The case for optimism


A short time ago, I asked my friends on facebook if they were optimistic about the economy. Scratch that – I insisted that the negative case for this slowly improving economy was bunk and got an eyeful of responses. Needless to say, my friends aren’t in the mood for Mr. Sunshine, as some of the commentators here have called me. Talk about fundamentals improving? Show them the money. Building a strong foundation for the next economy is nothing compared to a strong roof overhead and comfortable home inside.

So it is time to make the case for optimism, which is to say why I feel that things are going to get better in 2014. Either I’m ahead of the curve or I’m just plain wrong – you get to pick. All I ask is that whichever you pick now you file away, with this piece, and evaluate the decision for keeps later. But this is the case for the economy finally picking up this year and developing strong momentum into 2015 and beyond – into 2017 when I still think good times will be had.

The improving economy is not coming at a level where most people see it, that much is clear. People usually register good times with the amount of money in their wallet or their paycheck, and with good reason. Good intentions can’t be spent at the bar or paying your mortgage. President Monroe called the situation a “depression” in 1819 for a good reason – negative feelings feed on themselves before anything can get better. FDR was right in saying that “The only thing we have to fear is fear itself.” So here are the reasons to not be afraid.

Corporate Profits are Up – We’ve talked about this a lot in Barataria, but this is the first step in a wave of hiring. There is traditionally a 6-12 month lag between big corporate profits and a real expansion as businesses invest in the future. It’s been longer than that, a reflection of the deep seated anxiety that has ruled the economy. But the wave of hiring has to come sometime in 2014 if this is going to become more than just another opportunity for the rich to cash in. Look for a big gain in employment soon, on the order of a record +240k jobs in one month, sometime in April or May. Without that, the gain in corporate profits is only a cause for rebellion.

Dividends are Up – Wall Street goes through phases. For many years, the go-go attitude stressed outsized returns each quarter that were not sustainable. Not anymore. Wall Street has to reward consistent performers that return value to their shareholders before we can say anything has changed. That may be happening, but the trend has to continue. As long as the darlings of “investment” are big banks that take big, oversized risks we are all screwed. Look for banking to become boring and investors to be more impressed by consistent performance over a long term.

Wall Street is Reforming – This is the longshot, but it looks like the stock market itself is interested in reforming back to being what it has to be – a market for investors, not traders. The example of Brad Katsuyama is sinking in as the street realizes that the attention-deficit world of rapid trading cannot be what defines the market if they are going to be the place where America parks its cash in hopes of growth. Major reforms have to come in 2014 for this to occur, but the reaction so far is very encouraging. On this topic, look for a lot more talk, and quite a bit of action, as the year progresses.

Energy Independence – In 2007 about 25% of our energy came from US sources, and about 40% was North American. Now those figures are 50% US and 65% North American. The distinction on our continent is important as we move towards energy independence, because the first step is to wean ourselves off of tinpot dictatorships we have no business backing. Energy independence defines a quiet world as much as a boring finance sector – and that’s a world that invests in the future and hires the greatest resource of this or any other nation, the talent and dedication of the workers. Look for improved energy independence this year and a decline in oil imports to new record lows.

Investments in Research are Up – We’re not going anywhere without becoming the high-tech, high-margin nation we’ve been promised for decades. The biggest barrier to this has been attitude. Investors seeking a big return this quarter, today. Batelle’s Global 2014 R&D Funding Forecast has the US leading the world with $465 billion or 2.8% of GDP put into research. That’s our ticket for a stable, reliable future in this world. Look for that to not only happen but be rewarded, even though the real dividends for this won’t be paid off until the years yet to come.

Are you feeling optimistic yet? If not, we can still be friends. But the signs are there for the foundation laid in 2013 to become something much more this year. Yes, let’s expect a lot before we get too enthusiastic and call it a major turnaround. Judge Mr. Sunshine on how it gets delivered. But Spring may well be here if 2014 plays out the way I expect it will.

Listed here is what to look for if I’m not just plain wrong. Judge me on it, it’s all cool among friends.