Change is Good

For many years, I have written quarterly economic comments as Chairman of Wasatch Advisors. Recently I left Wasatch to help start up a new firm, Seven Canyons Advisors, with my two sons, Josh and Spence, my son-in-law Eric Moessing and Wes Golby. I made this change not due to any dissatisfaction with Wasatch but for the opportunity to have a new adventure in my life after the 42 years I spent at Wasatch.

Change is good, but some things shouldn’t—and one of those is quarterly publication of my overview of the economy and the markets. I always like to start this commentary with an overview of the economy, as most stock market events are driven by economic events. Rarely does the market encounter “clear air turbulence” during which the market reacts without any economic prodding.

As we look over the global economy today, we note there is substantial bifurcation between what is occurring in the U.S. and what is occurring in many other countries around the globe. In the U.S. everything seems just fine. Our economy is humming. Employment is overflowing as there are more jobs than job seekers. Wages are rising yet inflation remains contained.

However, as we expand our horizons to view the global economy, the picture is not so rosy. Europe is troubled by Brexit and Italian woes. Japan is plagued by mounting debt. China seems to alternatively step on the brake and then on the gas as it tries to navigate towards a growing consumer-led economy. And many emerging economies are suffering from inflation and weak currencies.

One explanation is unanticipated effects of the strange economic brew post-global financial crisis (GFC). The classic prescription for a financial crisis is easy money to halt the panic, followed by fiscal stimulus to get the economy going. Instead of following that pattern post the GFC, central banks around the world continued easing monetary policy in the absence of fiscal stimulus. Normally fiscal and monetary work in tandem with fiscal gas and monetary brake. However, post the GFC most economies relied on continued easing from central banks to stimulate the economy. Perhaps the absence of fiscal policy was a side effect of an overly debt-laden world.

Central banks, led by the U.S., are now finally withdrawing liquidity as the global economy appears strong enough to withstand diminished liquidity. However, as liquidity is the grease to the global economy, less grease is causing “hot spots” to develop (most notable in Argentina and Turkey).