January 22, 2014 | By Scott Minerd, Global CIO
As the 2014 World Economic Forum gathers this week in Davos, the focus of discussions has shifted significantly from last year. Then, the dialogue was almost exclusively around the developing consensus that the global financial crisis was finally ending. Financial assets were again safe for widows and orphans and financial market returns for 2013 proved the consensus correct.
Now, the focus has shifted to two new topics: growing income inequality as a risk to economic growth and social stability and the emergence of Africa as an economic force. Neither of these is a big surprise as neither is new. But the fact that these are the primary focus this year tells us that these topics will likely become more prominent in 2014.
The issue of income inequality will likely be prominent in U.S. Congressional mid-term elections in November. Republican Paul Ryan has already been criticizing the failure of Obama administration policies, saying the manner in which it tackled the 2008 financial crisis exacerbated the problem. Republicans and Democrats will both make the issue central as they seek to win over swing voters. Strap in! The debate on inequality will likely shape economic policy and the structural forces that will determine long-term economic growth and investment returns.
As for Africa, the cat is out of the bag that the opportunity there is huge. Sub-Saharan African nations are working together and making significant political and structural progress which will allow rapid economic growth in the coming decades. My meetings here with leaders from Rwanda and with a delegation from Nigeria on Monday in London remind me of experiences I had on my first trip to China in 1988. It is no longer prudent for investors to ignore Africa. It is becoming the greatest growth opportunity in the world. The good news is that if you invest now you are early!
Historically, a meaningful increase in capacity utilization is followed by acceleration in capital expenditure (CapEx). As the U.S. industrial capacity utilization rate in December increased to the highest level since June 2008, we should expect CapEx, measured by the U.S. private non-residential investments, to grow strongly in the next few quarters, adding further momentum to the U.S. economic expansion.
Source: Haver, Guggenheim Investments. Data of 12/31/2013 for capacity utilization and as of 9/30/2013 for real private non-residential investment.
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Risk assets will likely enjoy another rally while the Fed stays on hold, but the pause will only allow excesses to become more pronounced.
Should the mood this year at Davos prove once again to be a contra-indicator, this may be the signal that the economy is likely to re-accelerate soon and that the party in risk assets continues.
What would be a normal seasonal correction is turning into the worst December selloff in equities since the Great Depression.
Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.
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