March 06, 2014

March 06, 2014

Should be remain optimistic about the markets?  Will the stock climb be derailed and if so what signs should an investor look out for?  Upgrade your subscription today to find out what they are.

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Regulatory Burden, Productivity Growth, and Jobs  

At the Davos meeting of the World Economic Forum, economists and market participants are surveyed, among other things, about the regulatory burdens faced in their countries.  The results of this year’s survey, like those of the last few years, were not encouraging for the United States.

Government Regs.jpg
Source: The Economist

Since the 2006/7 rankings, the U.S. has fallen from 20th to 80th place among the 148 countries whose representatives were consulted.  Notably, in that time frame, many emerging market countries have moved toward more competitive regulatory regimes… while the U.S. and much of the developed world has either been moving in the opposite direction or lagging behind. 

The Problem With Regulatory Burdens

Why should it matter that the U.S. is lagging in the creation of a business-friendly regulatory environment? 

There are a few economic relationships that make this trend relevant.

To read our full analysis on regulation and U.S. economic growth and the longer term trends.  Upgrade to a Gold Subscription today.

Is Farmland Another Real-Estate Bubble?

Supported by high agricultural commodity prices and low interest rates, farmland prices more than quadrupled in Iowa during the decade from 2000 to 2010:

Commodity Supercycle and Low Rates Spike Farm Prices
commodity supercycle.jpg
Source: Wall Street Journal

Average Iowa land prices now sit at about $8,700 per acre.

Trend Beginning to Soften?

There is some evidence that the trend is softening a bit in the areas where it has been stratospheric.  In the territory covered by the Chicago Fed (all of Iowa, and most of Illinois, Indiana, Michigan, and Wisconsin) prices were up “only” 5 percent in 2013, versus 16 percent in 2012.

However, while not as elevated as prices in Iowa, prices in the territory covered by the Federal Reserve Bank of St Louis (including Arkansas and parts of Missouri, Mississippi, Tennessee, Kentucky, and Indiana) continued to rise dramatically last year — finishing 12.2 percent above 2012.

78 percent of the farms sold are sold to farmers, rather than to speculators.  But it still seems likely that prices are being driven by the desire to park cash in land.

Farmers and lenders alike are beginning to suspect that these prices have gotten too elevated.  When hard numbers are calculated for corn and soybean prices, and the costs of inputs, it begins to look like the economics simply don’t make sense.

For our part, we look at this phenomenon and wonder what it would suggest about inflation expectations if it continued to develop.

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Japan Comes Back to Nuclear

Japanese Prime Minister Shinzo Abe has reversed the nuclear shutdown that Japan imposed after the meltdown of the Fukushima reactor in 2011.  His new energy policy document explicitly gives nuclear energy a fundamental place in the Japanese energy mix.  After the shutdown of the system, energy import costs have skyrocketed in Japan, hindering Abe’s progress in jump-starting economic growth. 

Are we buyers of Japanese equities at this time?

The People’s Bank of China Plays Hardball  

Late last week, the People’s Bank of China (PBoC) aggressively acted in currency markets to drive down the price of the Chinese currency, surprising market participants.  The motivation for the PBoC to do this is, we believe, is fundamentally different from the motivations of many central banks around the world who have been seeking to boost exports by cheapening their currency.

What the PBoC is trying to do is curb speculation, and perhaps specifically to control property prices — which, along with excess in some parts of the shadow banking system, is a central concern of the government as it moves slowly towards a financial system more capable of global integration.

The Yuan’s Long Rise

The Yuan has been appreciating versus almost all other currencies very dependably for many years:

China Yuan.jpg
Source: Yahoo Finance

This reliable “safe haven” status of the Yuan as an appreciating currency has led to a lucrative “carry trade,” where economic actors borrow money abroad, and park it in Yuan-denominated assets. 

What is the rising Yuan doing to Chinese real estate and how will the Chinese government handle “hot money”? 

Guild Basic Needs IndexTM
GBNI Jan 2014.jpg

Rising cost of essential, basic needs can be tracked at

Market Summary

Fundamentally what markets look strong and which are not yet attractive?

Troubles in the Ukraine, how do we invest to deal with this situation?

Will volatility continue and is this positive or negative for the markets in March?

What investment areas do we think are bullish and what direction do we think inflation will head? 

Which investments do we think you should avoid?

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In Last Week’s Global Market Commentary, We Also Discussed:

  • Why Bother To Look At Venezuela?
  • Is Google Fiber Going to Eat Your Internet Service Provider?
  • Higher Inflation Expectations May Start
    With Breakfast

Rec table image 100.jpg