Translator
September 2010 Economic Overview
The global economy slumbers. Except for Germany and its nearest trading partners Austria and the Netherlands, and the UK and France, the world economy is weak: Stimulus programs are running out; Businesses are not hiring; Consumer confidence continues low; inventory restocking has begun to slow down; and consumer spending is weak. The German economy is firing on all cylinders reporting a nearly 9% annualized rate. Someone out there in the world economy is still spending. Exports to China for infrastructure equipment and luxury automobiles lead the way. The rest of the Eurozone is less encouraging, with Greece, Portugal, Ireland and Spain showing little progress. It is too soon to be sure the Eurozone is back on its feet, though there is anecdotal evidence that Germans have begun to spend more liberally.
Fears of a double dip recession because unemployment remains around 9.5%, the third straight month of no growth makes the economic outlook is unpromising. Unemployment Insurance claims reached 500,000 last week. There is scant evidence of life in the housing market. Banks remain unwilling to lend. Consumer Confidence and spending indices remain at a five month low. Demand for autos is anemic and world trade shows little fire, layoffs continue across the board. Retails sales showed an actual decline for the month and consumer confidence continues to hit new lows. Corporate America is flush with cash but shy to hire. Increased production seems to be met with its existing workforce. But one glimmer of hope, there has been an increase in hours worked by presently employed, a prelude to hiring new workers.
Rich-world trade has recovered. So long as protectionism can be held at bay, there is hope. Urging China and India to commit to deeper cuts in their tariffs on manufactured goods imports and bringing services in to the discussion, would be helpful. Keeping markets open will stimulate recovery.
It will be a hard slog, but do not expect the American recovery to grind to a halt. Economic value originates in ideas. America has no shortage of those.
From a portfolio view, the end of the bond market is here. Interest rates can go no lower which means the next move in rates is up, and that is not good for holders of bonds. Can a strengthening stock market be far behind?
August 2010 Economic Overview
The outlook for the world economy is unusually uncertain. The US Financial Reform Bill was the mouse that roared. It restrains banks’ proprietary trading but does not stop it; banks can still invest in hedge funds and in Private Equity firms; as for the new consumer protection agency, we will have to see if it actually works. Enforcement is the challenge. There will be financial blowouts, but hopefully, not soon.
European Banks’ Stress Test Report, at first blush, appears to have been a cousin to the roaring mouse, above. It seems to have been more to reassure, than to examine. Of the 91 banks tested, only seven were found wanting in capital adequacy. Markets yawned. The reports was more a damp squib, than an real effort to assess actual financial worthiness. There was nothing stressful about the stress test.
World output is growing at a 5% rate, but that rate will slow since emerging economies need to tackle rising inflation and possible asset bubbles. China is in obvious danger. India has several bubble-like events in real estate and their stock exchanges underway. US growth may slow as our government stimulus tapers off. But the specter of another recession is diminishing. American shoppers have returned to the shops. Prospects look grimmest in Europe and the worst is in governments and sovereign risk. Europe needs a painful fiscal adjustment but also needs profound structural reform. Southern Europe’s profligate governments must become prudent. Uncompetitive economies must shake up their labor and product markets. Northern European surplus current accounts economies must help by avoiding belt-tightening measures and by encouraging spending. Germany should stimulate growth and China should rebalance its economy to encourage domestic consumption. UK’s new government spelled out useful spending cuts. The US however, badly needs a plan to deal with its budget deficit. Frankly the judgment of politicians, generally unreasonably bad, poses the biggest risk to the world economy.
Stimulus is out and austerity is in, though fiscal stimulus remains the essential prop to the economy, worldwide. Fiscal austerity coupled with structural reforms would yield far higher growth, but it could be a recovery that is weaker and slower than it should be with austerity alone.
The US economy’s slow pace has become a test of American confidence and whether policymakers can implement ideas to increase job creation. Job recovery has cooled; tax hikes and regulatory changes loom; per capita incomes remain below 2008 levels; banks are not lending; households are still loaded with debt. No wonder there is uncertainty about the uncertainty.
Fed Chairman Ben Bernanke says the economy would be helped by setting policies to bring down the federal deficit. President Obama supports more aid to state governments to reduce layoffs. We must commit to bring long-term spending on health-care and Social Security into line with taxpayers’ ability to fund it. The Fed could put more money into the system. Finally we must get a long-term growth strategy that the country can embrace. What is the next big thing? Mobile Applications could boost the economy just as previous high-tech breakthroughs have. There were 7 billion software downloads in 2009, by 2012 consumers will be making 50 billion downloads; each a potential e-commerce transaction. As mobile e-commerce catches on, the global value of mobile commercial or financial transactions will exceed $600 billion. That’s economic growth. Can jobs be far behind?
July 2010 Economic Overview
World economic healing continues as a work in progress. The US economic stimulus plan is working, slowly. Job creation continues weak, only net 40,000 jobs were created last month and the jobless rate continues at 9.7%.
There are huge debts internationally producing a drag on the recovery. Many feel more stimulus is needed. The Financial Reform Bill being hammered out in Congress and among the G20 countries in Toronto, are a further drag on national and international recovery. This crisis period proves how inextricably linked our national economies are. Fedex, a noted economic bell whether company, produced earnings and revenues of plus 20% for their last quarter, being the only gleam of light.
America’s debt weakens national security and makes the world a riskier place. Entitlement programs and unfunded liabilities are growing in all Western economies. The solution: Vigorous economic growth in America and in Europe. In the 1920’s President Harding cut taxes and cut the federal budget sharply, though politically less likely these days, especially with the government being run by the Obama administration, but there is no other way out of our current malaise.
The EU agreed to publish the results of the stress test being conducted on its 25 largest banks. As for the Euro, the crisis is overblown. All of the most vulnerable economies- Greece, Ireland, Portugal and Spain, together, account for less than 20% of Euro area GDP. All the austerity programs underway come to less than one percent GDP next year, hardly a belt tightening. But the Euro area rescue package has only bought time, maybe three years, it has not solved any structural problems in the area.
But economic pain is likely to get worse in Europe. Libor is increasing, the overnight indexed swaps-OIS- is widening and credit default swaps-CDS- spreads are widening: All point to continued fear of a risk default or of a contagion.
China said it was going to allow a more flexible Yuan rate, implying an appreciation, but China’s current account surplus fell from 11% to 6% since 2007. Do not expect a surge. Germany’s current account surplus exceeds that of China. Germany would best assist the economic environment by doing something to boost its domestic demand.
June 2010 Economic Overview
There are glimmerings of hope, but the economy remains Janus Faced: for every good, there is a bad.
Housing prices have stopped going down and new home sales are beginning to show signs of life. But much of the positive is accounted for by the need of home buyers to get in before the incentive programs end shortly. Factory orders rose briskly, especially for commercial aircraft. But the unemployment rate is, though slowing, is stubbornly showing few signs of improvement. Bank lending remains on the sidelines. Most of the short term government incentive programs are drawing to an end, thus what signs of positive may prove ephemeral. The real test will come when interest rates are tightened. The negative consequences of our profligate past, will haunt us for a long time.
Questions remain of the Euro. The trillion dollar package created to shore it up is the ECB nuclear option likely to focus speculation on the Euro’s viability. Is it enough? Is it too complex, too many moving parts? Italy and Spain have announced measures to cut spending, but the Euro continues to weaken against the weakening dollar. We think the rate will approach par to the dollar.
Concern for particular sovereign debts continues, especially if Greece were to default on its debt though it now has a three year holiday. And the question remains, will Greece accept three years of austerity, imposed from outside? Street riots would suggest, NO! Fears of a wider sovereign debt crisis cannot be ignored, nor dismissed. Ineffective remedies limiting speculators continue to dodge the real issues of government spending excess. Fiscal discipline must return. As for the fear of contagion, is California our Greece? It is bigger, much bigger, and that is the problem: potential weakness there, and here.
The conclusion is that our best wish can be for only a moderate of US economic growth, but too, that implies a longish period in which the market can continue to build confidence and ultimately wealth.
May 2010 Economic Overview
Economic unintended consequences pervade the US. Is the party over? For the last 40 years, the US consumer has served as the engine to lead the US economy out of miasma. Is Unbridled economic growth undermining the Protestant ethic of self-denial? Conspicuous consumption has fallen into social disrepute. Real Thrift is Back! Thrift is becoming the way to redeem ourselves.
But there is a paradox of thrift. If individuals increase savings, there must be a consequent decline in industrial demand and unemployment rises. Japan, China, and Singapore have exported their excess savings, now amounting to trillions of dollars, by investing in the US. The inflow creates artificial demand in such areas as real estate and stock exchange assets. Booms and bubbles develop. But inflows stop and the party ends, Abruptly and Painfully. Think 2008/9. Now sluggish economic recovery not just in the US, but also world-wide, will expand the pool of global savings.
The US continues to suffer an innovation deficit. Where is the Next Big Thing? Is the US now evidencing a lack of confidence? Household spending remains constrained by high unemployment, modest income growth, and tight credit. China has reacted to its aggressive economic growth by raising interest rates. Greece has re-emerged as a hot spot with its borrowing rates soaring, after an EU and IMF proposal of monetary assistance appeared to be too little, too late. S&P just lowered the credit ratings on Greece, now BB+ (junk) of Portugal and of Spain. The Dollar (presently $1.32 to one Euro) should continue to strengthen. It could reach par: One dollar to one Euro.
Only a few glimmerings of positive: housing sales seem to be bottoming out, the consumer is becoming more confident, but unemployment remains stubbornly high, there is much to wish for and much to mend. This is a protracted recovery, if that is the right word.
April 2010 Economic Overview
And the Stress goes on and on and on.
It appears that Europe has hammered out a salvation plan for Greece. But it is still too little, too late and it’s only temporary. China’s government began to rein in lending. India raised reserve requirements and Brazil’s stimulus is being phased out. Central banks in the Rich World are beginning to unwind emergency liquidity facilities.
All this has knocked asset prices for a loop. Questions abound: the strength of the recovery is fragile. Favorite restaurants are busy, but few other businesses are seeing any traffic. New home sales have fallen to the lowest level, ever, in many countries. Second is the scale of the sovereign-debt problems. Finally, is the question of how well central bankers are at designing and coordinating the withdrawal of the stimulus packages.
The fight over Deficit Reduction has begun. Deficits are so large, and the bond market is getting impatient. Who gets the bill: Taxpayers, public sector workers, entitlement recipients, foreign investors, and future generations?
First, we must be honest about the size of the problem. Speculators did not invent the deficits.
Second, we must focus on economic growth. That will reassure markets. Increase tax revenues and reduce spending on unemployment, on entitlements and other welfare benefits. Avoid protectionist taxes, create more flexible labor markets, raise the pension age.
The crunch, especially in Europe, is between taxpayers and public sector workers. Spending cuts do better than tax rises, though some countries may be tempted to diminish their debts through higher inflation. Today that is not possible. We are heading into an era of austerity; the social cohesion of many nations will be put to the test.
Emerging economies are doing the best. India and Brazil are in good shape. China’s economy is vulnerable, but there are few signs that it will tighten too much, too fast. Key is their ability to re-orientate their economies towards domestic spending, thus pushing up the cost of capital.
In the Rich World there are reasons for gloom. There are few signs of private demand growth. Output is only restocking. un-employment , though seemingly stabilized, does not show any sign of reversing. Their singular problems of aging population and soaring health and pension costs are ingrained. Housing is wobbly; household debt is shrinking but from stratospheric heights. Consumer spending is subdued.
Europe and Japan, the outlook is less good. Japan has slipped back into deflation. In the Euro-zone, recovery, long before the Greek crisis hit, is faltering. Euro speculators focused their attention on Spain.
Emerging economies should unwind their stimulus and raise interest rates before inflation takes off. It’s too early to tighten in the Rich World, though aspects of increased inflation remains remote. Governments need to do more to control their deficits and boost economic growth, the sooner ,the better. Any rise in interest rates might itself spawn a higher risk premium on sovereign debt.
As for the US, this suggests that a bigger rise in yields than expected, and a worsening of its debt position. President Obama must craft a credible medium-term plan to cut deficits. The new Health Bill only adds to the deficit.
The market is likely to demonstrate a spiritless uplift. The economy and political vulnerability of the Fed virtually rules out any significant short or long term interest rate rises in 2010.
March 2010 Economic Overview
“Beware of Greeks bearing gifts” wrote Virgil in Book 2 of the Aeneid. Oh, had the Euro zone only listened! Greeks are presenting the Euro zone with a whopper now. Wishing that the Greek financing crisis an outlier does not make it so.
With hedge fund jackals at its throat, Greece is rapidly finding it impossible to get finance. Though tiny in respect to the grand alliance of bigger European economies, the fear of a contagion, spreading to Portugal, Spain, and Ireland cannot be ignored nor, dismissed. The Greek government was caught fiddling the books, and Greek workers are rallying in the streets to resist stringent measures to haul in its deficit. With over 60% of its entire workforce employed by the government, it is easy to see why bond markets do not welcome Greece into the borrowing markets. Problem is, that Portugal, Spain and Ireland share similar economic profiles with that of Greece. There now is fear of a contagion of reluctance spreading to these other economies?
The premium on Greek credit-default swaps has doubled in the last six months. Because Greece needs to refinance 51 billion Euros this year, it is forced to try to issue paper in a weakening market. Alarmed at the increase in premium, investors do not buy Greek debt without increased yields, thus reinforcing the cycle of concern and Greece’s inability to get finance.
Dubai and Greece will most likely be followed by others calamities. The road from government assisted credit creation to private sector sustainability is going to be long and rough. Slower than expected economic growth, ample liquidity, rising corporate profits under an umbrella of tacit government guarantees, mean equity markets should rise and bond markets stagnate. But the economic system remains vulnerable to an interconnected financial system. Buyer Beware.
Sniffing Blood, the more aggressive Hedge Fund managers have determined to short the single currency, “to parity with the dollar,” quoting some Wall Street Savants. Not satisfied that the Federal Reserve and Euro zone Monetary Authorities saved their desiccated industry from implosion a few shorts months ago, these Savants intend to force the Euro currency lower, but may also force the Euro zone into creating a ‘Federal Reserve’ of its own .
What is relevant to American investors is that taken together, all the troubled economies of Europe would equal the size of one systemic institution in the US. Greece is 2% of the GDP of that of Europe; California represents less than 1% of the US GDP. We should begin to focus more on Asia and other emerging markets.
January 2010 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.
December 31st 2009 Economic Overview
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.
