PMC Weekly Review - February 24, 2017

A Macro View: America: Land of the Free, Home of the Inflated Avocados? 

Following a recent trip to the grocery store, I can’t help but notice the stickers that dot the sides of my carefully picked organic produce. In the palm of my hand, I hold an avocado from Mexico, a banana from Guatamala, and a mango from the Philippines—a veritable fruit cocktail of free trade and open markets at its finest. It is an outcome of a progressively global system that recognizes countries with economies of scale or comparative advantages in producing certain goods or services, and seeks to pass them on for the greater benefit of all parties. 

Standalone arguments, like protecting and creating jobs, have long failed to carry the girth of their weight. More jobs, yes, perhaps over the short-term, but at what cost? Producers ultimately will look to pass down costs to consumers, leading to a modest rise in inflation and a reduction in total wealth and productivity overall. That is particularly so when the cost of higher priced items more than offsets expendable income that could have been used to fuel other areas of the economy. Not to mention the real consideration: The new dynamics of higher operating costs may cause job gains to reverse ultimately, as companies find new ways to cut costs and increase margins through automation. 

This week, US officials met with the Mexican government to discuss President Trump’s newly proposed immigration, trade, and deportation guidelines. As anticipated, the measures were met with criticism by Mexico’s government, as foreign minister Luis Videgaray pledged to protect the rights of Mexican citizens amidst already escalated tensions surrounding the building of a wall that led to President Enrique Pena Nieto’s canceling his state visit last month. 

The Federal Reserve (Fed) also released the meeting minutes of its January 31-February 1 meeting on Wednesday, which suggested that it would raise rates ‘fairly soon,’ but perhaps not as aggressively as originally anticipated. This prompted some analysts to revise their number of rate increase expectations downwards, from three to two, for the year. The FOMC held interest rates steady at 75 basis points, noting an improvement in business and consumer confidence and the risk for inflation as being ‘roughly balanced.’ 

Among leading indicators, US initial jobless claims increased to 244,000, up from 238,000 the week prior. Abroad, European indicators showed that the Eurozone is growing at its fastest pace in six years, prompting investors to sell bonds in anticipation that the European Central Bank (ECB) will wind down its economic stimulus. This is in conjunction with a general fear ahead of the French presidential elections, as the prospect of Marine Le Pen’s taking office and staging a ‘Frexit’ weighs heavily on the economy.

So, what is a rational citizen supposed to do in the face of an increasingly right wing administration and mounting protectionist economic policies? Should one bunker down, buy some land, invest in TIPS, and hoard gold like there’s no tomorrow? Although it might not be such a bad idea, given the already generous market highs, an understanding of the effects of a weaker-than-expected domestic growth picture is vital in framing expectations for returns. For what it’s worth, gold continues to climb, as evidenced in its new three-month high, topping $1250 an ounce this week.

…And, what about those avocados? We can take comfort in knowing that any new legislation will be tempered by the hands of members of Congress and input from agencies like the World Trade Organization. The CPI Index (a measure of inflation), has risen modestly over the past year, but core inflation continues to hover around 2%, which is well within target range and on the lower end of its historical range. Nonetheless, it may be smart to indulge in those guacamole cravings while prices are still low. 

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