This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Jonathan Citrin, founder and managing director at Citrin Group based in Birmingham, Michigan.
The current state of the global economic landscape lends itself to confusion more so than confidence. However, an abundance of noise can yield answers in itself—at least if we step back and listen closely.
For anyone with a proper understanding of how financial markets function, it is not a question of prediction but of mindfulness.
So far this year illustrates this notion: Markets continue to serve as the meeting place for investor emotions, leaving those who comprehend what is truly occurring with the greatest potential to mitigate risk and maximize return.
Any economic snapshot of the world, comprising as many negative attributes as positive ones, exemplifies this need for perspective.
Key Global Economic Indicators
Of the 10 largest economies in the world, only three have year-over-year gross domestic product (GDP) growth of above 2%, and only two have debt-to-GDP ratios under 40%.
In fact, half of these 10 largest economies have debt-to-GDP ratios nearing or above 100%. Broadly, global stocks en masse are down more than 6% during the past 12 months, and 33 countries have inflation of above 8%.
Data from the second-largest economy—China—highlights two major issues: the lack of transparency and slowing growth. Larger trends in China of population aging and youth unemployment seem nearly incurable.
And while 74 countries around the world have a jobless rate of over 10%, easy monetary policy amid fiscal austerity creates a zero-sum game in itself.
Add political uncertainly and the ongoing conflict in Syria to the mix, and one has firm ground to stand on in taking a negative stance on the world’s economic prospects.
World Of Low Interest Rates
Conversely, of the same 10 largest economies in the world, all except one (Germany), have negative government budgets (i.e., fiscal stimulus).
A majority of countries in the world now have positive GDP growth year-over-year, and the cost of living is down over the past one and five years across much of the globe.
By way of interest rates, four different countries have rates that are negative, 21 countries' present rates are at zero and 13 more are below 1%.
Low oil prices, while bad for some, are a spur in many ways—reducing the cost of goods while leaving cash in consumers’ pockets.
Almost ubiquitously, commodity prices are down. Natural gas, palladium, platinum, cotton, corn, rubber, wheat, cattle, steel and other industrial metals all have experienced price declines over the past 12 months.
Even stocks are well off their 12-month lows and trending upward.
Taking Correlation Into Account
In psychology, there is a concept called compartmentalization. Our brains have the ability to segregate thoughts from one another. And this is also how financial markets around the globe are often interpreted.
But times have changed, as globalization mixed with the advent of technology make the world a whole lot smaller, rendering it much more difficult to compartmentalize what happens in China from what occurs in France, for example.
If anything, the correlation of global markets is not to be overlooked.
That is not to say that all markets go up together, or the converse. Rather, we cannot analyze any one market segment without viewing circumstances from many others. Any form of macro prediction in a sideways-growing economic environment seems, at best, innately thin and fragile.
Facing The Certainty Of Uncertainty
So what are investors to do in such a climate of uncertainty? How does anyone find ground to stand on in an environment that yields no clear-cut path? Such questions have plagued investors for centuries. The answer is actually quite simple.
In markets that show both positive and negative indicators, we become confused. The same occurs in life itself: We are innately programmed to react in moments of great pain and pleasure, but these times of moderation baffle us.
Yet moderation, if one takes a step back, is the goal.
We want the world economies to give both good and bad signals. For example, the Unemployment Act of 1946 calls for price stability. And while we do not have inflation perfectly pinpointed exactly where we desire, it is neither negative 12% nor positive 20%.
This is a good thing, in that we are actually achieving our goal of moderation: nothing too high and nothing too low.
Mixed signals in economics are the desired outcome. In that way, difficultly in reading the tea leaves is the best indicator of all and any assessment of the current global economic situation must therein be a positive one.
The world economies are exactly where we want them to be: messy! And reaching this point after the tremendous downturn in 2008 is a significant signal of strength.
Jonathan Citrin is a financial advisor, media commentator, and international speaker and author on mindfulness and finance.