertation advisor (I can only verify that by seeing his dissertation). Fischer also has experience at the Bank of Israel (the central bank of the State of Israel), the IMF, the World Bank, and Wall Street. Fischer describes the Fed’s historic actions throughout the crisis as “dangerous and necessary” (Jefferies), which I think is exactly the right slant.


Monetary ruminations: I wrote my dissertation on inflation, and I began my research as a hard money, anti-central bank gold bug. Study and experience changed some of that. Ponder this (or, this is what I pondered!): In 1971 we went off of the Bretton Woods system of a gold-linked dollar, and for the first time the modern world, for an extended period of time (1971 to the present), operated on the basis of purely fiat currencies, which means they are backed by no commodity but rather declared to be legal tender by governments. Much of the resulting period has been described by past American Economic Association President Arnold Harberger (a free-market University of Chicago “Chicago Boy” by the way) as thus: “It is not an exaggeration to say that the half-century from 1950 to 2000 was the greatest in history in terms of improvements in the health, prosperity, and welfare of the world’s population. Further, the quarter-century from 1975 to 2000 has no problem in claiming the championship as the best ever.” So the best quarter century in human history is also the one in which gold advocates claimed that governments were destroying our money? My conclusion was either that the monetary system isn’t important (not a chance), or that the world has produced a tremendous amount of wealth and innovation under central bank managed fiat currencies. There’s more to it than this, of course, but this sort of thing did challenge my thinking, and perhaps it will challenge yours as well!