Best Ideas

Sorting Meaning from the Clutter

The past several years have been marked by constant fighting in Washington with the result
being a lot of noise masking the true direction of the economy. The same issues exist in other
parts of the developed world. In the UK, it is unclear whether Brexit will ever happen and under
what terms. In the case of Germany, France, and Italy the nationalists are challenging the
status quo leading many to question the long-term viability of the European Union. Lastly,
Japan and China are facing major challenges. Our view is that there are a few givens which
are likely to guide the markets over the next couple of years:

Reduced Regulation – the current administration has focused on reducing the level of
regulation for most businesses with the result being increased growth. It was not long ago that
major economists were declaring the growth above 2.0% was unrealistic and yet it now it
appears that 3.0% is the new base line.

Reduced Unemployment – with unemployment reach historic lows, the major constraining
factor now appears to be the availability of trained workers. This is terrific news for those
workers who have historically had difficulty finding employment but of course, employers have
to factor in increased labor costs.

Central Bank Support – the ECB has re-engaged in quantitative easing despite there being
no evidence of a recession. While central bankers hate to admit it, they have become more
political now that they have been given unprecedented powers. The result is a proclivity to
supporting economies when needed.

Suppressed Interest Rates – there is no “free lunch and therefore the cost if the central banks’
intervention is reduced interest rates and probably a slow build-up of systematic risk. (When
do we decide that Italy can no longer roll debt when debt to GDP is a stated 130+% and
realistically probably 135+%?)

Pension Fund Misery – with the reduction in interest rates and the corresponding reduction
in returns, many pension funds are unable to grow assets at a rate to cover their liabilities.
Some recent news in this area is that social security will supposedly collapse by 2035 per CBS

So, what is the most likely course over the next couple of years? Our view is that barring an
unusual calamity, the current trends will persist for the next couple of years until the economy
runs out of steam.

Regarding relative performance, Europe is and remains the most vulnerable.