Investment Outlook: Echoes from Africa

If I sang a song about Africa
Of the spotted giraffe, the hyena's laugh
Of the fiery sun rising to meet the day
With a stillness belying the lion's evening meal;
Would Africa sing a song about me?

If I remembered a time once in Africa,
Bride at my shoulder, chasing a leopard's shadow
With human eyes and Nikon shutters wide apart
Invading the solitude of blackened ancestors;
Would Africa remember a time once with me?

If I knew a story of Africa
Capturing a disappearing continent for a moment in time
Fleeting – far briefer than the earth's reign;
At least until its dusty death,
Would Africa know a story of me?

Bill Gross
- With appreciation for Isak Dinesen

I traveled once to Africa, as you might have guessed by now, and it's been a part of me ever since. Being perhaps the cradle of civilization, if not life itself, Africa casts an eerie glow over the entire history and, indeed, meaning of existence. There's a strange beauty to it – this eat and be eaten land – brutal, yet fair and loving underneath its violent surface. I think it's how I view my own life. I saw myself in Africa and, of course, through my own eyes I saw you there, too. The question however, that ends every stanza of my poem is whether Africa saw and will remember me. Are we just passing through without a trace following our dusty deaths? Will anyone, or anything, at the end of the line be the better for our time on earth? I,myself, know nothing of a grand scheme of existence, but I wish there to be one – if only to give meaning to our precious moments of happiness and frequent hours of despair.

Happiness has dominated risk markets since early November and despair has characterized global bond markets. Hope for stronger growth via Republican fiscal progress/reduced regulation/and tax reform have encouraged risk. The potential for higher inflation and a more hawkish Federal Reserve lie behind the 100 basis point move in the 10-year Treasury from 1.40% to 2.40% over the same time period. Are risk markets overpriced and Treasuries overyielded? That is a critical question for 2017.

Hope for stronger growth via Republican fiscal progress/reduced regulation/and tax reform have encouraged risk.

The assessment of future growth and associated risk spreads is still uncertain of course. President-elect Trump tweets and markets listen for now, but ultimately their value is dependent on a jump step move from the 2% real GDP growth rate of the past 10 years to a 3%-plus annual advance. 3% growth rates historically have propelled corporate profits to a somewhat higher clip because of financial and operating leverage dependent on higher growth. 2% or less typically has smothered corporate profits. The 1% difference between 2 and 3 is therefore critical. We shall see whether Republican/Trumpian orthodoxy can stimulate an economy that in some ways is at full capacity already. To do so would require a significant advance in investment spending which up until now has taken a backseat to corporate stock buybacks and merger/acquisition related uses of cash flow.