Patrick Williams

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Patrick Williams
217-442-8711
Danville, IL
 
Thursday, April 17, 2014

Our economic outlook

An editorial opinion 
by Derek Vogler, CFA
® 
Vice President - Investments

March 12, 2014

The Cold War between the United States and the former Soviet Union unofficially ended in 1991. However, the chilling events (particularly the Russian occupation of Crimea) that have unfolded in Ukraine over the last week reminds us there still exists a significant difference in political ideology between the United States and other Western governments compared to some of the Eastern Bloc countries – notably Russia. After ousting their former Russia-supported president, Ukraine has become a center of controversy and is beginning to attract attention from all over the world. Countries backing the new Ukrainian government have been clear that Russia has no place interfering in the country’s affairs, regardless of the fact that there is a significant Russian-speaking population in the Crimean region. Russian President Vladimir Putin has adamantly disagreed, saying Crimea should be able to make its own decision about being part of Russia or Ukraine now that the government has changed hands. There is a referendum scheduled for March 16 that will ask Crimean residents if they want to be independent or become part of Russia. Some believe the entire vote is a Russian ploy since residents will not even be given a choice to remain part of Ukraine.

The significance of this dispute is still unknown, but the impact on other countries and markets has already begun to increase due to the higher prices of agricultural and precious metal commodities. Energy prices haven’t yet reacted significantly, however, continued tensions will surely begin to be reflected in both oil and natural gas. As the world’s largest producer of oil, and one of the region’s largest producers of natural gas, Russia has the ability to impact the entire global economy through changes in its exports. They have already begun to make noise about the $2B Ukraine owes to the Russian government-controlled company Gazprom.

As the U.S. and other Western governments are crying foul for Russia interfering in Crimea, Putin and his advisors have already begun the war of words. They claim that any sanctions or other negative actions would be met with defaults on debt due to Western banks, and they warned they could stop the flow of gas to the region if pushed. It’s too early to tell how much of this is just posturing versus a serious threat, but the bottom line is that the conflict could escalate unless calmer heads prevail. As of this writing, the opposite appears to be occurring as Ukraine is discussing mobilizing forces to defend its borders.

Interestingly, the equity markets in the U.S. and much of the world haven’t seemed to care much about these geopolitical issues, at least so far. Other than the Russian RTS Index, which has declined about 7% since the beginning of March, equity prices around the world have been relatively steady throughout the crisis; many have recently hit multi-year highs. Either investors believe Putin and the other Russian officials are just thumping their chests, or they believe the issue will fade away. The other possibility is that investors have become so accustomed to support by central bankers that they believe any negative events will push the Fed and their counterparts into action with more stimulus and massive injections of liquidity if any significant issues arise.

While the Ukrainian problems grab headlines, investors have also clamored for more jobs data to either confirm the slowdown in the U.S. economy or confirm the pace of the Federal Reserve tapering program. February’s report provided some answers, at least temporarily. The monthly data showed an increase of 175,000 jobs, much higher than the expected 149,000. In addition, the December and January figures were revised up by a total of 25,000 jobs. While 175,000 isn’t quite as high as the 183,000 average of 2013, it does provide some hope that a higher pace can be sustained as we move past this extraordinarily rough winter. The number also solidifies the current policy of the Federal Reserve, which is to reduce the monetary stimulus each month and be finished before the end of the year. In fact, after these results were published, some economists are beginning to believe the labor markets are tighter than the number implies and the correct policy would be to finish the quantitative easing and in addition, begin raising short-term rates sooner than expected next year.

The argument is that the skilled labor force has a very low unemployment rate and some of the long-term unemployed probably won’t return to the pool of available workers. While we continue to see a lack of inflation in the data, the fear on many minds is that once the remaining slack in the labor market disappears, higher starting salaries and larger raises will be the norm. This, in turn, would begin increasing the level of inflation above the 2% targeted by the Fed. It’s still way too early to call this sort of change, but the fact that some are beginning to worry about it shows the precarious situation the Fed could find itself in after years of massive liquidity injections and easy money policy.

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With all of the current economic uncertainty, this is a perfect time to contact your financial representative for an in-depth review of your situation. Backed by a team of experts, your financial representative is equipped to give you the guidance you need. 

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