Jason Schenker's Views on 2014 Economic Events

Jason Schenker from Prestige Economics provided some insights into where we are headed in the global economy at the SCRC meeting today.

In his words, “the US economy is getting rich slowly.”    Prestige Economics measure for global growth is 3.4%, and the US is getting richer at 1.7 and 2.4% growth next year.  China is at about 7.7 and 7.8% growth.

The purchasing manager indices clearly show that last year we had a bottoming out, and we are now breaking through 50, which shows growth moving in the right direction.  This is a good indicator of future growth and is indicative of expansion, and the story of getting rich slowly continues to move in the right direction.  All of the stimulus that is feeding the growth will go away and the hope is that it won’t be to bad.

According to a recent Prestige Economics poll, interest rates are the biggest risk faced by companies, then foreign exchange, metals prices, and energy prices.  By a large margin, the biggest perceived risk is on the interest rate side.  The US economy is focused on “getting rich slowly, but the government data is “consistently garbage”, and this is the case not just for the US but for all government reported data in all countries.  Real GDP year over year is a fairly objective number, and it has been 1.5 to 2% consistently.

There is a good chance the Fed won’t taper until March and there will be huge volatility when it does.  Right now the Fed spends $45B a month on new mortgages.  If the average home is 300,000, and there are about $120B of new homes built a year.  Thus, it appears that the Fed is buying every single new house built this year every three months!  So the Fed is actually adding to home inflation prices….  What happens when they pull back?  This in fact will be a mini-bubble.

Unemployment continues to remain high, but is especially high for young people, int he ages 16-19 as well as 22-25.  Meanwhile, the US debt continues to grow, and with QE at $850B and growing, the US central bank balance sheet is at $3.8T, and is at $2.4T in the Eurozone.  This adds up to a $17T national debt int he US, with $100T in entitlements pending.  This is a massive and worrisome level of debt.  Credit ratings for states like California and Illinois are at A, and muni rates have gone down in many states.  If interest rates go up as the Fed slows Treasury purchases, this is bad news for municipal bonds.  One of the major risks perceived by executives of a muni downgrade is less of a probability, however.

Long-term secular oil futures will continue to grow, and the demand for oil will continue to grow due to the demand for transportation fuel.  Natural gas heavy duty vehicles are not broadly viable, due to the challenges in being able to meet the infrastructure issues.  The historic price volatility for natural gas is an issue, and one company converted their truck fleet.  He also hedge his natural gas prices…but the hedge price is higher at the Henry hub in Michigan, as opposed to the lower price found on the Gulf Coast.

Metals such as copper and tin could go up significantly, but nickel is the shale gas of the metals market – and inventories just keep going up, which means more downside risk.  But on tin and copper, the risk is lower.  in general metals prices will go up in 2014, and for steel and iron and scrap, prices will definitely go up.

Jason’s insights provided a great foundation on which to continue our discussion of supply chain analytics!