This morning over breakfast a number of 5/3 business banking customers gathered to hear the bank’s chief investment strategist speak on the overall economic climate we are facing in the US. John Augustine, CFA, of 5/3 indicated that our economic output is at $14.5 Trillion and that there are 14 economies of the world over a trillion dollars in theirs. Our federal government represents about $4 Trillion of that total, or 27% of economic activity. China and Japan are respectively $5 Trillion economies each. China grew at a rate of 9.5% last year; we grew at about 1.5%.
We are still the reserve currency of the world, Augustine indicated. China and the Middle East have at least 10 more years in the cycle of being fully convertible, in Augustine’s estimate. Corporations are sitting on roughly $2 Trillion in cash, or 11 to 15% of top balance sheets. Apple being notable with $78 Billion and increasing at a rate of $2 Billion a month.
Since 2008. lending has not really gone up, although banks have more monies than in previous recessions sitting with Federal Reserve deposits, earning 2.5%.
The actual current rate of inflation is around 3.8%, he said, and showed that those consumers holding funds in money markets or 10-year treasuries are not even meeting up with inflation. In fact, money markets at certain times even yesterday were getting negative earnings.
As this leads to the questions at hand: “Are we headed back into a recession, and if so, can other countries maintain their growth? ”
His key takeaways were that the global economy is moving forward, but at uneven pace and behind inflation rates, and US economic growth is frustrating slow, but self-sustaining on its own. The key factors are consumers’ perception of whether they should spend as we head into this next holiday season, and the fact that cash will not commit to be recycled back into the economy as capital.
Consumer spending is so far maintaining its own. So, the risk of recession is 50/50. Investment focus goes to: cash yields, real assets such as gold, REITs, etc..) and special long/short vehicles, Augustine said. For businesses, he suggests building a strategic growth plan that includes expanding the balance sheet–buy competitors/assets. New employment opportunities has been seen in this fiscal cycle in the US particularly in education, energy, manufacturing exports, transportation, healthcare, and retirement services. In 1980, it was growth from consumer services that saved the day. In the 1990s, technology. In 2000, the housing market.
As for the European countries under watch for high interest rates and default, Augustine said, Greece will most likely hit default. The key to watching this economy are the numbers coming from the International Council of Shopping Centers. If consumer spending drops, then we are into another recession, closed Augustine.
