Letter from America

Letter from America

“After the roller-coaster ride of the last month we were bound to have a quiet week sometime. Equities drifted higher as did bonds, but not even the monthly US employment numbers did much to disturb the torpid mood. It was vital to have a view during the October setback and be prepared to act. Now perhaps is a time to have no view and instead watch the news ticker.
Under the surface, however, there was some turbulence. Mid-week stories started to circulate that there was dissent in the ranks of the European Central Bank (ECB). The focus of attention was on whether Mr Draghi, the president of the ECB, continued to hold the confidence of the other members of the committee and by implication their governments.
In the event there was no palace revolution and previously announced policies were reaffirmed. What was interesting was the divergence of views the day after. Those who read the words of the press release seemed content, whilst the minority who watched the press conference were much less sanguine.
Apparently Mr Draghi’s body language told a much less confident story. Sometimes you need to turn the sound off. All this matters because in the absence of coherent government action to stimulate European growth it is hoped that the ECB will find a fiscal solution. The massed ranks of the European under-30 unemployed must hope that the US recovery is strong enough to blow across the Atlantic.
I once visited 26 US States in three months and ever since have admired the practical optimism that continues to drive the biggest and most successful economy. Fortress America delivered 214,000 new jobs last month and a further drop in the unemployment rate to 5.8%(1). Lower oil prices are transferring wealth from resource rich kleptocracies to Main Street USA.
The disappointment of recent months has been the failure of equity markets to make progress on a consistent basis despite good profits growth. The problem seems to be that although profits are rising, revenue growth has been harder to come by. Cost cutting and reducing tax bills can’t carry on forever.
Now with lower oil prices giving US consumers the equivalent of an after-tax pay rise it is time for the world’s most dedicated consumers to pick up the ball and run with it. The Christmas season is an ideal time to assess whether the economic traumas of 2008 have been consigned to the past and, with the global economy running a bit slow, this could be the catalyst for change.
Staying in the US, the non-event of the week were the mid-term election results. The electorate delivered a decisive vote in favour of stalemate for the next two years. Outsiders may regard this as a problem, but the evidence is that Americans are able to accept political uncertainty and still make sensible decisions based on their own circumstances.
The UK shows similar characteristics, but in contrast other European countries are much more risk adverse during times of political uncertainty. Russia is at the extreme where economic success and the government’s approval rating are highly correlated. This goes someway to explain why poor approval ratings for President Obama matter a lot less than if the same was the case for President Putin.
The New York Marathon was run the weekend before last in 30-40 mph winds. A cursory analysis of the numbers shows that 50,564 runners finished with an average time of 4 hours 34 minutes and 45 seconds, but beneath the surface a different story emerges. The times were slow with the men’s winner way down on his usual pace and if Paula Radcliffe had reproduced her women’s world record set on a quiet day in London she would have finished 10th in the men’s race.
Road signs and mile markers were removed to avoid injury as was the famous finishing gantry and clock. I am told that Manhattan intersections were like a scene from the Wizard of Oz as the crosswinds met and created mini-twisters full of leaves and discarded designer run-wear. Undaunted by the conditions, the vast majority of those who started managed to finish and of those I am sure that many will be back next year optimistically convinced that in perfect conditions a personal best time will be a certainty. ‘Dream it, Believe it, Do it’ always seems to work for America”.
By David Miller,
Executive Director at Quilter Cheviot Investment Management
(1) US Department of Labor 7/11/14
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