Is capitalism finally retuning to the United States.


Capitalism is a little like a seesaw. There are winners and losers and it continually moves back and forth. Nothing can go up forever nor can they go down forever.

It is my opinion that for the last several years we have been living in a benign economic environment.

The seesaw has not been moving.   

My friends in lending tell me that they are having a difficult time lending money, yet the Fed has made the economy awash in cash.

My investment banking friends tell me deal flow is slow. My own experience in this area leads me to the same conclusion. We have looked at several deals under our new PE firm and deals do not get past the initial due diligence.

All this said we are seeing strong GDP numbers for the 3rd and 4th quarter of 2014, oil has dropped over 50% creating a windfall of disposable income in many sectors of the world while hindering the economies of Russia, Venezuela, and Iraq.

The US dollar is at heights not seen in many years.

At this point the Russian economy is headed for a fairly large recession, and Venezuela is in real trouble.

This economic activity is creating winners and losers. This creates economic activity and hopefully a return to normal capitalism.

unemployment jan 2015

underused jan 2015

Future Interest Rates and Unemployment

Many of us have been waiting for interest rates to move from close to zero yet they remain stagnant. With strong GDP data we would expect strong employment and wage data. On the surface we are seeing a “reported” unemployment rate below six percent. Yet based upon the Fed data below the real number is close to 11.5% which is 3% above the pre-recession norms.

The federal Reserve news via the WSJ “The U.S. concluded its best year of job growth in 15 years as the unemployment rate fell to a post-recession low last month, signs of strength that mask continued challenges of stagnant wages and a stubbornly high number of Americans still on the sidelines.
Federal Reserve officials have flagged tepid wage gains as a sign of a labor market operating far from its full capacity.

Yet a reversal in wages—after hints of a pickup in the prior month—highlighted the labor market’s struggle to gain sufficient vigor to sustain stronger economic growth. Economists typically expect a rapidly falling unemployment rate—to 5.6% in December from 6.7% a year earlier—to deplete the pool of existing workers and spur competition among employers, reflected in higher wages.

And while strong hiring has helped push the jobless rate down, a broader measure of unemployment, which includes involuntary part-time workers and people marginally attached to the labor force, was 11.2% last month, down from 11.4% in November. Though nearly two percentage points lower than a year earlier, the level remains well above prerecession norms around 8% to 8.5%.

US Dollar:

The dollar reached its highest level against major currencies since September 2003, as they ramped up bets the U.S. economy will pull ahead of the rest of the world this year, with the Federal Reserve in the driver’s seat. This is wonderful for US citizens looking to take trips abroad and for consumers buying imported goods. It has driven down interest rates on US bonds. Companies that outsource jobs to foreign countries pay less for those wages.

On the other side the dollar’s rise is causing mild headaches for some CFOs. Large US enterprises rely on foreign markets for 45% of their revenue. According to the WSJ “In last year’s third quarter, North American and European companies recorded $8 billion in currency losses”. For U.S. manufacturers trying to sell their goods abroad, the new year might not be any easier.

This swing in the dollar will most likely impair the already overwhelming US trade deficit. According to the WSJ US manufacturers that export are seeing head winds, largely due to weak demand in Europe and in Latin America, two of the main markets for U.S. goods.

As we all know a stronger dollar made U.S. products more expensive overseas and imports cheaper.

The Euro Impact:

Germany, the leader in Europe, is seeing real challenges. Russia’s decision to become an aggressor in the world followed by global sanctions has substantially impaired their economy. The folks in Washington are thrilled but it is causing hardship throughout Europe as Russia cannot buy goods.

In Europe, an unexpectedly soft inflation report from Germany raised concerns the eurozone faces a potentially lengthy period of outright declines in consumer prices, which may make it harder for the region to recover from its lengthy economic slump. Recent data showed consumer prices fell 0.2% in December from a year earlier, a larger decline than economists had expected and the first drop since October 2009. Falling prices in Europe are in part a result of tumbling oil prices and a symptom of weak demand in Europe.

This creates real challenges for US manufacturers looking to move goods into Europe.

Other Global economies:

Other global soft spots abound: Economic output in Japan contracted in the second and third quarters of 2014 and growth in China has disappointed, putting added downward pressure on commodities world-wide.

The seesaw is moving.

When the seesaw moves we hopefully will start to return to more normal times. The economic data discussed above continues to be a mixed bag creating uncertainty.

The US is not the economic engine it was in the 1940s and 1950s so help is needed from around the world to really start global economic improvement.

But the seesaw is moving and in capitalism this creates winners and losers, which creates economic activity.

By | 2017-03-06T12:04:51-04:00 January 13th, 2015|business advisory|0 Comments

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