People hope that Emerging Market countries with their higher GDP growth will bail out the Developed world by providing enough growth to prevent the global economy from falling into stagnation. But the ironic thing about growth rates is that in most cases the higher the growth the lower its quality and thus the lower probability that its growth rates are genuine, sustainable, and reliable. Additionally, the higher one’s income the more one can afford to take on the risk of having excess debt. So EM countries havea dual risk: they have poor quality of growth and they have less per capita income which makes it harder to service debts. The reason this is important is because since 1997 the global
The macroeconomic fundamentals have improved in 2013 and momentum for stocks is upward so it may be tempting to take the plunge and buy stocks to benefit from the improving economy. The problem is that the economy often has significant time lags or poor correlation with stock prices. An era of rising GDP doesn’t necessarily mean rising corporate profits or rising stock prices. Investors should seek independent financial advice about the best investment ideas for 2014.
Tomorrow the BLS releases the monthly “Employment Situation Report”. David Rosenberg of Gluskin, Sheff and Macroeconomic Advisors said if no fiscal tightening had occurred in 2013 then the unemployment rate would be 6.0% not 7.3%. Rosenberg said monthly new job creation next year may be 280,000 instead of the recent average of 180,000. My opinion is that at this level, after subtracting 100,000 to 125,000 a month for population increase, in a year the unemployment rate would improve from 7.3% to 5.8%. At that level workers would feel more prosperous and buy more things creating a virtuous cycle where the rate of job growth would accelerate as businesses higher more people because of increased consumption.
Bond phobia has been caused by memories of Volcker era. Investors unfairly compare today’s low yields to the Volcker era dramatic increase in rates to a 22% prime rate. They remember rates increasing by 10% in a year. But in that era many benchmark rates had a negative real rate of about 5%. To reach normal levels of a 2% real rate they would have needed to climb 7% in 1979; additionally they would need an even higher real yield to really kill inflation. So the jump from a negative real yield of negative 5% to a positive real yield of 4% real was a 9% jump. In 1979 people who were used to paying