APRIL 2012 MARKET AND ECONOMIC COMMENTARY
By Adam B. Landau Permit Capital Advisors, LLC
The force that has moved the economy off the proverbial ledge may not have been ethereal, but it was anything but natural. Recognizing the role that central banks, international economic organizations, and other policy makers have played in the global recovery plays a critical role in trying to understand how events may unfold going forward. It would only tell a part of the story to describe the manufactured nature of the recent global growth profile as unsustainable. What would be left out is the real possibility that it could be actively unwound by the same parties credited with its creation. Potential missteps could be politically motivated or they could be the result of the fact that there is no playbook for the unprecedented course we’ve taken to arrive at our current status.
For now, everything is in a state of equilibrium as the large public deficit is offset by private sector savings, particularly in the U.S. Since 2007 we’ve seen an 8% gain in the private sector gross savings rate and a 7% increase in the size of the federal budget balance. This informs us that public sector austerity must be coordinated with private sector growth. On the monetary front there is no immediate reason for the Fed to shift from its dovish stance, as unemployment remains high, the economy has just started to pick up momentum and inflation
is not a problem. Just how much momentum the economy has picked up is still up for debate.
There has been an unusually large discrepancy between the improvement in jobs numbers and the improvement in economic growth figures. The latter is generally associated with GDP (Gross Domestic Product) growth, though some economists believe that GDI (Gross Domestic Income) may be a more reliable measure. While GDP measures the sum of money spent in the economy, GDI measures the total income in the economy. While there shouldn’t be much of a discrepancy between the two over time, there are interim fluctuations created by timing issues. In the fourth quarter of 2011 GDP stayed flat at 3%, while GDI growth was recently revised up to 4.4%. If typical convergence takes place we could soon be talking about a growth trajectory that is greater than originally thought.
Other data points have been encouraging as well. Housing starts posted near their highest level in three years last month, and initial jobless claims continued their downward trend printing their lowest number since 2008. While stronger growth is encouraging it also represents a risk to the fragility of the recovery. Current monetary policy has been tailored to fight deflation and stem sustained economic weakness. As long as growth remains moderate, current policy is appropriate for the economy and will continue to be a tailwind for many assets. If growth accelerates in a manner that is deemed to be too vigorous by policymakers working in unchartered territory it could disturbthe previously described equilibrium as the market anticipates a shift in monetary and fiscal policies, and the all-important Fed rhetoric could drift.
In conclusion, while there are certainly risks to monitor, the economy in the U.S. has exhibited surprising strength. In Europe the threat of a prolonged recession is very real, but the threat of a disorderly breakup of the European Union has abated. With the recent Fed Senior Loan Officer Survey pointing towards a resumption of normalized credit availability, funding costs likely to remain low and demand showing signs of strengthening, U.S. commercial real estate fundamentals should continue to improve, supported by a scarcity of supply in most markets. With a potential increase in interest rates fomenting beneath the surface, there may not be a better entry point for investors who want to participate.
About Adam Landau
Adam Landau is Chief Executive Officer and Chief Investment Officer of Permit Capital Advisors, LLC.
He has 15 years of experience evaluating investment managers, developing asset allocation strategies, and coordinating the process by which the two disciplines are merged.
Visit http://www.permitcapital.com to see how Adam and Permit Capital Advisors, LLC can grow your business.
Certain statements in this document may include forward looking statements and forecasts that involve known and unknown risks and uncertainties. The views expressed above should not be construed as recommendations, an offer to sell, or a solicitation of an offer to acquire any security, investment product or service. There is no guarantee that historical risk, rates of return, or scenarios discussed will persist in the future. All investments are subject to risk.
