3 Macro Views Ahead Of The Fed Meeting

June 09, 2015

 
Scott Minerd
Minerd is the global chief investment officer at Guggenheim Partners, which has more than $220 billion in assets under management.
 
What’s your outlook for the U.S. economy going forward?
The underlying fundamentals for the U.S. economy are as good as they’ve been at any time in the expansion. We’re getting a robust increase in purchasing power by wage earners. This reflects the success of the Fed’s policy. 
 
They’ve been focused on reducing the unemployment rate, and we’re starting to see minimum wage increases. We’re going to get some increased growth in wages, especially among low wage earners, who have the highest marginal propensity to consume. That will directly translate into consumption growth.
 
The one caveat I have is that the economic data for the first quarter is likely to come in a lot weaker than people are currently expecting. We’re having a replay of what happened in the first quarter of 2014, where weather distortions caused the economy to slow dramatically. I wouldn’t be surprised to see growth basically go to zero in the first quarter.
 
Ultimately, given the underlying fundamentals and the underlying strength, the rest of the year will be just fine, and there will be good momentum to go into 2016.
 
There’s been a growing demand for international stock ETFs in recent months.  Do you think the rally in U.S. equities is running out of steam?
The valuation of the U.S. market is getting rich. European stocks and some Asian stocks are better values than U.S. stocks. Against that backdrop, I think if you have money to allocate to equities, you should have a significant allocation overseas as opposed to the U.S.
 
But as for the U.S., even with earnings coming under pressure from currency translations, the multinationals and the depressed earnings we’re getting out of energy, we still have room to have multiples expand. I expect over the next 12 to 24 months that U.S. equities will be, on balance, 10 to 20% higher than where we are today.
 
What’s your outlook on rates? Do you have a view on what the Fed will do next?
The Fed really wants to get started raising rates. Originally, my view was that 2016 was going to be the start, but recently I’ve moved it up to September 2015. That really has a lot to do with the comments by various Fed presidents and Chairman Janet Yellen herself regarding concerns about asset bubbles.
 
But my understanding is that even if it raises rates by 0.25-0.50%, monetary policy is still going to be highly stimulative, so it would be better to do a pre-emptive move this year and set the stage for being able to normalize rates in the long run if it were to see an asset bubble take hold.
 
What the Fed is trying to avoid is doing anything sudden or extreme. 
 
What’s the weakest spot in the U.S. economy? What should we be concerned about?
The No. 1 weakest spot is energy. There’s reason to be concerned about a continued decline in oil prices. The supply/demand imbalance is very large, and we’re producing too much oil.
 
The ability to absorb the overproduction of oil, which is in the range of 2 million to 2.5 million barrels per week, is really becoming constrained by the storage facilities at Cushing, Oklahoma. We will, at the current pace of production, run out of storage capacity at Cushing in about another six weeks. If we reach that point, oil could come under significant downward pressure as a result of just having to dump production onto the spot market at any price.
 
Ultimately, that will be good for the economy and will probably give us a buying opportunity in the energy sector, but in the near term, we’re vulnerable to seeing another down-leg in energy.
—Cinthia Murphy 
 
 
 

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