Global Macro Strategy

  • What Andy is working on:

    • Engage: Big picture on stocks with Wunderlich’s Art Hogan

      Recently, I talked big picture on stocks Wunderlich Securities chief market strategist Art Hogan.

      1. Hogan felt the 100 DMA at 1,911 was key support point for the S&P 500 with 3-6% pullbacks normal for the markets before it goes higher.

      2. Hogan felt everyone on the planet is against what Putin is doing in the Ukraine, but Russia doesn’t want to shut off gas to Europe as they (Russia) need the cash for the economy. The recent economic numbers for Europe are reflecting the uncertainty over the situation.

      3. Hogan’s top drivers: calendar not kind at this time of year which adds to volatility, guidance for 2015 earnings estimates, and revenue surprises were high with top line growth improving.

    • Engage: JPM’s Senior Economist Jim Glassman Part 1 wages, jobs and govt intervention

      I spoke with JPM’s Jim Glassman on the economy, stocks and geopolitics ahead of the Fed’s Jackson Hole meeting.

      Here’s the transcript for segment one:

      Andy: Welcome to Engage. I’m Andy Bush. Thank you for joining us. This week we’re focusing on the economy and the markets as we enter the dog days of summer.

      The U.S. is coming off its best quarter of economic growth since the third quarter of 2013 at +4%. Our current quarter is looking pretty robust too as better-than-expected data really is pushing up estimates for what it could be this quarter.

      Job growth appears to be increasing at a pace this is also commensurate with GDP above 2.5% but wage growth remains pretty stagnant and geopolitical issues from Russia, the Ukraine, to the Ebola virus are headwinds that the economy must lean through to move forward.

      I can’t think of a better person to join us today to discuss this than managing director and Head Economist for the Commercial Banking JP Morgan, Jim Glassman. Jim, welcome back to Engage.

      Jim: Thank you, Andy.

      Andy: Let’s start with the easy stuff. How should the U.S. approach the stagnant wage issue? I’m kidding of course because this is a really tough one.
      Jim: The way we approach it is a reflection of a whole bunch of things. The business cycle is a part of it and that’s why the Fed has been doing what they’re doing. The best way to deal with wages is to restore the economy to full health so that you can get unemployment back down to something more normal.
      The truth is that there’s a bigger issue. People have been worrying about the middle class sort of disappearing. When you look at all of this research that’s going on, economists are beginning to realize that it’s all this computer technology that really has changed the game in the last 15 years. It’s not international trade.
      Some people lose out and other people gain but what academics are realizing is that it’s all of this computer technology that’s displacing routing labor. That’s good. It’s bad for people that get displaced but it means that folks have to figure out that there are better jobs. You have to get training for them.
      That’s not something the Feds can fix. It’s not something anybody can fix other than people who realize where the opportunities are and make those changes. All of the computer technology has brought a lot of good stuff but it’s also bringing challenges to the worker.
      The U.S. economy is doing quite well but we still have an awful lot of [inaudible 2:35] unemployment to recover and that’s probably what the biggest challenge for wages is.
      Andy: Isn’t the stratified employment issue with the new hires growing and specific high-skilled jobs seeing improvement with low skills stagnant? That really references what you’re talking about with computer technology displacing routine labor where back when I was first in the markets you had the Telex people in London to do rollovers in foreign-exchange trades and then you’d get a ticker tape. It was crazy how labor intensive it was. That’s what you’re talking about.
      Jim: Yeah, exactly. We still need people to be at the cash register and be at the toll booth. The problem is that the value they bring to the table is not what it used to be in the old days because now the computer does all the routine stuff and that’s really why pay levels have come in.
      When you look at official unemployment, for example and these people that have been unemployed for long spells of time, that unemployment is coming there also. It tells you that even those who are maybe not as attractive because they did quite have the skills, they too are finding jobs.
      That means that the best way to address that problem is to just do what the Fed is doing which is provide stimulus, promote economic recovery—we’re getting it—and in time we’re going see the job market improve and then everyone is going to get back to work. What happens to wages beyond that really depends on how successful people are in getting new skills and acquiring different training.
      Andy: That’s right. We’re certainly not seeing standards of living rise commensurate with the growth in this recovery. This is true not only in the United States but also in the UK and Canada as well.
      Jim: It’s all across the advanced economy.
      Andy: That’s right. This really kind of begs the question is this a fundamental question of the efficacy of capitalism?
      Jim: No. Do you know what I think it is? We’ve been living with innovation for 200 years, right? Innovation is very disruptive and it’s displaced a lot of people. I think if you think about it we’re all sort of used to this so we don’t really think much about what happened 10 years ago. The innovation, especially in computer technology has really accelerated in the last 10 or 15 years.
      I’ll bet somebody who had fallen asleep 15 years ago and woke up today wouldn’t have a clue what we’re talking about with all of the things that we do in life. I think what’s happened is not really a comment about capitalism; it’s a comment about the pace of innovation that’s been accelerating and it’s very disruptive.
      I think in time when people figure out how to manage it and figure out where the opportunities are we’re going to come to [inaudible 5:26] but right now it’s very disruptive.
      Andy: For myself, I think sometimes I fall asleep in the afternoon and wake up and have no idea what’s going on in the market. Recently I had on Amity Shlaes who is the author of The Forgotten Man and Coolidge. She said that one of the key takeaways from the Great Depression is that government often makes things worse rather than better for the economy and that change for the sake of change is effectively dangerous.
      I think I’m hearing from you that this is similar to what you’re saying. As far as to be able to address the wage issue, you really need to continue to see job growth and that doesn’t necessarily come from any government program.
      Jim: Yeah. This debate about division of income and what happened to the middle class is an important debate but we’ve got to figure out first why it’s happening. If it’s happening as a result of innovation and good things, why do we want to step in and get in the way of this? The risk is that by doing things that we think are going to help people; we actually make it worse for them.
      Andy: That’s right.
      Jim: I think what we’re going to find out is that in this last couple of decades we’re living in an accelerated version of what we’ve been living with for the last 200 years. This is out of our control in the sense that innovation is not something you want to stop. You want to encourage it. The best way to deal with this is to help people figure out where the opportunities are and there are a lot of opportunities. Folks in manufacturing are starting to figure it out
      Andy: Give me your top three things that you should be doing to enhance job and economic growth.
      Jim: What the Feds are doing is Number 1. Number 2 is that we need a pro-growth mentality. It’s more symbolic. We need to send messages that we understand that revving up the U.S. economy’s underlying growth is the key to solving a lot of problems and helping people get back to work, for one thing and then helping them find better jobs.
      That means business-friendly tax policies, less complicated tax policies and more focus on getting growth moving rather than arguing about who’s getting what and who’s not getting it.
      Andy: I think that’s a great point. For our listeners out there, one of the things I love about Jim is that he travels all over the United States so he’s in so many different states. You provide your wonderful insights to your clients but you also see the different states and the different economies within those states. What are the successful U.S. states doing to generate economic growth and jobs versus the ones that aren’t?
      Jim: For example, I was just in New Mexico so it was a reminder to me. Tax policy is important. States like Texas that are tax friendly and business-friendly states do very well and they tend to lure businesses in.
      I think having high-quality education is key also because when businesses decide, “Where do I want to move to?” states that have poor-quality educational systems tend to have a disadvantage in drawing businesses in to them. We saw that play out, by the way, with [inaudible 8:55] decision in where to locate.
      States that have natural resources like energy of course is a real plus but the key is having a message from state government that is encouraging and that realizes that drawing businesses in and being business friendly is what really gets your state moving. By providing generous tax benefits for businesses you may give up on business tax revenue but you get back in all the other things that come with a strong economy.
      The states that are doing really well all seem to have the elements of a pro-growth kind of policy. I think as a nation if you looked around the country and asked who is most friendly from a business point of view and we adopted those kinds of policies, you would probably do an awful lot to get the U.S. revved up again.
      Andy: I think that’s a great point. I’m here in the wonderfully mismanaged state of Illinois and one of the things that I see here if you look past the debt, past the pensions and such and get to the business-friendly environment, that’s one of the things that Illinois Chamber of Commerce CEO Todd Maisch said on our program when we did Illinois. He said that we need to rehabilitate Illinois’ image for making it business friendly.
      I think that’s a great point but one of the things I look at, Jim, is how states approach fracking as an example. Illinois is throwing a lot of regulations on it; New York is putting a bunch of regulations now on fracking. Some of it is needed, no doubt but it goes against what you need. Broadening this out to the globe, I know that UK is going through some of this as well where they’re fighting energy companies from fracking.
      Let’s take a bigger-picture look at things and broaden this out to the global-growth picture. Where do you see global growth and what are those nations doing that enhance that growth? What are the good things they do that maybe we can learn from?
      Jim: One of the interesting things is like Southeast Asia. They learned some lessons from the Asian Crisis. They saw that it’s great seeing capital flows coming in from the rest of the world but investors want transparency. They suffered when all of a sudden investors got nervous about Asia and pulled out.
      This is what countries like Malaysia are doing. Our clients are really dealing with options all around the world. What Malaysia is doing is giving you tax benefits if you come and invest there and you keep you direct investment there for a long period of time.
      Tax policy is a part of it but it’s also transparency and managing your government’s fiscal situation in responsible way. All of that stuff makes you more confident about a local economy. It makes you even more encouraged to go there.
      Of course, if you’re a developing economy and you are working hard to modernize, businesses want to be there because they know this is going to be a new market in the future. This is why Asia tends to draw a lot of our small-business clients.
      I would say that about 90% of them now are involved in some way in these emerging economies because they realize that it’s not the low cost of production that you go for; it’s because you know that these countries are developing, modernizing and these are going to be big markets in the future. You’ve got to understand business there and you’ve got to have a presence so people know who you are.
      Andy: That’s a great point. Let’s take a break. When we get back we’ll focus on the Federal Reserve and the markets. You’re listening to Engage.