After spending the holidays in New York City, Mary Claire and I flew home to Blackhawk late last week. We are anticipating the start of a heavy travel schedule in late January as we continue to look for above average growth around the globe. In mid-November I wrote, “Quickly, everyone’s attention has returned to the fiscal cliff. I, for one, am assuming that there will be a compromise that involves both increased revenues through tax increases, as well as expense cuts, particularly for entitlement programs, with most of the focus being on Medicare and Social Security.” (From East to West: Looking for Growth) While I was right about a compromise and increased tax revenues, spending cuts for the entitlement programs were not addressed in this round. I had also written:, “We continue to see a much faster growth rate and demand for our Strategic Insight research offerings and marketing services in the Asia/Pacific market, when compared with Europe, although off of a smaller base…I am anticipating that the U.K. will have modest growth in 2013, but will outperform the Eurozone, which will remain in recession as they continue to wrestle with the staggering debt loads of many of their members.” Now that we are in 2013, I should add that I do not see the Eurozone falling apart, but I anticipate that the deleveraging will continue for the next several years and that the recovery will be slow for most member countries.
I concluded that, “The Asia/Pacific region will continue to be the fastest-growing region of the world in 2013. During our annual aiCIO Summit in Sydney on Thursday, I heard several participants refer to the U.S. and Europe as having ‘insolvent economies.’ I did eventually point out that this was an overstatement and that the U.S. and U.K. would continue to recover from the Crisis, but that the path back to full employment, driven by strong growth, would take longer than most had originally anticipated. Our ability to operate globally should allow us, once again, to realize double-digit organic growth, although closer to 10% than the 16%-17% experienced earlier.” At this point, early in January 2013, I remain very optimistic that my projections will hold as we move forward.
I would like to add some additional observations and further color on the global economy and its impact on our business. This past Friday, Jim O’Neill, Chairman of Goldman Sachs Asset Management, wrote in his Viewpoint newsletter, “Is 2013 Going To Be The Great Year Of Rotation From Bonds To Equities?“: “Linked to my core theme of this Viewpoint, Thursday’s Federal Open Market Committee (FOMC) minutes raise the issue that not as many FOMC members seem to be so passionate about the extent of QE going into 2013. Furthermore, if the unemployment rate continues to decline, it would seem as though the US bond market is going to be quite sensitive to this. If this occurs, the big question is whether this is going to result in a shift in the equity-bond correlation or whether equities will just keep rising….Which brings me to the topic of bonds and equities. With close colleagues in my office, we are re-examining closely the long-term performance of markets, especially bonds and equities, with a lot of emphasis on the context of the so-called Equity Risk Premia (ERP)…There is quite a lot of compelling evidence that, when the ERP is close to zero (as it was in 2000), you want to reduce your exposure to equities to as little as possible, and then – at the other extreme – when the ERP is close to 6.0, you want to do the opposite and get as much exposure to equities as possible and be rather wary of bonds.” Mr. O’Neill goes on to cautiously suggest that we may be approaching a time when a rotation from bonds to equities, particularly in the U.K. and U.S., will take place. This rotation could prove very positive for many of our client companies. Bill Gross, founder and co-chief investment officer of PIMCO, in his January 2013 Investment Outlook, “Money for Nothin’ Writing Checks for Free,” counsels: “Investors should be alert to the long-term inflationary thrust of such check writing. While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the “out” years towards which long-term bond yields are measured. You should avoid them and confine your maturities and bond durations to short/intermediate targets supported by the Fed policies.” He goes on to advise that long-term “QE maneuvering” will have a negative impact and counsels caution.
As we move further into 2013, I sense that we will finally see an overdue rotation from bonds to equities, but that if spending is not addressed, particularly on entitlement programs in the U.S., this rotation could be short lived.
Turning from the global financial markets to the football games of this past weekend in the U.S., I have some final observations. Without a horse in the current NFL playoff picture, with the defending Super Bowl Champions bowing out, I can be mostly objective. The wild card team that impressed me the most this past weekend was the Green Bay Packers, with Aaron Rodgers at the helm. They move on after their convincing win over the Minnesota Vikings to play the San Francisco 49ers in San Francisco. They will present a very real challenge to the 49ers’ strong defense if Rodgers is as accurate and daring as he was this past weekend. The Texans will be overwhelmed by the Patriots, who are well rested and well prepared after their bye week. Baltimore will also find the rejuvenated Peyton Manning and the Broncos to be too much on the road. I am predicting a classic Brady vs. Manning duel in the AFC championship game. The winner will go on to face Rodgers and the Packers in the Super Bowl.
Finally, after many of us were hoping the Irish could deliver us a victory from another SEC national champion (the 7th in a row), Nick Saban’s Alabama Tide demonstrated that they truly play on another level. His legend continues to grow with his third national championship team in the last four years and his fourth overall, counting the one he won at LSU. One has to use the word “dynasty” now for Saban’s Alabama reign!