An Unsettling EquilibriumAugust 6, 2015
For the past six quarter, roughly since fiscal policy went into gridlock with sequestration and quantitative easing (post QE1) proved ineffective, the four sectors of the US economy have had extremely stable balances. The household sector is roughly zero, the corporate and foreign balances (think foreign business competition) are both about 2.8 percent, and the government deficit is near 5 percent. The household sector is the passive member of this crowd as it has no surplus to spend and can’t force the others to lend. Government is in hibernation until the election. We do believe an all Republican government will expand the deficit, while a Clinton election will maintain the current standoff–but nothing happens for at least another year when the polling outlook is clearer. The onus for growth appears to lie with corporate decision makers–which in large part means if, when and where multinationals decide to invest.
Multinational corporations are now like sovereign entities. They have the ability to pick and choose whose rules and regulations they will operate under. The thing they value most is stability, as they have learned through history that they can adapt to most any set of tax laws or regulations via lobbying and avoidance so long as the shifts are small. That is why they often thrive during periods of political gridlock and sometimes favor nations with totalitarian, but stable, regimes. It has been the uncertainty about Greece in Europe, Abenomics in Japan, the corruption campaign and economic rebalancing in China, and knock-on effects of all this for the emerging markets that has stifled growth. No one runs fast into a dark room.
In America today, investors are concerned with the anti-business stance of government–from both the right and left. A rising tide of regulation appears number one in generating uncertainty and higher costs. Many would be happier if immigration laws were looser, repatriation of foreign profits were easier, and trade was more free and open. None of this seems likely soon. The Trans Pacific Partnership (TPP) hit another snag this week. The Ex-Im Bank and repatriation are both hostage to ongoing negotiations about the transportation bill, which was given another short term extension. We see no resolutions of these matters before the next election.
Meanwhile, foreign competitors are at the beginning of the same grinding improvement the US saw after 2009. Despite beggar thy neighbor devaluations, there is little shift in export growth anywhere–and rather an ongoing shrinkage of international trade as the emerging markets bear the brunt of the ongoing global correction. Just as it has taken a long time for wages to firm up in the US due to slack, we expect it will be years before commodities producers absorb the slack created by new technologies called out in response to formerly high prices. Commodities producers play the role of unskilled labor in our global economy.
Equity Breeds Psychology
As we see it, the global economy is waiting for marching orders from someone, but the leaders are still stuck in a committee meeting. Ideas like the Marshall Plan, the Space Race, the Great Society, the rise of the Baby Boom, defeating the Evil Empire, the technology boom around Y2K, the expansion of Japanese mercantilism throughout Asia, the establishment of the Eurozone, the emergence of China–these were big overarching themes that businesses could get their teeth into and invest with confidence. They all had identifiable backers–be it a government edict from a strong leader or the momentum of an unstoppable reality whether demographic or revolutionary. Certainty (even misplaced certainty, like the housing bubble) underpins confidence, investment and growth. Growth generates profits as rising revenues outstrip stickier costs leading to wealth and an increased ability and desire to undertake profitable, but risky, investments.
Bottom line, we see little certainty anywhere–and without it, we basically see more of the same until a leader appears. The trump card of this millennium was China, but that story is changing.
The preceding is an abridged version of a commentary for McVean Trading and Investments, LLC and has been reposted here with permission of the author.
The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.