There are going to be some key macroeconomic themes for 2014 which will determine the direction of any portfolio. The current environment cannot sustain a 20% plus return in equities or a 20% decline in long bond returns. Most Wall Street forecasters are predicting a better growth year, but to have this growth occur we are going to have to see some positive developments in some key areas. We are in a period of transitions as we begin 2014, but that does not really get to the heart of the issue for future. We may not have a well-known way of achieving transition from the current policy and growth issues. We are not in normal business cycle transitions where we move to a well-known or experienced phase of higher growth.
From "tapertantrum" to beyond - So what now for monetary policy? The start of tempering is a movement to normalization and suggest that the economy is starting to better, but reliance on forward guidance's a policy is bankrupt. Let's look at the bank lending channel. It is not working, so what does it mean to say we are ready to move to normalization? It is not clear that Chairman Yellen will have some new ideas to present. The same policies will not be effective at changing the current slow growth path.
Fiscal policy fiasco again? - We are going to have deal with the debt ceiling again in the US and there still has to be a deeper discussion of G7, EU, and fiscal responsibility. Austerity is not an effective policy for growth but the government liabilities that are continued to be grown also are not a policy that can last much longer. If pension liabilities are not addressed, consumers will have to save to make up the difference which is a drag on aggregate demand and is at odds with the objectives of monetary policy which is to get consumption pulled forward.
From "tapertantrum" to beyond - So what now for monetary policy? The start of tempering is a movement to normalization and suggest that the economy is starting to better, but reliance on forward guidance's a policy is bankrupt. Let's look at the bank lending channel. It is not working, so what does it mean to say we are ready to move to normalization? It is not clear that Chairman Yellen will have some new ideas to present. The same policies will not be effective at changing the current slow growth path.
Fiscal policy fiasco again? - We are going to have deal with the debt ceiling again in the US and there still has to be a deeper discussion of G7, EU, and fiscal responsibility. Austerity is not an effective policy for growth but the government liabilities that are continued to be grown also are not a policy that can last much longer. If pension liabilities are not addressed, consumers will have to save to make up the difference which is a drag on aggregate demand and is at odds with the objectives of monetary policy which is to get consumption pulled forward.
Deflation issue - Monetary policy in the G3 has not been able to create what they have always wanted in this post-crisis environment - inflation. The concept of simple. If there is some inflation, there will be more economic activity that will be moved forward. If deflation occurs, consumption will be pushed back in time and creditors who are highly levered will be hurt. We are willing to hurt creditors in an effort to improve aggregate demand. This policy has not worked.
The Fed has not been successful at hitting a 2% inflation. The numbers suggest that we are going in the opposite direction. The numbers are worse in the EU. There has been some improvement on the inflation front in Japan but we still have to see sustained price increases. If central banks start to normalize policies, are we going to be see any inflation? Normalization and more inflation are at odds with each other.
Abenomics - 2014 will be the true test of the new Japanese policies given there is an increase in consumption taxes. The question is whether we are headed to a better growth environment or "Abegeddon".
Emerging Markets - The years has started poorly for EM stocks. It is hard to have a robust global economic expansion without EM growth. The US was a more important driver in past decades. We are not discounting the catalyst that comes from a US growth increase, but the relative importance has declined. The world needs the BIITS (Brazil, India, Indonesia, Turkey, and South Africa) to kick in with better growth. These are the countries that all have current account deficits, poor currency dynamics, and sharp stock loses. They are the countries most vulnerable to any rise in US rates.
China as usual - This has now become the usual country of choice to any watch list for positive growth. The government wants us to believe that another 7% growth year is going to occur, but the recent problems in financial markets suggest that policy-makers may have less control over the economy. Try and crackdown on excessive lending and there are unexpected impacts on rates. 2014 is supposed to be a year of reform and movement to market based principles. I would hate to be an out of favor Chinese politician. There will be a crackdown, but can it help get a consumer driven high growth economy? The export policies of the last decade are not going to be the driver. The current account surplus has fallen to about 3% of GDP which is about the deficit that is being run by the US.
EU reforms - this will be painful - The EU needs bank reforms, pension reforms, trade reforms, and change in the traditional mindset of governments that can provide a nice safety net from the robust competition from the rest of the world. The AQR (asset quality review) tests will be a lightening rod for what reforms may be possible in the EU. Deflation fears are real and the ECB has a limited bag of tricks. Their forward guidance to say that they will do whatever it takes may actually be put to the test.
Are all of these transitions going to occur? Not likely.
EU reforms - this will be painful - The EU needs bank reforms, pension reforms, trade reforms, and change in the traditional mindset of governments that can provide a nice safety net from the robust competition from the rest of the world. The AQR (asset quality review) tests will be a lightening rod for what reforms may be possible in the EU. Deflation fears are real and the ECB has a limited bag of tricks. Their forward guidance to say that they will do whatever it takes may actually be put to the test.
Are all of these transitions going to occur? Not likely.
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