MANDARIN PACIFIC ASSET MANAGEMENT 

LESSONS LEARNED FROM THE 2008 COLLAPSE  AND GREECE

 (APPARENTLY NONE)

The global growth engines in todays world are India and China.  The U.S. Japan and Europe  show little real growth.  Until growth accelerates I see no need for higher interest rates.

Ever hear of the labor force participation rate?  Today there are more people choosing to not work than ever.  Maybe they are semi retired, defeated, or after taxes make more on food stamps than they would at $13/hr.  The point is there is a vast underutilized pool of talent that is a core contibutor to  the lack of growth.  Stop looking at the meaningless unemployment rate.  If you are not looking for work you do not count in that statistic.   According to the U.S. Bureau of Labor Statistics there  are 8 million people counted as unemployed yet 93 million non working Americans.  The real unemployment rate is 37% not 5%.

Age is a big contributor to our lack of growth.  Baby boomers (about half the U.S. population) and their spending, are retiring.   Economic growth, and tax revenue will decline significantly over the next 20?? years.  The U.S. Office of Management and Budget has forecast  much larger budget deficits, beginning 2015, due to increased Social Security and Medicare payouts.  A giant wave of negative cashflow is coming.  The U.S. needs 4+% rates of real growth to pay the bills.

Still some see the need to reduce the growth in wages and real estate bubble.  Never mind that most of the growth in minimum wages has come from cities mandating  higher wages not from the goodness of employers.  And unless you are in a top 10 city you have only read about the big gains in home prices.

The Alternative Plan. The regular Yellen threat of higher interest rates has gotten in the way of solid policy.  A smarter approach would be to slow spending through existing sequestration.  Then cut interest rates, and corporate tax rates, to provide relief.  The goal being a weaker dollar export based economy. There is a very short window to make those changes or the markets will force them upon us. ( Remember the causes of 2008?)

Growth in corporate profits is mixed.  New product introductions (fewer these days due to lower R&D spending) and increases in market share are fueling these gains.  And despite all the CNBC chatter China and India continue growing in the 7% range.  Those countries, and their 2.5 billion consumers, are likely to provide most of the global growth for many years to come.  People might be poor, but everyone knows you do not have to remain that way.  This is where the missing U.S. cap ex spending has gone.

The world has undergone a large socialist experiment.  What we created is global massive underemployment, unsustainable spending, a much more dangerous world and a government that does not care.  The U.S. presidental election campaign is beginning in earnest. Let's hope a reasonable candidate emerges that addresses these issues.  Issue #1: how to turn those 93 million couch slackers into productive wage earners.

No matter who wins the election I believe demand will increase consistently for the basics: clean water, telephones, smarter software, homes, pharmacutical drugs, food and even soap.  Those are the kind of companies we look to place our clients assets.  

Roger O. Groh

7/20/15

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