The Tide Falls But Boats Still Float

Global volatility and its effect on accessibility of capital in Georgia

  • Global economic indicators do not universally support a national contraction.
  • As emerging markets decline in a strong U.S. dollar environment, U.S. exports are under pressure.
  • However, most profit losses are disproportionately borne by energy and heavy industrials like Exxon. Minus those sectors, U.S. profits remained unchanged in 2015.
  • Changes in capital flow, as China became a net seller of treasuries and invests more domestically, should have improved yield, but other players stepped in as buyers seek safety.
  • In addition, Georgia’s economy is outpacing the U.S. in population and employment growth, banks gotta bank and many factors are pushing institutional equity sources into the market over going back to sitting the bench.

Executive Summary

Recent events in global markets have led to speculation that the expansion of the US economy has ended. China’s growth continues to decline (along with other emerging markets) and with the U.S. currency strong, weaker economies are dampening the demand for U.S. exports.

But indicators do not universally support a national contraction. Interest rates have seen their first increase in ten years indicating the Federal government’s renewed confidence in the U.S. economy. Additional rate increases will further strengthen the U.S dollar, adding to the global imbalance.

Despite international instability, Georgia remains a preferred choice for foreign financial investments and business expansions, bringing with it significant job growth. The flywheel of job growth compounded by an influx of new young workers compounded by more job growth is a well-worn path in Georgia economic development circles and is running full steam now.

China has moved decisively (through Belgian intermediaries) to unload U.S. treasuries, which should have moved yield higher and increased equity costs domestically. However, a number of sovereign funds and investors seeking safety have stepped in to fill the gap and kept borrowing costs low.

As such, access to capital has remained open to organizations and data suggests that they have been taking advantage of it. The adage that equity managers will get in trouble for making a bad investment but fired for making no investments holds true, so our assessment is that equity stays inexpensive and available throughout 2016 so long as job growth stays positive.

You don’t have to go home, but you can stay here.

Three factors contribute to economic pessimism as of late. First, much of the world is struggling with low or declining growth, including the world’s second-largest economy, China. China is expected to slow further this year with doubts in Beijing’s ability to make the Chinese economy more reliant on domestic consumption. We expect that national leadership in China will divert some portion of U.S. investment toward shoring up local economies and job creation. China created 7M new jobs in the first half of 2015 and that figure is expected to expand rapidly into 2016.[1] The Eurozone (struggling to manage a debt crisis) and Japan are only expected to grow 1.7% and 1%, respectively in 2016, while Russia and Brazil are both forecasted to weaken. [2] Emerging markets like Brazil, South Africa, Thailand and Turkey are especially vulnerable with problems with either financial or political weakness.

Second, the strong U.S. dollar, coupled with weak economies internationally, can cause trouble. The dollar is at a near-term high against an index of other currencies. While the U.S. Federal Reserve recently implemented a modest increase in interest rates, other central banks outside the U.S. are easing their monetary policies. Additional increases to our interest rate are still yet to come, further strengthening the dollar. Since oil is priced globally in dollars, when the dollar is strong, oil becomes more expensive for other countries, dampening their demand for oil. Furthermore, a stronger U.S. dollar makes it more expensive for other countries to buy U.S. goods, thus lowering U.S. exports.

Thirdly, the U.S. is experiencing a decline in Industrial production, a potential warning sign of recession. Production in the U.S. has declined in 10 of the past 12 months and is still down 2% from what it was over a year ago.[3] Manufacturing, in particular tends to lead the economic cycle of instability and it’s struggling, according to Thomas Costerg, Sr. Economist at Standard Chartered. But unlike past dips in production, today’s decline is driven primarily by the collapse in the oil industry. Oil production (among private producers) is up, but global demand is down, resulting in layoffs, particularly in the energy industry. Some energy producers have already gone bankrupt.

Corporate profits are down by nearly 5% since peaking in the Summer of 2014, according to the Commerce Department. But it’s the energy industry primarily responsible for diluting corporate profits and having the most negative impact on U.S. profit margins. When you take energy companies like Exxon Mobil Corp., Chevron Corp. and Valero Energy Corp. out of the equations, profit margins among the companies in the S&P 500 stock index have seen little change over the past year.[4]

Stock market prices have fallen this year, with the Dow Jones Industrial Average down 7.6%. In this case, it’s not just oil companies in decline. A falling stock market typically creates worry, leading to consumers’ lack of confidence. As they pull back spending, it can cause additional declines in company profits, ultimately leading to layoffs.

And now, the rest of the story . . .

But these three indicators do not tell all the story for the national economy or Georgia. The U.S. job market is one of (if not THE) best recession indicators. While layoffs can signal the beginning of recession, the reality is that so far, the number of U.S. jobs have grown– up 2.7 million over the past year and by 292,000 just this past December.

Examples of strong job growth locally, and across the U.S. (around 2,000 a month) are one of the reasons why many economists remain confident the U.S. can avoid recession. The ultimate call on whether the U.S. has entered a recession would be made by a group of economists known as the business cycle dating committee at the National Bureau of Economic Research (NBER). For now, it’s too early for any NBER prediction. No crisis is “global” if American financial markets hold up. At this point, a true global financial crisis is unlikely, according to Gerald O’Driscoll Jr., a former vice president at the Federal Reserve Bank of Dallas.

Additionally, the University of Georgia experts predict a better Georgia economy in 2016. What accounts for the optimism? First, Georgia has a large number of major projects in its development pipeline and Georgia will see much faster population growth than the nation. In addition, continued low oil and gas prices are much better for Georgia’s economy when compared to the U.S. overall. Georgia’s economy will grow faster than the nation’s next year, just at a slower pace than in the past, according to the Georgia Economic outlook report. Healthcare, as a whole, has a lot to take credit for.

Several new facilities have been announced for Georgia in the past few months. Netherlands-based, CSM Bakery Solutions recently announced its plan to move its global headquarters to Sandy Springs, bringing with it a $5.5 million investment and creation of 120 jobs. Atlanta’s manufacturing sector is also getting a boost, as Swiss-based pharmaceutical company Alcon Laboratories is expanding its manufacturing plants in Atlanta’s northern suburbs, creating another 250 jobs. Baxalta’s new $1 billion biologics plant is slated to be completed this year and expects to employ 1,500 workers by 2018. As the recent slate of corporate expansions can attest, Georgia remains a favored destination for foreign-direct investment.

The Tide Falls But Boats Still Float-PE-graph

Continued low oil and gas prices are much better for Georgia’s economy than the U.S. economy, according to UGA Today. As of the end of January 2016, the national average price for regular gas was $1.82/gallon, compared to $1.75/gallon for Georgia and $1.76/gallon for Atlanta.[5]

Georgia will see much faster population growth than the nation, and employment is at its highest level ever. Georgians can also look forward to a rise in personal income of 5.7%.[6] Atlanta is 1 of the 12 largest MSAs, and among those, Atlanta showed the fastest rate of job growth (3.4%) as of this past November.[7] Over the past 12 months, Georgia has added a net of 92,900 payroll jobs and its unemployment rate has also continued to decline, boasting the lowest since 2008. [8] UGA experts predict a better Georgia economy in 2016, but could see a slowdown in the rate of job growth. This is primarily due to many companies no longer being understaffed, or are cautious about hiring. Because both the national and global economies are under duress, local businesses’ profits are showing signs of the stress.

The River Runs Dry, but the Boat’s Still Afloat

U.S. Treasuries are the gold standard for safe yield and everyone from corporations to sovereign funds look to them as the benchmark rate for complete safety. China has been a net buyer of treasuries for years, but in 2015, China unloaded $187B in treasuries and the market barely blinked.[9]

The Tide Falls But Boats Still Float-PE-graph2

What did happen was capital poured into treasuries from other sources seeking a safe haven. Volatility on yield ranged from 2.4 to under 2 during the period when the largest buyer was a net seller of approximately its previous three years’ inventory.[10]

So Back at the Ranch

That money came from somewhere with foreign nationals providing considerable purchasing in the period. Treasury data reports that for the year prior to November of 2015, the ten largest (by percentage) net buyers of treasuries added $309.2B (see table below).[11]

The Tide Falls But Boats Still Float-PE-graph3

As stated previously, the economic velocity in the United States and Georgia has been significant. Anecdotal evidence from equity sources indicate that this low interest rate environment has provided needed liquidity in markets where businesses have previously been unwilling or unable to access capital.

Monetary policy within commercial and main street banking has been tightened significantly, but it has not become an inhibitor of access to capital. Banks have no option but to grow within this expanding market and that injects more capital into the market. Local delivery methods for institutional equity reward individuals who are able to place capital over individuals who are able to place capital safely.

Individual private equity and venture investment topped $2B in the southeast for the previous cumulative four quarters for the first time in 2015 since the first quarter of 2002. Beginning in the second quarter of 2013 and continuing through the most recent data available, trailing four quarters of deal volume has exceeded 250 transactions for the period each quarter—a feat that has not been attained in the southeast except for twice (Q1 of 2008 and Q1 of 2004) since the second quarter of 2003.[12]


Plenty of volatility exists in the world. While investors typically look for yield in such circumstances, safety seekers looking to protect massive currency investments will keep interest rates low in the hopes of guaranteeing that a dollar will still be a dollar tomorrow.

While some sectors will be hit by this volatility, systemic deterioration throughout the U.S. economy is unlikely. Economic fundamentals and job growth remain strong and the general consensus among pre+equity firms (those that will be seeking funding) and equity providers is that this is a market in which one needs to expand – banks gotta bank, businesses gotta transact and investors gotta invest.

Liquidity in capital markets will continue to flow until someone messes something up. No one knows who that will be or how they’ll do it, but for now, the music is on and everyone has a chair.

Link to whitepaper


[1] Business Insider (Australia), “China Has Already Created 7 Million Jobs This Year.” July 20, 2015. Available online at

[2] Zumbrun, Josh “Warnings Mount, but Recession May Not Come to Pass.” The Wall Street Journal 25 Jan. 2016

[3] O’Driscoll, Gerald, Jr. “The Chances of a Global Meltdown.” The Wall Street Journal 26 Jan. 2016

[4] Zumbrun, Josh “Warnings Mount, but Recession May Not Come to Pass.”

[5] AAA Fuel Gauge Report, “National Average Prices” (updated daily) as of January 28, 2016

[6] UGA Today.UGA experts predict a better Georgia economy in 2016, but slower job growth.” Available online at

[7] Bureau of Labor Statistics (News Release)Atlanta Area Employment – November 2015” Available online at

[8] Federal Reserve Bank of Atlanta Regional Economics.  January 7, 2016, “Data Digests.” Available online at

[9] Bloomberg Business “As China Dumps Treasuries, World Sees No Better Place for Refuge.” January 10, 2016. Available online at

[10] ibid

[11] Department of Treasury/Federal Reserve Board. January 19, 2016. Available online at

[12] PriceWaterhouseCoopers/National Venture Capital Association, Money Tree Report. 2016. Available online at