Inflation not a big concern

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Barring unforeseen circumstances, the risk of a double-dip recession is “pretty unlikely,” Keith Hembre, U.S Bank’s chief economist, told the audience at U.S. Bank’s Economic Update and breakfast at the Doubletree Hotel on Tuesday.

Across the developed world, interest rates are basically at zero. And governments have used unprecedented policy action, so they aren’t apt to prematurely withdraw fiscal or monetary stimulus.

Global recovery is under way, and U.S. third quarter gross domestic product growth is estimated at 3 percent or higher.

“Leading indicators have turned up sharply,” Hembre said, “and this suggests growth will continue in the fourth quarter — driven somewhat narrowly by rapid growth in manufacturing.”

As private sector demand for debt has “flattened out,” the government has filled that gap. Closing the fiscal gap will be an economic issue during the coming years.

Inflation is an absolutely critical variable for spending power, economic policy and financial markets. Budget deficits alone don’t cause inflation — it’s also driven by central banks, Hembre said.

But consumers and investors alike can rejoice in Hembre’s assessment of the near-term dangers of inflation.

Since 1958, on average, core inflation — as measured by the Consumer Price Index (excluding food and energy costs) — has fallen by 2 percentage points during the first two years after a recession ended, Hembre said.

So sustained inflation acceleration is not an immediate concern, especially because labor costs are not expected to rise during the next several years.

Emerging markets, investing

“Americans tend to have a very closed border concept,” said David A. Jeppson, regional investment manager, U.S. Bank Private Client Reserve.

But emerging markets — such as Brazil, Russia, India and China — are changing the face of consumer markets.

“Certainly, the U.S. is still the big daddy — we love to shop,” Jeppson said. “But when we look at 2020, the numbers look very different.”

The rise of the global middle class will alter global consumption patterns.

The growth is coming from India and China, as the epicenter of the global middle class returns to Asia — where it was during the 1700s.

There’s plenty of room to grow.

In the United States, for instance, private domestic consumption accounted for 71 percent of GDP during 2008 (it can’t go much higher than that). But China’s was 37 percent for the same year.

And a 2006 McKinsey survey showed that 82 percent of women surveyed in India “look forward” to shopping for clothes, as did 79 percent of women in Brazil.

(Ironic that in the land of plenty, shopping for clothes can be viewed as an irksome chore — although not yet by yours truly.)

Investors need to watch emerging markets/consumers closely — not for fashion advice or how to enjoy shopping, of course, but — because global markets affect the U. S. economy.

“The first, foremost and most fundamental change is that we’ll need to have more export growth to make up some of the slack in the economy,” Hembre said.

“Slack” comes from domestic consumption growth hovering at 1.5 percent instead of 3.5 percent, and an increase in the household savings rate from zero percent during 2008 to about 4.5 percent this year.

And emerging markets affect U.S. investors and their portfolios.

“The days of buy-and-hold went away with everyone’s portfolios in 2008,” Jeppson said. “We were on a tailwind for years. You could throw a dart and make money.”

But now it’s time for an active — not passive — investment strategy.

“You have to be an active investor — shifting in and out of asset classes,” Jeppson said.

And, for now, “broadly speaking,” here are his suggestions for the four Tier 1 asset classes.

Equity strategy: Overweight in stocks, relative to a long-term strategy — with an emphasis in emerging markets, mid- to small-cap U.S., and hedged strategies (“hedged” here means “the ability to shore up or protect oneself”).

Fixed income strategy: Neutral, with an emphasis in high-yield debt (municipal bonds are “attractive” now).

Commodities strategy: Overweight, with an emphasis in hedged strategies.

Real estate strategy: Underweight — “the commercial markets are still under pressure. There will be a better entry point later,” Jeppson said.

From 1982 to 2000, Hembre said, investors couldn’t help but make money.

“All you had to do was buy something that was going up in value,” he said. “But now you have to have a strategy.”

For now, the “punch bowl stays at the party (interest rates remain low). Financial markets appear to be healing, and the overall tone in the markets is friendly,” Jeppson said. “Compared to this time last year — things feel pretty good.”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.