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August 2016

A Note From The Team

Here at Centric Capital Advisors, we maintain that geopolitical, economic and capital market risks are high. The U.K. recently decided to leave the European Union. Though there was a clear economic impact, the real message of this vote was a desire for change. A change to what? At this time, nobody is sure. U.K. voters have accepted a high level of uncertainty, in an effort to fight a feeling that something is wrong!

Similarly, many in the United States currently feel things aren’t, well, “right.” The United States economy has expanded for over seven years, yet people remain frightened. Normally in a business cycle this mature, people tend to feel comfortable with risks and opportunities. Something has changed this cycle as compared to the past.

Here in the U.S., we face an upcoming presidential election. If one believes the polls, neither candidate is particularly popular. Both seem to be viewed with a high degree of uncertainty. U.S. sentiment appears similar to that of the U.K. – that something is wrong. This suggests that people may make decisions going forward which may not make economic sense.

We suggest that a systemic lack of economic growth underlies the “something is wrong” consensus. Economic activity is driven by a combination of ability and willingness to consume and invest. One driver without the other leads to a lack of transactions and slow economic activity. The ability to transact is driven by discretionary income growth, in turn driven by income growth and job creation.

In both the U.S. and U.K., the systemic long-term average economic growth rate has been around 3 percent. Both countries' economies are now struggling to grow in excess of 2 percent. The difference in overall economic activity between 2 - 3 percent growth is meaningful, and leads to fewer jobs and businesses created, and less savings and lower growth in family income. In the end, it harms discretionary income growth, fueling public concern that “something is wrong.”

More next month…


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