Error!

X

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

X

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

X

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Financial Professionals

Forgot password

Forgot Your LordAbbett.com password?

If you are a registered user, but have forgotten your LordAbbett.com password, please enter your email address.
Once your email address is verified, we will send you an email with instructions on how to reset your password.

EMAIL ADDRESS
e.g. joe@firm.com

Financial Professionals

Forgot Password

Thank you.

An email has been sent to with instructions on resetting your password.

Financial Professionals

Reset Password

NEW PASSWORD
Your password must be a minimum of characters.
CONFIRM NEW PASSWORD

Financial Professionals

Reset Password

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

Financial Professional*

  • Gain access to exclusive LinkedIn Groups
  • Simplify your login
LOGIN WITH LinkedIn
LOGIN WITH LinkedIn

A verification Email Has Been Sent

Close

An email verification email has been sent to .
Follow the instructions to complete the email validation process.

I have not received my verification email

Check your SPAM mailbox and make sure that twelcome@lordabbett.com is allowed to send you mail.

I'm still having trouble

If you're still having trouble verifying your email address. feel free to contact us.

1-888-522-2388
clientservices@lordabbett.com


OK

We're sorry. We found no record of the email address you provided.

Close

Register For a LordAbbett.com Account
Using Your Email Address.

  • Registered Financial Advisors gain access to:
  • Our data mining tool, Insight & Intelligence
  • Best in-class practice management content
  • Educational events, videos and podcasts.
  • The Lord Abbett Review - Subscribe now!

Registered but Having Problems?

If you believe you are registered and are having problems verifying your email address, feel free to contact us.

1-888-522-2388 clientservices@lordabbett.com

Terms & Condition

X

These Terms of Use ("Terms of Use") are made between the undersigned user ("you") and Lord, Abbett & Co. ("we" or "us"). They become effective on the date that you electronically execute these Terms of Use ("Effective Date").

A. You are a successful financial consultant that markets securities, including the Lord Abbett Family of Funds;

B. We have developed the Lord Abbett Intelligence System (the "Intelligence System"), a state of the art information resource that we make available to a limited community of broker/dealers through the Internet at a secure Web site (the "LAIS Site"); and

C. We wish to provide access to the Intelligence System to you as an information tool responsive to the demands of your successful business pursuant to these Terms of Use. Accordingly, you and we, intending to be legally bound, hereby agree as follows:]

1. Overview. · Scope. These Terms of Use (which we may amend from time to time) govern your use of the Intelligence System. · Revisions; Changes. We may amend these Terms of Use at any time by posting amended Terms of Use ("Amended Terms of Use") on the LAIS Site. Any Amended Terms of Use will become effective immediately upon posting. Your use of the Intelligence System after any Amended Terms of Use become effective will be deemed to constitute your acceptance of those Amended Terms of Use.We may modify or discontinue the Intelligence System at any time, temporarily or permanently, with or without notice to you. Purpose of the Intelligence System. The Intelligence System is intended to be an information resource that you may use to contribute to your business research. The Intelligence System is for broker/dealer use only; it is not to be used with the public in oral, written or electronic form. The information on the Intelligence System and LAIS Site is for your information only and is neither the tax, legal or investment advice of Lord Abbett or its third-party sources nor their recommendation to purchase or sell any security.

2. Your Privileges. · Personal Use. Your use of the Intelligence System is a nontransferable privilege granted by us to you and that we may deny, suspend or revoke at any time, with or without cause or notice. · Access to and Use of the Intelligence System. The User ID and password (together, an "Access ID") issued by us to you (as subsequently changed by you from time to time) is for your exclusive access to and use of the Intelligence System. You will: (a) be responsible for the security and use of your Access ID, (b) not disclose your Access ID to anyone and (c) not permit anyone to use your Access ID. Any access or use of the Intelligence System through the use of your Access ID will be deemed to be your actions, for which you will be responsible. · Required Technology. You must provide, at your own cost and expense, the equipment and services necessary to access and use the Intelligence System. At any time, we may change the supporting technology and services necessary to use the Intelligence System. · Availability. We make no guarantee that you will be able to access the Intelligence System at any given time or that your access will be uninterrupted, error-free or free from unauthorized security breaches.

3. Rights in Data. Our use of information collected from you will be in accordance with our Privacy Policy posted on the LAIS Site. Our compliance with our Privacy Policy will survive any termination of these Terms of Use or of your use of the Intelligence System.

4. Your Conduct in the Use of the Intelligence System. You may access, search, view and store a personal copy of the information contained on the LAIS Site for your use as a broker/dealer. Any other use by you of the Intelligence System and the information contained on the LAIS Site these Terms of Use is strictly prohibited. Without limiting the preceding sentence, you will not: · Engage in or permit any reproduction, copying, translation, modification, adaptation, creation of derivative works from, distribution, transmission, transfer, republication, compilation or decompilation, reverse engineering, display, removal or deletion of the Intelligence System, any portion thereof, or any data, content or information provided by us or any of our third-party sources in any form, media or technology now existing or hereafter developed, that is not specifically authorized under these Terms of Use.

· Remove, obscure or alter any notice, disclaimer or other disclosure affixed to or contained within the Intelligence System, including any copyright notice, trademark and other proprietary rights notices and any legal notices regarding the data, content or information provided through the Intelligence System.

· Create a hyperlink to, frame or use framing techniques to enclose any information found anywhere on the LAIS Site without our express prior written consent.

· Impersonate any person, or falsely state or otherwise misrepresent his or her affiliation with any person in connection with any use of the Intelligence System.

· Breach or attempt to breach the security of the Intelligence System or any network, servers, data, or computers or other hardware relating to or used in connection with the Intelligence System; nor (b) use or distribute through the Intelligence System software or other tools or devices designed to interfere with or compromise the privacy, security or use of the Intelligence System by others or the operations or assets of any person.

· Violate any applicable law, including, without limitation, any state federal securities laws. 5. Your Representations and Warranties. You hereby represent and warrant to us, for our benefit, as of the time of these Terms of Use and for so long as you continue to use the Intelligence System, that (a) you are, and will continue to be, in compliance with these Terms of Use and any applicable laws and (b) you are authorized to provide to us the information we collect, as described in our Privacy Policy.

6. Disclaimer of Warranties.

· General Disclaimers.

THE INTELLIGENCE SYSTEM, THE LAIS SITE AND ALL DATA, INFORMATION AND CONTENT ON THE LAIS SITE ARE PROVIDED "AS IS" AND “AS AVAILABLE” AND WITHOUT ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND. WITHOUT LIMITING THE PRECEDING SENTENCE, LORD ABBETT, ITS AFFILIATES, AGENTS, THIRD-PARTY SUPPLIERS AND LICENSORS, AND THEIR RESPECTIVE EMPLOYEES, CONTRACTORS, DIRECTORS, OFFICERS AND SHAREHOLDERS (COLLECTIVELY, THE “LORD ABBETT GROUP”) EXPRESSLY DISCLAIM ALL WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, AND NONINFRINGEMENT. YOU EXPRESSLY AGREE THAT YOUR USE OF THE LAIS SITE, THE INTELLIGENCE SYSTEM, AND THE DATA, INFORMATION AND CONTENT PRESENTED THERE ARE AT YOUR SOLE RISK AND THAT THE LORD ABBETT GROUP WILL NOT BE RESPONSIBLE FOR ANY (A) ERRORS OR INACCURACIES IN THE DATA, CONTENT AND INFORMATION ON THE LAIS SITE AND THE INTELLIGENCE SYSTEM OR (B) ANY TERMINATION, SUSPENSION, INTERRUPTION OF SERVICES, OR DELAYS IN THE OPERATION OF THE LAIS SITE OR THE INTELLIGENCE SYSTEM.

· Disclaimer Regarding Investment Research.

THE INTELLIGENCE SYSTEM INCORPORATES DATA, CONTENT AND INFORMATION FROM VARIOUS SOURCES THAT WE BELIEVE TO BE ACCURATE AND RELIABLE. HOWEVER, THE LORD ABBETT GROUP MAKES NO CLAIMS, REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY, TIMELINESS, COMPLETENESS OR TRUTHFULNESS OF SUCH DATA, CONTENT AND INFORMATION. YOU EXPRESSLY AGREE THAT YOU ARE RESPONSIBLE FOR INDEPENDENTLY VERIFYING YOUR INVESTMENT RESEARCH PRIOR TO FORMING YOUR INVESTMENT DECISIONS OR RENDERING INVESTMENT ADVICE. THE LORD ABBETT GROUP WILL NOT BE LIABLE FOR ANY INVESTMENT DECISION MADE BY YOU OR ANY OTHER PERSON BASED UPON THE DATA, CONTENT AND INFORMATION PROVIDED THROUGH THE INTELLIGENCE SYSTEM OR ON THE LAIS SITE.

· Survival.

THIS SECTION 6 SHALL SURVIVE ANY TERMINATION OF THESE TERMS OF USE OR YOUR USE OF THE INTELLIGENCE SYSTEM..

7. Limitations on Liability.

NONE OF THE MEMBERS OF THE LORD ABBETT GROUP WILL BE LIABLE TO YOU OR ANY OTHER PERSON FOR ANY DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, SPECIAL OR EXEMPLARY DAMAGES (INCLUDING LOSS OF PROFITS, LOSS OF USE, TRANSACTION LOSSES, OPPORTUNITY COSTS, LOSS OF DATA, OR INTERRUPTION OF BUSINESS) RESULTING FROM, ARISING OUT OF OR IN ANY WAY RELATING TO THE INTELLIGENCE SYSTEM, THE LAIS SITE OR YOUR USE THEREOF, EVEN IF THE LORD ABBETT GROUP HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS SECTION 7 WILL SURVIVE ANY TERMINATION OF THESE TERMS OF USE OR YOUR USE OF THE INTELLIGENCE SYSTEM.

8. Miscellaneous Provisions.

· Governing Law. This Agreement will governed by and construed in accordance with the laws of the State of New York, without giving effect to applicable conflicts of law principles.

THE UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT OR ANY VERSION THEREOF, ADOPTED BY ANY STATE, IN ANY FORM ("UCITA") WILL NOT APPLY TO THESE TERMS OF USE. TO THE EXTENT THAT UCITA IS APPLICABLE, THE PARTIES HEREBY AGREE TO OPT OUT OF THE APPLICABILITY OF UCITA PURSUANT TO THE OPT-OUT PROVISION(S) CONTAINED THEREIN.

The Intelligence System is not intended to be used by consumers, nor are the consumer protection laws of any jurisdiction intended to apply to the Intelligence System. You agree to initiate and maintain any action, suit or proceeding relating to these Terms of Use or arising out of the use of the Intelligence System exclusively in the courts, state and federal, located in or having jurisdiction over New York County, New York.

YOU HEREBY CONSENT TO THE PERSONAL JURISDICTION AND VENUE OF THE COURTS, STATE AND FEDERAL, LOCATED IN OR HAVING JURISDICTION OVER NEW YORK COUNTY, NEW YORK. YOU AGREE THAT YOU WILL NOT OBJECT TO A PROCEEDING BROUGHT IN YOUR LOCAL JURISDICTION TO ENFORCE AN ORDER OR JUDGMENT OBTAINED IN NEW YORK.

· Relationship of Parties. The parties to these Terms of Use are independent contractors and nothing in these Terms of Use will be construed as creating an employment relationship, joint venture, partnership, agency or fiduciary relationship between the parties.

· Notice. All notices provided under these Terms of Use will be in writing and will be deemed effective: (a) when delivered personally, (b) when received by electronic delivery, (c) one business day after deposit with a commercial overnight carrier specifying next day delivery, with written verification of receipt, or (d) three business days after having been sent by registered or certified mail, return receipt requested. We will only accept notices from you in English and by conventional mail addressed to: General Counsel Lord, Abbett & Co. 90 Hudson Street Jersey City, N.J. 07302-3973 We may give you notice by conventional mail or electronic mail addressed to the last mail or electronic mail address transmitted by you to us.

· Third-Party Beneficiaries. The members of the Lord Abbett Group are third-party beneficiaries of the rights and benefits provided to us under these Terms of Use. You understand and agree that any right or benefit available to us or any member of the Lord Abbett Group hereunder will also be deemed to accrue to the benefit of, and may be exercised directly by, any member of the Lord Abbett Group to the extent applicable.

· Survival. This Section 8 will survive any termination of these Terms of Use or your use of the Intelligence System. The undersigned hereby signs these Terms of Use. By electronically signing and clicking "Accept" below, these Terms of Use will be legally binding on me. To sign these Terms of Use, confirm your full name and enter your User ID and Password (as your electronic signature) in the fields indicated below and click the “I Accept” button.

 

Fixed-Income Insights

The U.S. economy will likely keep plodding along, but stocks may wait to see the impact of Fed tapering.

In Brief


  • The U.S. economy may grow by 2.5–3% in 2014, but it remains hampered by regulation, weak lending, and a lingering legacy of fear from the 2008–09 financial crisis and recession. Tapering of the Federal Reserve's bond-buying program will likely lead to higher mortgage rates, which could slow the recovery in housing, but the rise in home prices during 2013 could boost consumer confidence.
  • In Europe, efforts to implement structural reforms remain stalled, while the banking sector struggles with loads of bad loans. Germany appears to have decided that keeping the eurozone together is in its own best interest. But growth will likely be barely positive.
  • The shift of China's economy from exports to domestic consumption will be a lengthy process and is unlikely to slow global growth in the short term. In the long run, the switch to domestic growth could add to global growth, certainly compared with an export-oriented model.
  • In this environment, the stock market may pause to assess the impact of the Fed's tapered bond-buying program.

Few prognosticators expected the S&P 500® Index to produce a total return of more than 30% in 2013,1 and even fewer are predicting such a performance for 2014. In fact, many observers now expect a significant correction. The U.S. economy also surprised some observers in 2013. Many expected that policy uncertainty, higher tax rates, and federal spending cuts due to sequestration would lead to recession. But through three quarters, the economy managed to keep chugging along, edging up by about 2% in inflation-adjusted terms.2

Growth may improve in 2014, despite a likely rise in interest rates and other headwinds. Potential contributors to this performance will be steady personal consumption, lower imports, less fiscal drag from the federal government, and possibly a rise in business investment.

Meanwhile, in the wake of stalled reform efforts, Europe faces the continued likelihood of anemic growth and the possibility of deflation. In Asia, China's transition to a consumption-based economy will proceed slowly, posing little threat to global growth.

Addressing these and other topics are Lord Abbett Partners Milton Ezrati, Senior Economist and Market Strategist; Zane Brown, Fixed Income Strategist; Harold Sharon, International Strategist; and David Linsen, Director of Domestic Equity Research.

Q: U.S GROSS DOMESTIC PRODUCT GREW BY 4.1% IN THE THIRD QUARTER OF 2013, UP FROM 2.5% IN THE SECOND QUARTER, AND THE STRONGEST PERFORMANCE SINCE THE FOURTH QUARTER OF 2011.3 WILL THIS RATE OF GROWTH CONTINUE? WHAT'S THE OUTLOOK FOR 2014?

Milton Ezrati: The economy is likely to just continue plodding along. In fact, the third quarter has set us up for a slowdown because of the inventory buildup that has occurred. That buildup will have to be worked off. So from a purely technical standpoint, we will probably have at least one bad quarter, probably in the fourth quarter of 2013 [data to be released January 30, 2014] or the first quarter of 2014, when those inventories are sold off. [A reduction of inventories is subtracted against GDP growth.]

Final sales [GDP minus inventory increase] were a little better than in the earlier estimate for the third quarter, but they're about where they have been for a while. Personal consumption also came in higher, as did exports and business investment, but the surge in exports is not likely to be repeated.

The same thing that has been holding this economy back will remain in place, namely, uncertainty about regulation. There's a lot of uncertainty not only about the Affordable Care Act but also the Dodd-Frank banking reform legislation as well as the huge growth in regulation across the board.

There's also the legacy of the financial crisis. So, even though the banks are flush with cash, they’re not lending very aggressively. They're still not lending much for real estate or to consumers. Lending to consumers has grown some this year, but banks still remain cautious.

Zane Brown: But we are seeing a little more in government spending. In the past couple of years, we haven't seen much spending from state and local governments, but that has started to change. It's likely that there won't be as much fiscal drag from the federal government in 2014. The recent budget deal in Congress modified the sequestration plan passed in 2012. The deal resumes some of the spending over the next two years and then reduces it again over the following eight years. So that new spending by the federal government will help a little over the next year.

But we are still likely to see a continuation of the plodding growth in consumption that we've seen over the past few years, which is around 2%.4 Business investment may pick up, but it seems that businesses are more interested using their cash to pay out dividends, buy back shares, or make acquisitions than they are in expanding via organic growth.

David Linsen: Focusing on consumption, job creation, higher consumer confidence, and low inflation should support a continued recovery in housing and retail sales. Our housing analyst is expecting new starts to be 1.1 million, versus 855,000 in 2013.5 So these developments could provide a good backdrop for overall consumption.

Brown: I'm concerned that housing affordability could be hurt as interest rates rise as a result of the Fed's tapering its bond-buying program. Home prices nationwide are already up 11% or so year over year, according to the S&P/Case-Shiller Index, so affordability has already gone down. Affordability is a matter of home prices and interest rates, and interest rates are probably headed higher.

Linsen: Countering that is the trend in job creation. As more jobs are created, buyers who have been sitting on the sideline may gain more confidence. That confidence should lead to better housing demand, assuming interest rates rise at a more gradual pace from here.

Brown: I think tapering is likely to have a serious impact on housing. It may not be complete even a year from now because the Fed is frightened of a kneejerk reaction like the one that occurred in May, when [then-Federal Reserve chairman Ben] Bernanke just mentioned "tapering." So the Fed will likely proceed slowly. Despite that, I think we'll see the yield on 10-year Treasuries rise to 3.5% by the end of the year, and that could easily push 30-year mortgage rates to 5.25%.

Keep in mind that without quantitative easing, bond yields would be higher. Under normal monetary policy, the yield on the 10-year Treasury ought to be about the same as the nominal growth rate in the economy. So if the economy grows by 2.5% and inflation is running at about 1.5%, then the 10-year Treasury yield ought to be about 4%. So it's likely we're headed in that direction and that we may see the 10-year Treasury reach 3.5–3.75% in 12 months. That could dampen demand for housing and constrain economic growth.

The Fed has reduced its growth forecast for 2014, from 3–3.5% to around 3%.6 I think it's likely that we'll see about the same thing we've seen for the past two years: slow but persistent growth. But we might see a greater contribution from business investing and from government spending. Higher home prices and a strong stock market could also boost consumer confidence.

Ezrati: The wild cards are government spending—although it's not that wild, given that it is constrained—capital spending, and imports and exports. Exports will likely slow because the dollar has gone back up, and imports should continue to improve because we’re not importing that much oil anymore [imports are subtracted in the calculation of GDP].

But even with state and local governments starting to increase spending somewhat, and even with the new budget deal allowing the federal government a little more discretionary spending, that won't be enough to be a game-changer. As for capital spending, I don't see why business would suddenly become excited about increasing it in this kind of an environment. So growth will likely remain slow.

Q: WHAT ABOUT EUROPE? CAN THE EUROZONE FINALLY SHAKE OFF THE SLUGGISHNESS OF THE PAST FEW YEARS?

Brown: The periphery countries of the eurozone, such as Italy, really haven't done much to improve their competitiveness and efficiency. Their inflexible labor markets, for example, are one of a number of hurdles that keep their costs high and make it difficult for them to be competitive internationally. They started to address the problem two years ago, but they really haven't made much progress.

Ezrati: [Italy's then-prime minister] Mario Monti had been leading the effort in Italy and the rest of the periphery, and there was a lot of interest in fundamental change of labor market regulations, product regulations, zoning—a whole mélange of efficiency-destroying regulations. Everybody talked about it, but nobody did much of anything. The influence of the interest groups that oppose reform and benefit from the status quo is tremendous. So the hurdles to competitiveness remain in place.

Brown: There is a small chance that the eurozone could experience an economic contraction in 2014, but the economy's primary driver will be Germany, and it's likely to be strong enough that growth for the eurozone as a whole will be positive. But it won't be that meaningful, and it won't benefit the rest of the world economy much.

Further, I don't think there is much of a risk that Greece or any other country will exit the eurozone in 2014. But it's still a year-to-year situation.

The fact that Europe is trying to unify its banking system helps to reduce that risk. There are huge problems in the banking sector, with many bad loans that haven't been written down. I think the eurozone will make progress toward identifying the bad loans and determining how to deal with them. And if the economy grows at least a little bit, that will provide investors with some reassurance.

Ezrati: Regarding the outlook for the eurozone, I think there are two positives. One is that [former prime minister Silvio] Berlusconi is out of the picture in Italy. He was a major obstacle. The other is, I think, that it's clear that Europe has tagged Germany with the cost of the bailouts, and in return Germany has made certain demands. One is that the bailed-out countries must implement austerity policies. The other is banking reform. So the eurozone is going to implement austerity programs and undergo German-style banking reform because Germany is bankrolling the bailouts. So it's now apparent that the Germans see a benefit to paying to keep the eurozone together because it gives their economy a great advantage.

What's amazing is that that advantage has been enshrined in the euro. The deutschemark converted to the euro at a low price, whereas the currencies of periphery countries, such as the [Italian] lira, the [Spanish] peseta, and the [Greek] drachma, converted at a high price. That means that the euro has enshrined the German advantage in selling to the rest of Europe. And the Germans like that.

Q. THE EUROZONE'S GROWTH RATE AND INFLATION RATE ARE VERY LOW. HOW MUCH OF A THREAT IS DEFLATION?

Ezrati: The ECB [European Central Bank] has said that its push for quantitative easing and for lower interest rates is aimed at raising the inflation rate. So it seems like the ECB has finally realized it is fighting a battle against deflation.

Fortunately, with wages being so high in Europe, it's unlikely that deflation will occur. Because of rigid labor laws, firms are more reluctant to hire in Europe and also slow to lay people off. That rigidity helps keep wages high, which provides some protection against falling prices.

Harold Sharon: The eurozone's low inflation is a reflection of what is happening both in the periphery countries and in the core countries. The periphery is internally devaluing via lower labor costs, etc. (Portugal and Greece, in fact, are experiencing deflation.) And overall, inflation is around 1%, according to the ECB. Will the eurozone actually go into Japan-style deflation? I would say "no," but if it did, there are some tools to help it quickly recover.

The problem continues to be credit shrinkage due to bank deleveraging, but we're getting close to the end of that process. I'd even say that if regulators and courts hadn't been so interventionist over the last 24 months, the banking sector would have been able to lend a bit more to small and medium enterprises [SME] and to consumers. As it stands, it's tough to get an SME loan in some countries, and that's leading to layoffs, bankruptcies, etc.

The fall data showed that price weakness is now evident almost everywhere in Europe—in most countries and in most sectors. Of course, this has spooked the ECB and led [ECB president] Mario Draghi to remind everyone of his July 2012 commitment to "do anything it takes" to save the euro.

We're now in a reverse of the situation that we were in prior to the financial crisis, where monetary policy was basically set for the core countries while the periphery partied. Now monetary policy is set for the periphery's "hangover," and the core, while not partying, is benefiting more than it should. Of course, this excludes France, where the economic data haven't become any better, and politicians desperately cling to their expensive political hobbies.

But the long-term inflationary expectations are still around 2% for Europe on the whole, based on inflation-linked swaps.7 To be fair, the expectations have fallen a bit, so it is worth watching carefully.

Q: THE FED HAS FOUGHT DEFLATION THROUGH ITS QUANTITATIVE EASING PROGRAM WHILE THE ECB HAS BEEN RELUCTANT TO USE THE LONG-TERM REFINANCING OPERATIONS (LTRO) PROGRAM, WHICH IS ITS EQUIVALENT OF QUANTITATIVE EASING (QE). WILL THE ECB BE MORE ACTIVE IN 2014?

Brown: It's more difficult for the ECB to buy government debt because of political considerations. It becomes a question of whose debt does the ECB buy. If the ECB buys Spanish debt, the Greeks will want the bank to buy Greek debt. That's primarily what is holding the ECB from doing more asset purchases.

Ezrati: Think of it this way: If the eurozone were to break up, every member country, proportional to the size of its GDP, would be obligated to bail out the ECB. That means that Germany, with the eurozone’s largest economy, would have to put up the lion's share. But if the ECB has bought debt mostly from Spain, Italy, and Greece, then that would amount to a transfer payment from Germany to those countries. And, of course, the Germans don’t want that. So it makes for an awkward situation.

Brown: But the ECB still can use more conventional monetary policy. It still has some room to cut interest rates as a primary mechanism of easing. Unlike the Fed, which has cut rates to zero, effectively, the ECB has reduced rates to 0.25%. So the ECB still has some room to cut, and it might do that.

Sharon: The ECB could do another LTRO program, although that really only helped banks to build capital and countries to issue debt. I'd think a more targeted SME/consumer lending program may show up—it certainly did wonders in the U.K. housing market. So the ECB has the tools to battle a dip in inflation, and since there will be GDP growth this year—and the forecast for the next two years is for real growth of 1.2–1.4%, according to UBS—I think the ECB can avoid the worst effects of slowing inflation. Disparate levels of inflation in the different countries had to happen to rebalance the eurozone internally, but there are limits to those internal devaluations. Spain's labor costs, for example, are now very competitive. I can't, however, say the same for Italy yet.

With the national election behind it now, Germany has sorted out its politics, and I think Europe, not just the eurozone, is getting better. Certainly, places like France, Portugal, and Italy are still just creaking along and not contributing much, but the economy is generally getting better. And if you agree that austerity policies, while still in place, are becoming less severe, then you could make the argument for more gradual recovery and a long period of very low growth, but growth nonetheless. At some point, Europe can loosen its belt to attack unemployment, which it will have to do. Unemployment could lead to some social unrest in the summer (although we didn't see much in 2013), but I think we're clearly out of the danger zone for Europe, which is why the stock market in Europe has done so well.

Q: MOVING ON TO ASIA, MANY OBSERVERS BELIEVE THAT CHINA'S TRANSITION FROM AN ECONOMY BASED ON EXPORTS TO ONE CENTERED ON DOMESTIC CONSUMPTION COULD SOON START TO HAVE A MAJOR IMPACT ON THE GLOBAL ECONOMY. SHOULD WE EXPECT TO SEE AN IMPACT IN 2014?

Brown: China has some interesting proposals for structural reform, but it's open to question as to whether they will be implemented. One of the proposals is for greater land rights for rural citizens, for example, but that may conflict with the interests of municipalities, which have often taken over farmlands, developed them, and collected lucrative rents. So there is a culture and a historical precedent that opposes such reforms.

Another proposal is to open up financial markets. But all the major banks are state-owned, and they have a large amount of bad debt on their books, and the government can't let them fail. So before those banks are exposed to foreign competition by opening up the financial markets, the government really needs to fix that problem.

So China's economy is still driven by exports, and it's going to take a long time to shift the economy to one that is oriented to domestic consumption. In the meantime, the rest of the world is not growing fast enough that China can rely as much on exports. So it is going to be hard for the Chinese economy to maintain a 7–7.5% real growth rate over the next few years.

Linsen: I think the shift to domestic consumption is small but significant. Wages are higher, and the consumer market is developing. In addition, as China shifts away from infrastructure development, pricing pressures on commodities markets could ease, which would be good for Europe and the United States. So this transition will likely be beneficial for inflation, which should ease input costs in developed markets, and for the growth of global consumption.

Ezrati: But it's a very long-term story. So I think it is premature to think that the shift is going to have much of an impact this year. Still, the Chinese know this shift is necessary, so they're moving in that direction.

To give you an idea of another problem they face, in order to open up their financial system, they have to relinquish control of the yuan. They're not ready to do that yet. So there is going to be a constant tension, but this gradual shift may not have a significant impact on the global economy for several more years.

Sharon: The most startling development coming from all the recent meetings and the like is how quickly Chinese president Xi Jinping has centralized his power. He has become very powerful and is using that to root out corruption and rebalance the economy. He's definitely slowing down credit growth to squeeze out the "shadow banking." This will make it very hard for local and regional governments to get funding. In his economic plans, he kept stressing the importance of allowing "market forces" to accomplish resource allocation. To the extent that he starts chipping away at all the rules that make it hard for the market to work (and that favor state-owned enterprises), that should help China's productivity and growth.

I guess one drawback is that if the government is less concerned about the aggregate GDP level and more concerned about how and where it gets its growth, then there may be a little more volatility in China's quarterly economic numbers. That may scare us a little until we get used to it and learn to avoid reading too much into it.

The adjustment going on internally over how China grows and where it grows will not prevent it from contributing to world growth; it just won't contribute as much as it did in 2010–12, when it rescued the world with massive stimulus and debt buildup. The unwinding of that will keep the Chinese economy somewhat in check, but it's still a fairly large driver for the world—especially as nominal GDP is much, much bigger than in the past.

China's growth probably helps Asia a bit more than Europe or the United States. And from an investment standpoint, it's one of the few countries that is already tightening monetary policy. So at least investors will have the potential to make a little money on the stronger yuan. If China's investment is better and more efficient, given how badly the domestic market has done and how relatively cheap it is, the Chinese equity market may be decent this year.


1 Return data from Bloomberg.
2 "Gross Domestic Product: Third Quarter 2013 (Third Estimate)," Bureau of Economic Analysis, December 20, 2013.
3 Ibid.
4 Ibid.
5 U.S. Census Bureau.
6 Minutes of the Federal Open Market Committee, December 17–18, 2013, and March 19–20, 2013, U.S. Federal Reserve.
7 Bloomberg. 

ABOUT THE STRATEGISTS

Our new blog features timely commentary and analysis from Lord Abbett experts. Join the conversation.


RELATED CONTENT