Larry Fink’s Annual Letter to CEOs.

Each year Larry Find, CEO of Blackrock, writes an annual letter to CEOs.  One of his main points is that many assumptions have been upended over the past 12 months.  For instance assumptions of sustained low inflation and an expectation for continued globalization.  The root of these changes, according to Fink, is a growing backlash against globalization and technological change.  Here is a link to the letter:  https://www.blackrock.com/corporate/en-us/investor-relations/larry-fink-ceo-letter



Outlook 2017 – Gauging Market Milestones

by admin in News

It’s been a while since I or any of my contributors posted on this site.  Sometimes life just happens.  It is our goal to post more in the coming year.  We are entering a new era in the global political economy.  The world political economy is undergoing significant structural shifts.  In this post we want to focus on the outlook for global capital markets by LPL Financial’s Research Department.




Brexit – Good or Bad for America?


This coming Thursday, June 23rd, is the date of the much anticipated British referendum on whether the United Kingdom should remain a member of the European Union or leave.  As of today polls suggest that voters are evenly split.  The Economist magazine in a recent article made the case for how bad Britain’s exit or Brexit would be, not only for the United Kingdom, but for Europe and the West.  The argument goes that in both the economic and security spheres the West and Britain would be harmed if the electorate votes for a Brexit. 


I agree from an economic standpoint there seems to be a strong case that a Brexit would be disadvantageous for the United Kingdom.  The capital markets would probably be negatively impacted in the short-term by a Brexit, which would not be good for America or American investors.  However, my sense is that it would be a short lived “market dislocation” and that the Brexit won’t have a long-term negative impact on global capital markets nor American capital markets. 


Financial markets are currently jittery in the run up to the election on Thursday.  The British pound has fallen to its lowest level against the dollar since 2009.  Markets like predictability and stability.  The prospect of the uncoupling of the world’s fifth largest economy from the European Union, and the unmooring of the strongest military power within the Union, as well as the world’s fifth largest defense spender, causes nervousness in the financial markets. 


I don’t believe that global markets would be harmed by Britain leaving the EU.  I could see where it would damage the British economy in the long run, but I don’t see where it would hurt the United States economically.  We have to be concerned about the short-term market dislocations that might occur if the “leave” vote wins.  It very well might be a buying opportunity for investors.  I am concerned that Brexit might be another factor that could, in conjunction with other issues, signal an end to the 7 year bull market in US equities. 


From a security perspective, the Economist magazine makes numerous arguments why a Brexit would diminish Europe and the West’s security.  However, the West’s security is solidly anchored in American military supremacy and NATO.  Britain’s exit does not threaten NATO’s cohesiveness.  I don’t find the security arguments compelling.  Not for us, not for Britain, and not for NATO. 


My conclusion is a Brexit is neither bad nor good for America. 


The 7 Big Risks Facing The Global Economy

by Riaan Nel in Global Economy


Tail risk


Recently Nouriel Roubini wrote an article about the 7 risks he sees that are plaguing the US and global economy.  I want to provide a summary of the article and share some of my thoughts about the issues he raises.  I agree with Roubini that we potentially might be entering an era of volatility that is more serious than anything since 2009.  There are currently seven sources of global “tail risk.”  Tails are the end portions of distribution curves represented by bell-shaped graphs showing the statistical probability of a measured event.

Risk 1: The slowdown in China.  According to Roubini China is more likely to have a bumpy landing as its economy is slowing down.  I agree that it seems like the policies the Chinese government have used to manage the process of a slowdown and to manage the restructuring of their economy from and export led model to a more domestic consumption based model, seems to be running out of steam.

Risk 2:  The emerging world is plagued by currency weakness which has the dangerous consequence of increasing the real value of trillions of dollars worth of debt these economies have built up over the last decade.  As a long term trend I continue to believe the emerging world will be one of the main engines of growth fueling the global economy in the future.  But currently these economies are in serious trouble.

Risk 3:  Roubini thinks the Fed erred when they increased interest rates in December 2015.  He sees tighter financial conditions via a stronger dollar, corrected stock market, and wider credit spreads that are threatening US growth.  He is, of course, right about the tighter financial conditions, and that remains a risk.  Although, I don’t think the Fed erred necessarily.

Risk 4:  Roubini points to many simmering geopolitical risks.  There are always geopolitical risks.  I don’t see anything currently that I would classify as a tail risk.  But his point about the uncertainty created by the prospect of a long term cold war between Sunni Saudi Arabia and Shia Iran is worth thinking about.

Risk 5:  Declining oil prices is definitely a major issue.  Although it is counter intuitive that cheaper energy should be a “risk,” it creates the following problems.  It damages US energy producers, which comprise a large share of the US stock market, it imposes credit losses on energy exporting economies and energy firms, and regulations restrict market makers from providing liquidity and absorbing market volatility.  So each shock becomes more severe in terms of risk-asset price corrections.

Risk 6:  Global banks are challenged by lower returns.  New financial technology is disrupting their business models and there are rising credit losses on bad assets (energy, commodities, emerging markets and fragile European corporate borrowers.)

Risk 7:  There are massive problems facing the Eurozone.  Roubini thinks the European Union could be ground zero for global financial turmoil this year.  Their banks are challenged, the migration crisis could end the Schengen Agreement (which represents a group of countries allowing the free movement of people), Britain might exit after their referendum in the summer, and Greece and its creditors are again butting heads.

I’ll end with this paragraph from Roubini:

“In the past, tail risks were more occasional, growth scares turned out to be just that, and the policy response was strong and effective, thereby keeping risk-off episodes brief and restoring asset prices to their previous highs…  Today, there are seven sources of potential global tail risk, and the global economy is moving from an anemic expansion to a slowdown, which will lead to a further reduction in the price of risky assets worldwide.”


70 Is The New 65: Demographics Still Support ‘Lower Rates For Longer’

Demographic spendingIn many of my public presentations I address the impact of demographics on political and economic outcomes.  I am a firm believer in the adage that demographics are destiny.  I am also a believer in the savings glut theory that posits excess savings in the world are depressing interest rates.  This savings glut was also a contributing factor leading to the global financial crisis in 2008.

A recent study by PIMCO has shed some interesting new light on the savings glut phenomenon.  Matthew Tracey and Joachim Fels state the following in their study:

“Is global aging about to end the savings glut?  Some observers think so. More and more baby boomers are reaching retirement age, and they will soon not only save less but also start to dump their accumulated assets to fund retirement … or so the story goes.  If this were true, the consequences for interest rates would be profound… and what we here at PIMCO call The New Neutral might soon be history.  We strongly disagree with that thesis of an imminent demographics-induced savings drought.  Rather, we have argued in recent work that the global excess supply of savings… is not only here to stay but likely to increase further in the coming years…”

Here is a link to the study: https://www.pimco.com/insights/viewpoints/in-depth/70-is-the-new-65-demographics-still-support-lower-rates-for-longer