Welcome to The Outlook archives, where you can view several past issues featuring our investment and economic thinking. The Outlook is available in both PDF* and HTML format. We recommend that you review the PDF format, as it is closer in appearance to our printed version.
Quick Take on the Franc, the Euro and the Greek Election
In the past two weeks, two big economic changes and one big political change occurred in Europe. On January 15th, the Swiss National Bank (SNB) surprised the markets by freeing its currency, the franc, from its link to the euro causing the franc to instantly increase in value and setting the stage for Switzerland’s export-driven economy to go into recession. This recent change was in anticipation that the European Central Bank (ECB) would expand its quantitative easing (QE) program to ward off deflation and recession in the Eurozone. The ECB, on January 22nd, did exactly that announcing monthly purchases of 60 billion euros through September 2016 or until the ECB sees a sustained adjustment in the inflation rate to its target of below but close to 2%. Then on January 25, 2015, the people of Greece elected the anti-austerity party setting up a fight between Greece and its creditors. The SNB policy action is emblematic of the currency wars which are a consequence of insufficient global demand resulting from the lack of appropriate fiscal policy. The ECB policy action is illustrative of the challenge facing governing institutions in the Eurozone as they attempt to address the growing imbalances, structural deflation and insufficient fiscal policy support. The very important Greek election is the direct result of seven years of a shrinking economy which has led to record high levels of unemployment, particularly for youths. Shrinking economies have also resulted in lower living standards and increased resentment throughout the European community. This is a tipping point for Europe’s governing bodies in determining the outlook for the Eurozone.
Amid Global Divergencies, the U.S. Reaffirms Its Role as Engine of Global Growth
As we enter 2015, the fundamental economic forces in the developed world are the strengthening of the U.S. dollar against the euro and yen, declining interest rates, collapsing oil prices and falling inflation rates. In the developing economies, we are witnessing decelerating growth accompanied by declining currencies and rising interest rates. These forces have led to increasing market volatility and are defining our current Outlook for investors. Against a backdrop of a prolonged period of slowing global growth, the United States has reaffirmed its role as the most vibrant and dynamic major economy after several years in which global growth was driven by the developing world. The U.S. resurgence is a consequence of its resilience and technology leadership as well as its reduced dependence on imported oil which are contributing to its growing productive capacity. The U.S. is better positioned to meet its energy needs today than at any time in the past 45 years.
Help Wanted: Smart Fiscal Stimulus
“No one in society remains untouched by a situation of high unemployment. For the unemployed themselves, it is often a tragedy which has lasting effects on their lifetime income. For those in work, it raises job insecurity and undermines social cohesion. For governments, it weighs on public finances and harms election prospects. And unemployment is at the heart of the macro dynamics that shape short- and medium-term inflation, meaning it also affects central banks. Indeed, even when there are no risks to price stability, but unemployment is high and social cohesion at threat, pressure on the central bank to respond invariably increases.”
Excerpt from Jackson Hole speech by
Mario Draghi, President of the ECB, 8/22/14
Investment Strategies for an Unprecedented Business Cycle
The market has reached record levels this year in the face of geopolitical events in Ukraine, the South China Sea and throughout the Middle East, which in other economic cycles would have likely led to a significant pullback. Clearly, the current market is being driven by other forces. Russia’s aggressiveness in Ukraine and conflict in the Middle East now pose major risks to political stability. While the term “complacency” has been used to describe the stock and bond markets this year, we believe that today’s market reflects a more complex set of dynamics resulting from the combination of a prolonged low-growth economic expansion, a lack of sensible alternatives available for investors (given the low and declining yields on fixed income) and the deflationary forces which exist in the global economy. The disequilibrium present in the global economy continues as the major economies struggle with muted growth due to excess capacity and debt in the system.