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The Expectations Game

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Investment is a tricky thing. You put up a lot of money in the expectation that you’ll have a small return year over year. Currently, the expected rate of return is historically small in the developed world, on the order of a few percent. It has to be weighed against the risk that the initial investment will never be paid back, winding up in default.

The slowdown in the global economy is not actually a decline in output all over the world, but a pause in the rate of growth. It wasn’t expected, either, which is the real problem. The developed world is largely stagnant, save some hope in the US for better times ahead. The developing world need to catch up, but appears to be taking a breather after a tremendous run.

As we consider the next few years and the potential for a genuine boom ahead, it is becoming clearer that we aren’t ready for anything more than muddling through until there is a reckoning and a realization of how the next economy will work – for everyone. That will take some patience and public investment all over the world.

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A New Cold War?

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Are the clouds of a new “Cold War” gathering over Russia and the US? A member of the Russian Duma has declared as much, and it’s resonating through the world for one simple reason – it sure seems right. Sanctions are starting to bite hard throughout Europe as the ties that were formed since the last Cold War ended 25 years ago slowly meandered towards integration.

But was the integration of Russia, and for that matter China, really such a good thing in the first place? Many nations around the world don’t share the same values as the West and stand in competition to what we value as an open society. Clouds of war challenge not just our relations, but the very soul of what we as a people value most dearly. And we value it because it makes us who we are.

It’s called “Social Capital”. It is the fruits of an open society. The parts of the world that aren’t ready for it will always be in conflict with us over it, and we are at our best when we don’t forget it.

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Greed Beats Fear – For Now

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The the sun beats out beads of sweat and the kids laze at home without school to worry about. It’s summer, the season of loafing. Typically this is the time of year when there’s work to be done and jobs are plentiful but the stock market takes a gentle pause.

Not last year, and not this year. The stock market is hitting new highs as investors find US securities the safest and most promising investment on the planet. But just like last year, the pace of job growth is still not accelerating beyond the roughly 190k jobs created every month. It’s a decent pace, but not what we need to claw out way out of the six year hole and bring back the boom. Barataria called that one completely wrong.

It’s past time to get serious about income inequality – or really the lack of opportunity for those who don’t have money to invest.

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Ongoing Currency War

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While Syria and Ukraine have the world worried about war, a much cooler war continues across the world.  This is the one fought not with bullets or missiles, but instead with big wads of cash.  The currency war that has swept the globe since 2008 is continuing on many fronts, as we have discussed before.

It’s time for an update.  Who is winning the currency war?  Right now, the answer appears to be Japan, but China has more than a few tricks it is working on.  Europe remains a big loser and the US is pretty much holding even.

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Cold Currency War

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In the Cold War, the foundation of diplomacy was mutual fear and hatred.  With that behind us, interdependence  has introduced a new system which includes much closer relationships – and something more like angst and loathing.  So has our relationship with China evolved.

As China has awakened, the GDP has grown by a factor of ten since 1990.   The population went from 22% urban to 52%.  All of this came at the expense, and mutual support, of hungry US consumers, corporations, and our nearly limitless need to finance our debt.  It was too much, too quickly, and wise investors saw that it was a bubble ready to pop – or at least relax the insane pace.

That day is coming very soon.

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