INSIGHTS

On August 09, 2010

The Economic Butterfly Effect

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It appears the butterfly effect has less of an impact when economic winds are swirling. For those not familiar with it, the butterfly effect is when minute changes in an initial instance cause dramatic changes as it proceeds through the series of events. It is often relayed as a story relating to a butterfly flapping its wings in Hong Kong causes a rain storm in New York. The locations and impact often vary to the situation. Though many may believe this to be a current hypothesis with regard to globalization and perceived weather pattern changes, it was in fact first introduced in the late 1890s and that of a more broad based chaos theory.

A brief history now concluded the importance is that this theory has historical precedent when we look at over a century’s worth of economic data. Last week we witnessed first hand this theory in place with the move in the Wheat market as the fires in drought ravaged Russia caused a short term ban on exports of the grain. UBS now expects grains exports from Russia to be over 50% less than in 2009. The spike in the December Wheat contract has risen 22% since the beginning of the year. The same contract spiked nearly 15% in two days on news of the Russian export ban, but has since pulled back 10% on profit taking. Many believe that there is ample world supply to offset this pressure on the supply with expectations of more farmers planting wheat in the coming growing season.

We continue to like commodities and particularly the agricultural area. We believe these types of instances, the butterfly flapping its wings in the form of fires, droughts and inclement weather patterns, will occur more than most think causing potential severe spikes to pricing and strains to emerging market political stability.

The jobs report, though surprising most to the downside, is a clear representative of the state of the economy we are in currently….stressing the “currently” aspect. When the government drops 200,000 jobs, barring an economy that is in the throes of hyper growth, one should not over emphasize the report. We do see this transition as a difficult one, but one that has occurred in nearly every recovery in the last 60 years. We continue to monitor the earnings and hours worked weekly as indicators for the future trend in jobs growth. The average hours worked weekly for the private sector rose to 34.2 hours in the last report. This is well off of the lows set last October and near the 4-year average of 34.3 hours which we see as an indicator of companies pushing currently employed workers to squeeze out as much productivity gains as possible without having to hire new workers. We believe that at some point, diminishing rates of returns with regard to productivity gains comes into play and will force a bit of new hiring that has always lagged the recovery to some degree.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.