On the Global Economic Outlook, the Importance of Liquidity and the Blue Zones of Longevity – Part III!

From: aditya rana
Date: Sat, Sep 21, 2013 at 2:24 PM
Subject: On the Global Economic Outlook, the Importance of Liquidity and the Blue Zones of Longevity – Part III!

Hi!,

With global markets reacting favourably to the surprise decision by the Fed to delay its widely anticipated tapering program, it is helpful to analyse the economic outlook for the U.S., Europe and Emerging Markets in order to influence weightings of an investment portfolio. Saumil Parikh from PIMCO provides an insightful overview in a recent note:

-The global economy expanded by 3.0% over the past year, making it one of its slowest expansions in recent history, with Europe and the major emerging market countries providing the downside surprises.

-The U.S. economy slowed to a 3.3% nominal growth, compared with 4.5% over the previous year, as a consequence of fiscal tightening and a slowdown in global trade.

-Europe’s growth slowed to only 0.4% from 2.1% during the previous year, as the sharp rise in sovereign bond yields increased concerns about a run on European banks, leading to a rise in public and private savings.

– Growth in the major emerging markets (China, Brazil, Russia, India, Mexico) dropped to 9.1% (nominal, local currency) from 10.0% the prior year, and with the large drop in their currencies, their contribution to global growth was negligible in dollar terms.

-Looking forward, the growth outlook is cautiously optimistic, driven by: 1) fiscal policy in the U.S. and Europe being less of a drag going forward, 2) the rise in global wealth and the resulting positive impact on private sector confidence, and, 3) global central banks willing to be more proactive in reducing downside tail risks – like the ECB in 2012 and high quality emerging market central banks more recently.

-However, considerable challenges remain for the year ahead which could easily tip the global economy into slower growth: 1) households in the developed world will continue to reduce debt relative to income, thereby limiting the upside for growth and credit expansion, 2) the recent rise in global interest rates will result in tighter monetary conditions, and reduce the positive impact of U.S. housing and emerging markets corporate spending, and, 3) the degree of success of Japan’s extraordinary fiscal and monetary stimulus of 2013.

-The outlook for global corporate profits will be key in determining whether the global economy has transitioned to a period of self-sustaining growth going forward. Global corporate profit growth stalled in 2013 following the slowdown in global GDP growth, with sectors linked to global trade and commodities being particularly hard hit.

-Looking at history, successful transitions from government aided to self-sustaining growth, require an increase in household income and spending, spurring a rise in investment spending on capital and labour by corporations.

-While U.S. growth is expected to accelerate, it is likely to disappoint elevated consensus expectations. Though the fiscal drag will be lower, it will be offset by a higher monetary drag from higher interest rates and weak household income growth (2% real) due to the low quality of jobs being created. At the same time, the increase in household wealth will provide a buffer against weak household income growth, though its impact may be limited by the skewed distribution of the wealth thereby reducing the positive impact on consumer spending.

-European growth is likely to increase, but stay in a range between 0% and 0.5%, as fiscal and monetary policy is likely to remain relatively tight and household income growth will remain flat to slightly negative as governments and corporations continue to restore competitiveness through internal devaluations and cost cuts. However, Europe has the potential to significantly surprise on the upside by easing monetary policy aggressively, particularly in countries which now have current account surpluses and are in the process of deleveraging balance sheets.

-Japan is expected to grow at close to its potential over the next year, assuming a continuation of its aggressive fiscal and monetary policies. Any deviations in the policy path is likely to cause a large downside surprise in the growth outlook, particularly given that significantly further yen depreciation is likely to face resistance from the global community.

-Lastly, in China and the emerging markets, growth is expected to stabilize, particularly as high quality central banks (i.e. China, Russia, Mexico and Brazil) use their dollar reserves to retain control over their financial market conditions and thereby spurring higher growth. However, the low quality central banks (India, Turkey and Indonesia) are likely to continue to face tight financial market conditions, and may even have to seek assistance from international balance sheets. China will be the key country to watch going forward, with upcoming structural and cyclical policy decisions which will impact the growth outlook over the coming year.

Interesting overview, which touches on the main issues and paints a persuasive outlook for the key economies of the world in the coming year, which in turn provides a key input into forming views on the performance of global stock markets. While the U.S. might grow at a higher level, it is likely to disappoint expectations, and combined with a gradual withdrawal of its fiscal and monetary stimulus, lead to relative underperformance of its equity markets. Europe is likely to surprise on the upside, following an expected reversal of its monetary tightening policies (see 9/7 newsletter), leading to outperformance of its stock markets. Japan is likely to also continue it outperformance, albeit at a slower pace. Lastly, China will be the key economy and stock market to watch over the next year, with growth upside resulting from supportive structural and cyclical policies to be announced over the next few months, leading to a likely significant outperformance of its equity markets.

As highlighted in the 9/7 newsletter, global liquidity via central bank balance sheets is likely to start growing at a slightly faster clip than the pace over recent months, following an increase of the ECB’s balance sheet. In addition, the receding risk of an EM crisis following a decision by the Fed to delay it’s tapering (perhaps driven partially by the EM situation and that the announcement of an LTRO program by the ECB is not likely before year-end?), reduces the risk of a sudden stop shrinkage in global liquidity. This bodes well for risk assets going into year-end. Do liquidity flows really matter? Yes, they do (to stock markets at least!) – as the chart below (via Sy Harding) illustrates:

1. Bernanke’s first warning, out of the blue, in his May 22 testimony before Congress of perhaps tapering QE as early as June. A market plunge.

2. His panicked rush in at the June low with assurances he didn’t really mean the Fed would dial back right away. A sharp rally to new highs.

3. The peak at the end of July when the hints from the Fed began again, this time that tapering might begin at the September meeting. A market plunge.

4. At the September low, assurances from the Fed that any tapering would be only a baby step. A big rally.

5. And here we are with another surprise reversal, no taper at all?

What about the impact of easy monetary policies on economic growth? They can have a significant impact as the chart below illustrates (via Paul Krugman):

Why was France different? It stayed on the gold standard!

The Blue Zones of Longevity-Part III:

This is the third part of the summary of the recent book: "Blue Zones: Lessons for Living Longer From the People Who’ve Lived the Longest" written by Dan Buettner, an internationally recognized explorer and educator. The Blue Zones are five specific towns or regions around the world, where people are up to three times more likely to live to be at least 100 years old, while remaining active, with a significantly lower rate of disease. The Blue Zones include the Barbagia region of Sardinia in Italy, Okinawa in Japan, the community of Loma Linda in California, the Nicoya Peninsula in Costa Rica, and the Greek island of Ikaria.

-The Loma Linda community of California, currently numbering around 21,000 people, are Seventh-day Adventists (a faith which endorses healthy living) and have the highest life expectancy in America. Over the last fifty years, they have participated (36,000 people) in a groundbreaking health and dietary study which promises to hold vital clues behind their longevity.

-Their faith discourages smoking, alcohol, meat in general, rich foods, caffeinated and cold drinks and even stimulating condiments and spices.

-An average 30-year old Adventist lives 7.3 years longer than the average 30-year old white Californian male, and the average Adventist female lives 4.4 years longer than the average female. Adventists males who are vegetarian live 9.5 years longer and female vegetarians live 6.1 years longer.

-According to head of the study (Dr. Fraser), two thirds of all people either die of heart disease or cancer, and Adventists do a number to things to protect themselves from these diseases.

-Approximately half of the Adventists are vegetarians or rarely ate meat. Non-vegetarian Adventists have about twice the risk of heart disease than vegetarian Adventists.

-Adventists consume a lot of nuts, and those who consume nuts about 5 times a week had half the risk of heart disease that those who didn’t. This was true of men, women, vegetarians and non-vegetarians.

-The study has also showed that consuming fruits, vegetables and whole grains seems to provide protection against a whole range of cancers (eating two servings of fruit a day reduced the risk of lung cancer by 70%, eating legumes 3 times a week had a 30-40% lower risk of colon cancer, and eating tomatoes 3 or 4 times a week reduced risk of ovarian cancer by 70%).

-Adventist men consuming five or six glasses of (room temperature) water a day had a 60-70% lower risk of a fatal heart attack than those who consumed considerably less water. The differences were less significant for women. In addition, drinking soft drinks, coffee and cocoa seemed to increase the risk of an attack.

–Adventists eat an early light dinner, to avoid flooding the body with calories during the inactive part of the day, and promoting better sleep and lower weight.

-Adventists spend a lot of time with each other, illustrating the importance of having like-minded friends to share values and support each other’s habits. Adventists are also encouraged to give back by volunteering and helping others.

-The daily lifestyle of a 100-year old lady – Marge: get-up at 4.30am, prayers and reflections, a mile power walk, a stationary bicycle ride, and some weight lifting (five-pounders) , six glasses of water before breakfast, oatmeal for breakfast, a mid-day fruit and vegetable snack, volunteering work, meeting friends, growing (and eating) grains, plants and vegetables, and maintaining sabbath.

-In summary, the studies so far have also showed:

-being a vegetarian adds an extra two years to your life

-eating nut also adds about two years, mainly through reducing heart risk.

-being a non smoker reduced lung cancer and heart risk.

-modest, but regular, physical activity adds an extra couple of years.

-maintaining a fairly normal body weight is important – from reducing heart disease risk, lowering blood pressure, cholesterol and inflammation (which may come from fat cells). Being vegetarian is also associated with low weight – with lacto-ovo vegetarians (eggs & dairy) being on average 16 pounds lighter and vegans being 30-32 pounds lighter.

Here’s to eating a daily diet of vegetables, legumes, fruits, whole grains, nuts, drinking 6-8 glasses of room temperature water and walking a total of one to two hours daily!

Regards,

Aditya

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