No Economy Is An Island
I have written many times in the past that the U.S. economy is not immune from the global deflationary impacts. To wit:
"While none of this analysis suggests that a domestic recession is imminent, it does suggest that the hopes that the U.S. can 'decouple' from the rest of the world's deflationary drags are likely misplaced. As shown in the chart below, the U.S. economy has historically been unable to achieve accelerating rates of economic growth when both the EuroArea and Japanese economies have been weak."
"The current detachment of the U.S. economy (red dashed circle) will most likely be unable to withstand the drag of economic weakness from two of its major trading partners. With Q3 estimates already being ratcheted down, any impact from geopolitical unrest, weather or a misstep in monetary policy could have a substantial impact to already strained financial markets."
This has not been a popular view and the world, and particularly stock market investors, have come to believe that the U.S. economic resurgence is "real" and will continue to support the current extremely lofty level of asset prices and valuations. As I suggested previously, this is not only very misplaced logic, but also a danger to investors:
"The implications to investors are important. The current growth in domestic profits is one of the last remaining footholds of market "bulls." With valuations now expensive, interest rates near zero and yield spreads flattening, the risks to the markets have risen substantially. While this doesn't seem to be the case as markets push up against all-time highs; it is worth remembering that we saw much the same in early 2000 and 2007. This time is likely no different, only the timing and catalyst will be."
Daniel Alpert, who is the Managing Partner for Westwood Capital, recently published the following presentation expressing many of the same concerns. His presentation asks the very simple question:
"Is it possible, in a global economy in which the United States' principal competitors are experiencing slow growth, disinflation or deflation, wage stagnation or slowing of wage growth, and slumping currencies relative to the US$, that the U.S. economy can be an island of relative prosperity unto itself?"
The attached slide deck explains what is really going on under the hood of what appears to many to be a U.S. economy moving out of idle and into sustainable traction forward. The 25 data-packed slides illustrate numerous factors such as U.S. monetary policy, downward pressure on long U.S. Treasury bond rates, Disinflationary trends, etc. All of which, as investors, are critically important to your investment outlook and positioning relative to expected future returns and risk.
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