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RCS Investments Global Macro Outlook 2014

RCS Investments Global Macro Outlook 2014

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Published by Rodrigo C. Serrano
This report researches the major macro factors that will affect the economic landscape over the coming year. A macro summary of the U.S. and other major global economies is followed by an investigation into the main trends likely to affect the economic and investment landscape next year.
This report researches the major macro factors that will affect the economic landscape over the coming year. A macro summary of the U.S. and other major global economies is followed by an investigation into the main trends likely to affect the economic and investment landscape next year.

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Published by: Rodrigo C. Serrano on Dec 29, 2013
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| Rodrigo C. Serrano, CFA | SIPA | Columbia University Master of International Affairs ’14 Candidate | New York City, NY | 01-305-510-0181 | rcs2164@columbia.edu
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Chart: RCS Investments
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Chart: RCS Investments
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Chart: RCS Investments Source: American Association of Railroads
RCS Investments 2014 Global Macro Outlook
December 28
 th
, 2013 This report researches the major macro factors that will affect  the economic landscape over the coming year. A macro summary of the U.S. and other major global economies is followed by an investigation into the main trends likely to affect the economic and investment landscape next year. Economic Summary The Eurozone has stabilized. Led by Germany, the region has  produced numerous positive signals indicating that the worse has passed for the monetary union. Investors have begun to divert funds towards the territory in a vote of confidence; indeed recent reports of U.S. investors moving back into Europe at the fastest pace since 2008 serves as evidence. Leading indicators imply growth is set to continue in 2014. Meanwhile periphery countries remain in harrowing shape however. Unemployment rates north of 25% for Spain and Greece have brought about despair; youth unemployment for  both surpass a dangerous 50%, which may result in a lost generation. Furthermore, growth has been increasingly asymmetric, comforting a German populace but generating growing anxiety for underperformers such as France and Italy, among others. A “protracted period of low inflation,” in the  words of Mario Draghi, Central Bank Chief of the European Central Bank (ECB), has placed a fissuring ECB board –  when considering the Bundesbank’s headstrong opposition to  loose monetary policy – on high alert. In the U.S. a frail manufacturing sector over most of the  year has recently found renewed spark, joining a brisk pace of growth in the service sector. This development has been confirmed by strong readings in the American Association of Railroad and the American Trucking Association’s  transportation indicators. If core durable goods orders could also confirm, factory activity would have a solid bill of health.
 
 
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Chart: RCS Investments Source: Bureau of Labor Statistics
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Chart: RCS Investments Source: Case-Shiller
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Chart: RCS Investments Source: Mortgage Bankers Association
Notwithstanding the latest downturn in demand as suggested by the Mortgage Bankers Association’s purchase applications index, the housing market has been on the mend  throughout the year. Rising home prices, currently at their fastest pace since the go-go times of 2006 according to Case-Shiller, are assisting rising equity values in bolstering consumer  psyche (wealth effect), a key benefit of Bernanke’s Quantitative Easing (QE) program. While the rancorous debates over the U.S. budget and debt ceiling damaged consumer confidence for a while, it has slowly reappeared. This has been largely due to an improving labor market. Regardless of joblessness remaining above the Federal Reserve’s interpreted range of normal unemployment of 5.2-6.0%, private sector job creation has remained relatively robust and less volatile in recent months, while leading indicators  point to further gains ahead. Despite these improving conditions, consumer spending,  the economy’s largest component, remains stuck in low gear. Household spending for Q3 rose at its weakest pace since 2009; the holiday shopping period has relatively disappointed as well. The principal reasons for this inadequacy are an ailing  pace of real wage growth, currently less than 1%, as well as the  beneficial but asymmetric impact of QE. The aforementioned  wealth effect has largely benefited households with notable financial assets, an infrequent characteristic among lower wage earners. In fact, according to a recent study by respected economists Emmanuel Saez and Thomas Pikettey, the dispersion of income from economic activity has benefited the  top 10% of households by the most since the government began  tracking the data almost a century ago. This dynamic has  translated to diverging measures of confidence within income groups as shown by Bespoke. Meanwhile inflation has consistently underperformed the Federal Reserve’s mandate of 2%. The Fed’s preferred measure, the price index of the  personal consumption expenditures indicator, stands at 0.9%  year over year (YoY) growth. In general the U.S. economy has been an outperformer in  terms of growth this year, recently exemplified by the strongest quarter of growth in Q3 since Q1 of 2012. Furthermore it is  poised to contribute more than China towards global growth (at market exchange rates) in 2014 as per The Economist. Improving business metrics, particularly within the labor market, have marked the beginning of the next chapter in what I have termed the “Global Economic Restructuring.”
(Source: Bespoke)
 
 
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!"#$% '$() *+,(-./,$
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Chart: RCS Investments Source: National Bureau of Statistics
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Chart: RCS Investments Source: National Bureau of Statistics
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Chart: RCS Investments Source: Korea National Statistical Office
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Chart: RCS Investments Source: Australian Bureau of Statistics
Bernanke’s announcement on December 18
 th
 of a $10B taper of  the Fed’s QE program to $75B, comprised of $40B in Treasuries $35B in mortgage backed securities, has served as an indication of optimism for the recovery as well as a closure  to his legacy. In Asia, China has seen a rather pedestrian year for factory activity; growth in industrial production downshifted. This has been a direct consequence of a weakened global economy. YoY growth in exports has mostly declined but remains in positive territory, indicating that worldwide trade flows may have stabilized.
 
Fixed-Asset Investment, another  long-standing pillar for the economy, has remained in low growth mode. However, retail sales have held mostly steady  throughout the year. These business sectors or barometers are important for Chinese leaders to gauge their progress in their role in the Global Economic Restructuring. Rearranging the economy to one geared more towards consumption and innovation vs. exports and fixed-asset investment is a critical step in attaining a worldwide long-term sustainable expansion. Business partners, such as South Korea and Australia,  verify the weak trade picture. The former’s growth in exports and industrial production has roughly flat-lined since the  beginning of 2012; at least the latter has seen a modest revival in demand for business.
 
In Japan, Abenomics has resulted in a  positive inflationary environment; however, real wages have  been the victim. Household confidence has faced adversity since mid-year, translating to a growing but weakening pace of spending growth. This has led many to wonder whether upcoming labor market reform and a weaker yen – which raises profits and cash piles – will give companies enough confidence to increase investment in time before a planned sales tax increase takes effect in April.
 
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!"#"$ &'()*'+, -#.$,/$0
-.- * /012 3.42 5462 7-.-8
Chart: RCS Investments Source: Ministry of Internal Affairs & Communications

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