A race for economic growth or to debase their currencies?

First it was the European Central Bank, next it was the U.S. Federal Reserve and now it is the Bank of Japan. All three agencies have put programs in place to lower interest rates and spur economic growth. The global stock and bond markets have reacted positively in the near term. That being said, there is risk that these measures, over time, will devalue all their respective currencies, create inflation and possibly another bubble from investors fleeing to higher risk and emerging market investments for higher returns in the low to no interest environment.

Worries of a slowing global economy have overridden concerns about inflation or asset-price bubbles. The central bank efforts, to pump money into the financial system, have for the most part been pushed to the back burner. But should economic activity pick up, those concerns could quickly revive, especially when it comes to commodities or higher-yielding investments.

Investors are flocking to countries and assets that offer higher interest rates than the rock-bottom rates offered in Japan, the U.S. and parts of Europe. That is driving other central banks to employ their own measures, in part to keep their interest rates low or to make their currencies less attractive.

"All of this cash generated by the Federal Reserve is going to be entering foreign shores," said Komal Sri-Kumar, chief global strategist at TCW. "Emerging markets are going to be tempted to cut interest rates…to offset their currencies appreciating too much."

The Fed's move resulted in loud complaints from Brazil, China and other emerging powers that a surge in "hot money" would destabilize their economies and spur unwanted inflation. By contrast, U.S. job creation has slowed sharply since the start of the year. The euro zone is already in recession, driven by worsening downturns in southern European nations such as Spain and Italy spreading to their northern neighbors. Most emerging-market economies, in turn, have seen their export sectors struggle as a result of Europe's woes. Almost every major economy in the world is seeing its manufacturing sector contract, according to recent surveys of purchasing managers.

Not everyone is excited by continued monetary easing by the Federal Reserve

The Federal Reserve's most recent action brought criticism from a Federal Reserve Bank President and legendary mutual fund manager. Federal Reserve Bank of Dallas President Richard Fisher said the central bank's third round of bond purchases will probably fail to create jobs while risking higher inflation. "I do not see an overall argument for letting inflation rise to levels where we might scare the market," Fisher said Wednesday on Bloomberg Radio's "The Hays Advantage" with Kathleen Hays and Vonnie Quinn. "We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction."

Famed fund manager Bob Rodriguez stated in a recent interview in AdvisorOne that an "'all in' may be a good strategy for poker, but not for the economy." He believes that economic growth is stagnate and the divergence between the stock market and economic reality cannot be sustained. One or the other has to adjust and with the current fiscal gridlock taking place in D.C. He believes that Fed's policy is highly dangerous, misdirected, untested and will lead to greater risk and likely end in heartbreak.

Currently the stock and bond markets like what the Fed's move for now and borrowers are enjoying lower borrowing costs and these trends can continue for the foreseeable future. However, I don't believe it is time to break out champagne and party, but take a measured and practical investment approach going forward.

Healthcare advancements versus human weaknesses 

This week I read three articles pertaining to healthcare in the U.S. The first article was in Tuesday's Wall Street Journal regarding medical advancements that may allow for organs such as blood vessels, muscles, skin patches and even ears to be grown or in some cases created by 3-D computer printers using living stem cells as the ink. 

Being able to print tailored tissues suitable for surgery or entire organ transplants would be incredible. It would eliminate long delays for patients waiting for suitable donors and the risk of the patient's body rejecting the tissue. Unfortunately, this one positive article was offset by two other articles regarding Americans and obesity. Both articles were published Tuesday. 

The first article, from the Wall Street Journal, noted that medical equipment manufacturers are forced to increase the size of various medical equipment to accommodate larger patients in the U.S. For example, Siemens has had to increase the maximum opening and load allowed in their CT scanners from 23.6 inches and 330 lbs. in 1997 to 31.5 inches and 660 lbs. in 2011. The cost of these larger machines can be as much as 40% more than standard size scanners and larger patients are subjected to higher doses of radiation needed to penetrate their bodies and take suitable images. 

The second article referenced a study done by the Robert Wood Johnson Foundation, which is a private foundation dedicated to improving health and healthcare for Americans. The study noted that if we continue to follow the current trends, then by 2030 more than half of Americans will be obese. It is estimated this will result in a wide array of illnesses that could cost the U.S. up to $66 billion in treatments and $500 billion in lost economic productivity annually. 

I realize there are some individuals that have medical issues outside of their control that cause weight gain. However, as a nation, we are becoming increasingly overweight, unhealthy and a financial burden to our families and society. Since children are more apt to follow the examples of their parents or role models, and obviously with the U.S. obesity rate at approximately 30% today, we are falling short in our responsibilities. 

This topic is off the normal financial or economic subject matter of my commentaries. However, the long-term effects of this obesity trend are truly damaging to our healthcare system and economy. As a result of this problem, a large amount of our economy's dollars are being directed toward potentially preventable healthcare costs and lost worker productivity, due to illnesses and special services and equipment required. Through education, discipline, and personal responsibility, a vast majority of these individuals could reverse the path they're on, which would result in healthier lifestyles and lower healthcare costs. There by freeing up these funds to be allocated to more productive sectors of the economy and society in general. 

Quotes 

"Genius is external patience."

                        Michelangelo 

"Nothing is a waste of time if you use the experience wisely."

                        Augeste Rodin 

"Concentrate all your thoughts upon the work at hand. The sun's rays do not burn until brought into focus."

                        Alexander Graham Bell 

"Anger is a thief that seizes control of man's faculties and uses them blindly and destructively. Usually a man who loses his temper also temporarily loses his ability to think logically."

                        Lowell Fillmore

 

Tony Moeller, CPA 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on.  Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

Sign up to receive our Commentary

First Name:
Last Name:
Email:
Security Code:
 
Back to top