3 Macro Views Ahead Of The Fed Meeting

 

We speak with macro experts on their outlook for the U.S. economy going forward.

 

 

 

 

The reason I own the dollar is because there’s more turmoil coming in the world, and during times of turmoil, many people flee to what they think is a safe haven, and the U.S. dollar’s perceived as a safe haven. It’s not for me, but some people think it is, so I own it.

 

I would not be surprised if the dollar turns into a bubble in a year or two or three as we have more turmoil. You see what’s happening to the Japanese yen, the Russian ruble, the euro, the Australian dollar, the Canadian dollar—the list goes on and on.

 

The U.S. dollar could turn into a bubble down the road. If it does, and if I’m still there, and if I’ve got any brains, I hope I’m smart enough to sell it.

 

 

 

 

 

 

 

I expect inflation to stabilize over the summer and then to start to trend up in the fall. The punch line for that is that I expect the Fed consequently to be extremely patient with the economic rebounding prices. And I don’t expect an interest rate increase before December.

 

 

So yes, U.S. equities have had some more room to run, but I anticipate there will be fewer record highs than the last few years as some of these head winds continue to grow. There are two head winds in particular I’m thinking about: One is a stronger U.S. dollar that actually challenges earnings. The other is short-term and medium-term rates rising in anticipation of Fed action. And we’ve already seen that happening.

 

One area that is a concern for me and that I’ve started to think about, when I look forward six, 12 months down the road is that I’m seeing very few real drivers of strong growth or excessive inflation. Yes, disinflation and inflation are stabilizing, but I’m not seeing any signs of runaway, really strong, robust growth or excessive inflation. The typical drivers of growth over the last era have been emerging markets, the U.S. consumer. It isn’t clear that anyone is stepping up and taking leadership to sort of drive global growth going forward.

 

So that’s one concern for me. There are unintended consequences that are going to be out there that are not quite foreseen at this time. 

 

 

 

 

 

 

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.

 

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.

 

 

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. 

 

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.