Macro Environment Thoughts

One of Doubleline's bond mangers Jeff Gundlach had a conference call last week and made some interesting macro observations we thought we would share with readers.

Below is a summary of his thoughts:

• There’s been no real household income growth since 1970, which is why people still feel like the US is in a recession. 

• Household debt has quadrupled over the past few decades and has formed a scheme of borrowing to keep up nominal income growth.
 
 
• Similar to the Roman Empire, R&D as well as infrastructure spending have been declining.

• The debt ceiling raises from 2011 were supposed to take us past the November election, but it looks like, due to increased spending, the ceiling will be breached before the election.
 
 
• He thinks taxes are too low.  Top earners pay an average of 34.2% today, compared to 70% in the 1950's.

• Incredibly, 60% of the US population has seen taxes rise since the 1950’s while top earners have seen declines.

• Exploding Central bank balance sheets have helped prop up global equity markets. 

• To make serious money in the market you need to wait for single digit PE on the broad market and we are not there yet. 

• Says the Federal Reserve will only raise rates if there is real inflation. 

• Biggest risk to the economy and assets is skyrocketing interest rates.

First Quarter Real GDP up 2.2%

Real gross domestic product -- the output of goods and services produced by labor in the United States -- increased at an annual rate of 2.2% in the first quarter of 2012 (from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, nonresidential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset by accelerations in exports.

The GDP report was weaker than expected, however, on the bright side, final end demand was good.  Personal consumption expenditures increased at a 2.9% annual rate in the first quarter, and residential investment increased at a 19.1% annual rate. Weather probably provided a boost to GDP.  However, growth at this rate is not sustainable longer term without more personal income growth.

China Growth Expected to Slow in 2012

China's gross domestic product grew 8.1% in the January-to-March period from the prior year according to the National Bureau of Statistics - slower than 8.9% in the fourth quarter and the median 8.3% forecast by economists.

The first-quarter growth was the slowest on a year-on-year basis since the 6.6% in the first quarter of 2009. It was also disappointing on a quarter-on-quarter basis, slowing to 1.8% compared with the fourth quarter's 2%.

Chinese Premier Wen Jiabao said yesterday China faced rising inflation risks amid the growth headwinds, adding that Beijing would continue to improve and fine-tune macroeconomic controls and policy to deal with the challenges.

In sharp contrast to the quarterly GDP reading, data for industrial production, retail sales and bank lending showed momentum picking up in March.  Chinese production of steel, cement and automobiles - which had recently triggered concern of an economic hard landing - accelerated last month. Industrial production rose 11.9% in March from a year earlier, and topping the 11.6% median forecast. Retail sales rose 15.2% from a year earlier, also up 0.5% and beating the forecast gain of 15.1%.

Meanwhile, an unexpected surge in new loans last month showed the ruling Communist Party was trying to avoid a deeper growth slide. The People's Bank of China said on Thursday that new loans made by the country's banks trumped forecasts to spike to 1.01 trillion yuan last month from 710.7 billion yuan in February.

One area where there was little to cheer about was the property sector. Investment growth in the first quarter was the slowest since the government started its property market tightening campaign two years ago and home sales continued to shrink.

JOBS ACT 2012 Signed Into Law

The Jumpstart Our Business Startups (JOBS) Act was passed by The U.S. Congress and signed into law by President Obama on April 5, 2012. The JOBS Act represents the most significant change to our capital formation regulatory framework since Securities Offering Reform in 2005. The JOBS Act will affect private companies considering an IPO or alternative capital raising approaches, as well as existing public companies, and, of course, the financial intermediaries that advise companies in connection with capital raising.

The most important belt that the Jumpstart Our Business Startups Act loosens concerns the amount of capital a new company may raise through the sale of securities in a 12-month period. Previously $5 million, the securities sales cap will be raised to $50 million. That cap will now specifically apply to a broader group of small companies: those with annual gross revenues of $1 billion or less (adjusted for inflation), within a five-year interval from the sale of its first security.

A new phrase is getting used, emerging growth companies (EGCs). It's the term proposed by the National Venture Capital Association (NVCA), and is now codified into law. It refers to this specific, new group of young, low-revenue companies for whom some of the normal reporting regulations will no longer apply.  The NVCA recommended the five-year period as part of what it called the "IPO on-ramp." As the proposal read, "We recommend that companies with total annual gross revenue of less than $1 billion at IPO registration and that are not recognized by the SEC as 'well-known seasoned issuers' be given up to five years from the date of their IPOs to scale up to compliance. Doing so would reduce costs for companies while still adhering to the first principle of investor protection."

Lastly, the JOBS Act removes many of the restrictions placed upon research analysts involving their ability to comment on issues. An investment banking firm participating in a proposed public offering of common equity of an Emerging Growth Company may publish research relating to that issuer at any time, whether before the filing of a registration statement, during the waiting period or after it is declared effective, without that research being treated as an offer to sell a security. Whether or not this new Act "jumpstarts" the economy through a lessening of business startup regulation remains to be seen.