January 31 Economic Overview
In 2009, economic catastrophe was averted… just! Today’s stability is worryingly fragile: global demand is dependent on government support, papering over older and deeper problems.
The political and social consequences of the worst economic crisis since the Great Depression have been milder than predicted. The end of 2009 was a period of healthy recovery. The fact that there has been no angry upsurge in pessimism explains that composure. BRIIC (Brazil, Russia, India, Indonesia, China) now accounts for 45% of global growth, but final demand for exports rests on America.
Property prices may be stabilizing in the US, after falling 30% from their highs, but in UK, in Spain, and in Ireland, housing prices have further to fall.
Banking stress persists.
In 2009, troubled commercial loans in the US increased five times, to $68 billion. Are we to learn anything from the 20 years Japan has needed to begin recovery after they dragged their feet making hard decisions about their problem banks? The pupils are worse-off than the teacher was. Our global turmoil makes Japan’s problem small, in comparison. The West has a more flexible system and acted more decisively in pumping money into the economy. However, overly optimistic signs of economic recovery must not fool the West. The banks have huge write-downs to make on their loan portfolios, industry is burdened with excessive capacity and household debt levels remain high. Hotel delinquencies increased to 14% from 1.2% and overall delinquencies were 6.7% versus 1.3%.
There is a specter of asset bubbles in commodities markets and distortions will get worse, since government openly admit that they are forced to keep financial conditions too loose, for too long. In the US, we have lost more than seven million jobs and over 10 million full-time jobs last year.
Expect all kinds of shocks. There will be significant pockets of weakness in coming years. There is no way that a sustainable economic cycle can get underway.
Business needs rules and those rules need to be followed.
Capitalism has the tendency to form cartels, but tend to collapse on the weight of its own inventiveness. Our Real success depends on moral sensibility and institutions of governance, a democratic system of laws and social institutions- people yearn for a sense or moral purpose. Moral progress is up to You and to Me. Let’s get our harness on!
There are no straight lines in the stock market.
Economic Overview, December 31st 2009
The calamitous economic decline experienced worldwide, over the past two years would normally be followed by a robust recovery. Not so, this time around. We are in a dull heavy calm …and this is best we can hope for.
In 2010 the US economy will struggle to show 2-3% real GDP growth. Interest rates will remain low but unemployment will remain high or even rise. The government stimulus plans are, and remain, too small. Jobs have simply evaporated. Replacing them with new industries and employment is a slow process, particularly with credit scarce. Innovation is our hope. Where is Silicon Valley, Boston, Austin, Denver, Miami and New York? Come on guys, roll your sleeves up and pull up your socks.
Ex Fed Chairman Paul Volcker sensibly suggested that Banks be legally barred from proprietary trading of speculative financial instruments. Let hedge funds do as they want, they can go bankrupt for being wrong. But it is their money they are losing, not the taxpayers’.
We cannot say that about our banks, as Citigroup and Bank of America among others, gleefully learned. They are too big to be allowed to fail. At this moment the banks are laughing behind their hands. They are up to their old tricks: trading currencies, and financial futures, rewarding huge bonuses, already. With your money! We must build a financial system that produces long term businesses and business credit, not credit for speculation.
The post-crisis economic landscape is becoming clearer. High Debt and high unemployment rates imply a long hard slog. We must devise strategies for future growth rather than tactics to exploit anomalies in the market. Emerging markets: India, Indonesia, Brazil, Russia, South Africa and China are key to growth. With the US, China has become an indispensable nation.
In 2010, We will remain in an environment of pervasive tension. “Where is John Gault?”
December 2009 Economic Overview
The rally in risky assets is proving hard to stop. Low interest rates have been the main driver, though having limited alternative markets or currencies to invest in must share the blame. But we must not mistake the stock market for the economy. As stock and commodity prices continue strong, there is a tendency to believe that the economy has bottomed out with them. This far from the truth.
With interest rates near zero, investors- individuals and institutions- feel compelled to put their unusually high cash balances to work. The stock, and the commodities markets offer a return, though variable, higher than can be garnered in the bond market.
Company profit margins have held up well because industry has been able to shed jobs without lowering end prices markedly. Companies are saving cash and cutting back on capital spending. Banks are not lending, period!
Consumers are repaying debt, and are loath to take on any new debt. Consumer confidence is fragile at best. Retail sales have been good but are due mainly to government sponsored incentives- cash for clunkers. Lower mortgage rates and the perception that interest rates will remain low for a long time, buoy confidence, but the hand outs will end, as will the enthusiasm. There are just too many imponderables to make man light of foot, mind, and spirit.
Commercial loans outstanding, are over $3 trillion and over 50% of that number is held on the books of the banks. The entire profile of the commercial loan market is in peril.
Unquestionably, the loosening of rules of the credit markets and innovations and securitization created the illusion that risk could be eliminated. These monsters must be dismantled. Recently Ex Fed Chairman Paul Volcker made a Wake up Call to the financial community. He called for taking proprietary trading completely out of the banks and putting it totally on the hedge funds dealers’ books. “If you fail, fail. The stock of the hedge fund is lost, but no one else is affected. “
Then here comes Dubai. Dubai, unilaterally rescheduling its more than $8 billion debt, while their entire debt is over ten times that amount, sent shivers up and down the spines of the entire banking world. The fact that Abu Dhabi did not step into the breech signals, at best, that wealthy Abu Dhabi is becoming choosier in bailing out its energy poor neighbor. Greece, Latvia, Ireland and several other strung out Euro economies are eyeing Dubai longingly, if not imitatively. Tick, Tick, Tick.
November 2009 Economic Overview
Consumers are snatching at any evidence indicating that this recession is ended. Reported 3rd Q GNP was up, subject to subsequent adjustment. Durable goods orders for the month were up. Home sales were positive for the first time in over 18 months two month ago, thought they were down once again in the last month.
Anything indicating that the worst is past makes headlines.
The drug addict wants to believe that he is cured.
Whittaker Chambers said, “To live is to maneuver,” and that is exactly what everyone is doing – maneuvering to find something evidencing the end of the fall has come. But we should not, however, want to kill crises, Crises are the alarm bells of reality.
No question that the $878 Billion Stimulus Package prevented a collapse of not only our economy, but also of the world’s economies. Without ours, other countries such as the UK, Ireland, and Spain would have failed miserably. Without the Stimulus Package, we would have had an economic debacle in 2008, every bit as bad as we had in 1929. We dodged a bullet.
Most importantly, the stimulus package will end and we need a new path, or at minimum, planning for a new path.
Debt accumulation is bad; bad for government; bad for industry; bad for the people who allow themselves to be sucked into the morass of debt. There is no denying that over the last 10 years, the entire economy was made drunk by sipping the elixir of cheap money, using unrealistically inflated asset prices in stocks and real estate as collateral.
What was unnoticed and was hugely unpopular was the fact that from 9/11, the US and the West generally, entered a 30 years war with fundamentalist Islam. This far, 10 years into the battle, we have not found the handle. We can only hope it won’t take another 20 years to find it.
The sudden economic collapse was set off by the implosion of the sub-prime mortgage market, accompanied by huge numbers of job losses, and by a virtual shutdown of consumer spending. Mortgages holders were suddenly confronted with ‘inverted mortgages’, mortgages greater than the value of the assets collateralizing the debt.
What was lost can be restored.
It will take time, time to establish goals, objectives, and strategies. We cannot continue with a financial system being held hostage by a few monster financial institutions too big to fail; that are immune to market vagaries, or immune to regulation. These mega institutions are of no visible benefit to the everyday citizen; where there is little or no trickle down, save for the salaries of their employees.
Periodically, during the hay day of the economic boom, flaws in the system surfaced briefly and were noted by regulators and even by market participants and money managers. But people who could have prevented the flaws, notably regulators choose to wait because they were enjoying the limelight of the euphoria of an artificially robust economy.
The system was infiltrated by beneficiaries of the system. No one was regulating the regulators. It required a decision to use the judicial system to bring back into control that reigned in the exuberance. The regulators on ’site’, would not be around to clean up the mess, or clean out the stables.
What is needed to restore economic strength?
The power of the mega- financial institutions must be cauterized. The political power of these institutions must be eliminated. Conquering unbridled speculation and speculators is a MUST. The economy is not out of the woods yet. The bottom is going to be long lasting. A ‘New Deal’ at grass roots is called for
After the economic implosion, the US populace wanted a ‘Roosevelt Moment’ with the election of Obama…
Create jobs is the first requirement. Recognize everyone’s right to have a job, a right to earn enough to make a decent living; create trade in an atmosphere of freedom; provide programs that achieve good health and achieve good education. And finally, create a sense of security. Without security at home, you cannot have security abroad.
