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The Global Economic Outlook: Jason Schenker's Soothsayings…

Jason Schenker spoke at the SCRC conference today and spoke about his forecasts for the global economy. The global economy is expanding, albeit at a modest pace. US GDP and the US labor markets are showing modest improvements. Chinese GDP will grow, but central bank monetary policy at home and abroad is likely to remain accommodative for some time.

The current outlook for GDP is 2.2-2.3% through 2014. Jason notes that “you may as well take a nap through 2013, as not much is going to happen…but there should be some improvements towards the end of 2014.”

The Key Factors behind this is that first, US jobs will remain weak. Energy markets will act independently of financial markets, with natural gas seeing lower average prices, and crude oil remaining strong in 2012. Metals prices will be slightly lower prices than in 2011 except for gold.

US and Eurozone are the critical downstream markets driving the global supply chain economy. Jason notes that “we buy the stuff China makes. If we are not growing and Europe is in a recession, that’s not good if you sell stuff. India is the global mid-stream for services, China is the midstream for manufacturing. There are two places where you can make a good margin – in the US and Europe – and better ones in Europe. And if Europe is in a recession and the US is soft, then growth in China will be slow. Brazil is the global upstream for materials which end up in China for manufacturing! Brazil is starting to see growth to 4.0 percent.

Another key prediction: “Regulatory impact through direct executive mandate is what’s really up for grabs in the current Presidential election.”

Regulatory risk is the top of the list of issues to watch out for that will negatively impact companies due to the Obama re-election. 45,000 pages of EPA regulations have been added in the last year, another 45,000 was headed going into the election, and Jason expects the administration will add another 25,000 to 45,000 pages soon. This is a scary proposition for many regulated industries.

During the election debates, no one talked about the labor participation rates. This refers to people who have dropped out of the labor force and have given up looking for work. Job growth and the recovering labor market will take years to occur. If companies have to trim the fat they do it quickly, but as they begin to expand, they do it slowly. In Jason’s words: There are no low hanging fruit in the investment forecast. Investments that are “no-brainers” are the only ones that companies will invest in, and even then, they will take these projections and cut them in half. In his words, “the fruit has to jump off the tree and into the basket for it to be a worthwhile project.” Job Creation comes from fear and greed. The greed is when people want to hit the “stretch” goal, but in fact, most are just taking the low stable number and dividing them by two, as fear has overtaken. But by 2014, greed may overcome this.

On the Fiscal Cliff, there will be a set of tax cuts set to expire and budget expenditures that are set to be cut. If all that happens, we will be sent into recession. There is a less than 5% chance that it will be hammered out. Politicians will tell you that for their own personal benefit, it is not up to them to settle early. They have to tell constituents that I fought for what you asked for….and I fought for it until the last day. As such, it is likely that the fiscal cliff issue will be “kicked down the road” further.

In the Eurozone Outlook – the euro is the Eurozone’s problem that they have to love, no matter how ugly it looks. People are still talking about the euro falling apart, but it isn’t going anywhere. If Greece tried to leave the Eurozone – chaos would ensue. 95% of Greeks wants to stay, not leave. If they did leave – they would economically be set back in a very bad way. They have to love it, and they can’t bring the baby back. Latvia and Lithuania can’t wait to get into the Eurozone, and waiting for the velvet rope to drop outside the club. No one is going anywhere, and they just have to work it out, and has huge implications. Every client who doesn’t do business in the Eurozone is delaying corporate investment and is considered a huge risk. And people are waiting for the fruit to drop off the tree into the basket, but the fruit doesn’t seem to be cooperating.