Revisiting Surprise No. 1: Best of Kass
NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Among the posts this past week was an entry about the global economic recovery.
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The Global Economic Recovery Is Foundering
Originally published on Friday, Feb. 14 at 7:59 a.m. EDT.
From my "15 Surprises for 2014":
"Surprise No. 1: Slowing global economic growth and fears of stagflation emerge. "At the core of this year's surprise list is that the U.S. economy disappoints (with domestic real GDP growing at +1.75% or less, half the expected rate offered by the consensus) relative to consensus expectations. Many (e.g., Harvard's Martin Feldstein) are worried about the economy overheating, but global growth also fails to meet forecasts (and is only +2.5% against consensus forecasts of +3.6%+). "The case for slowing growth is not necessarily quartered and dependent on rising interest rates. Rather, central to my surprise is a "spent-up not pent-up" consumer whose fragility may be exposed and an uptick in economic inequality as trickle-down policy grows increasingly ineffective. "The recent rise in unemployment claims, higher gas prices, slowing population growth, the higher costs of health care, slowing retail sales and a pause in domestic automobile and housing activity likely presage that slowing growth is in store for 2014. "U.S. real GDP growth is under 2%, and worldwide growth is under 3%, making the difference between anemic growth and recession increasingly one of semantics. (Note: The U.S. stock market has a forward P/E ratio of nearly 17 with a 2% real GDP growth rate, while China has a forward P/E ratio of about 7.5x with a 7% real GDP growth rate.) "The Fed's tapering will be put on hold in response to slowing growth, and some within the Fed, including Whirlybird Janet Yellen, argue for increased levels of quantitative easing. Half the Fed members are reluctant to add "more cowbell," however, so there is no additional QE and the new Fed Chair's more aggressive monetary policy views are repudiated. "Pressure is placed on both parties in Washington, D.C., to introduce more radical and aggressive fiscal policies in order to stimulate domestic economic growth by year-end. "Major droughts in the U.S., Brazil and Russia have a knock-off impact on much higher commodity and food prices, experiencing a greater-than-5% rise in 2014 (negatively impacting the consumer's purchasing power). "The drought brings on stagflation concerns. Other supply disruptions fuel some cost-push commodity price inflation even though economic growth is weak relative to expectations. "The risk of an exogenous shock expands, and further downgrades of global growth could put the U.S. and Europe in a deflationary headlock, finding both regions in a light liquidity trap.My biggest surprise for this year is panning out: The global economic recovery is foundering. The economy is the lifeblood of corporate profit growth, so it is not surprising that the most hotly debated topic in the investment community is what the pace of worldwide global economic growth will be in 2014. Many have interpreted the recent soft data as being weather-related. This group believes that the weak jobs number, in particular, should be dismissed and that the domestic economic growth rate will quickly return to 3% once the weather distortions have been passed. Others view the strength in the November and December economic releases as a big fake-out, believing that overall economic activity is slowing.
At the time of original publication, Kass was short SPY.
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