The American investor
rush into bonds defies common sense. The income they generate is minuscule,
the more so on an after tax basis, and with interest rates at all but
record low levels, the potential for capital appreciation is limited,
to say the least. For this to prove a sensible investment will require
two things. Inflation must remain subdued - possible but not probable
given the amount of liquidity pumped into the system, the age-old tradition
of governments inflating their way out of untractable debt problems,
and the pressure of a growing global population & rising living
standards on resource prices. And interest rates must remain low - which
will require a willingness by the Fed not to raise interest rates if
inflation were to rear its ugly head & by foreign investors to continue
buying UST securities at current interest rates, when in recent years
they have lost more on the US dollar’s depreciation against their
own currencies than they generated in interest income.
It reflects on North
America’s near-term priorities & longer term economic prospects
when its working age adults average 13 days of vacation a year (vs.
the Brits’ 26 & the French 38) while its childrens’ school year
& days are among the shortest in the world.
In 2005 China’s economy
was half the size of Japan’s; this year it surpassed it as the world’s
second-largest (along the way having tripled its copper-, & quintupled
its iron ore-, imports). There is a lesson here for the US : the compounding
effect of growth at 8-10% vs. that of 0-2% can amazingly rapidly close
what once seemed all but inbridgeable gaps. And there is another lesson
for the US in the Economist’s assessment of Japan’s basic problem
: “it suffers from a gross misallocation of resources, both financial
and human ... it has long kept the cost of capital low, to ... help
stragglers ... the system almost guarantees that fresh capital goes
to the losers of yesteryear ... it has lost its knack for getting the
best out of its human capital.” (similarly in the US in recent
decades the ‘best & the brightest’ went to Wall Street
to do things of limited, if any, real economic value - as Goldman’s
CEO conceded last year - rather into economically worthwhile
things like developing new technologies or educating new generations
of scientists & engineers).
At the end of WW II,
the average American home owner had 80+% equity in his home. Over the
next 20 years this slowly declined by one quarter to just over 60%,
whence it rose to 70% by 1980, only to decline again to 60% by 1990,
at which level it held more or less steady until 2004. But then ...
BOOM ... it skidded to 35% in just four years, from which level it has
since recovered to 38%. And Alan Greenspan wants people to believe he
couldn’t foresee the potential consequences thereof? He’s selling
himself short!
The Canadian authorities
have ‘rolled up’ an alleged homegrown terror plot involving three
Muslim Canadian residents, a medical doctor, an X-ray technician &
a former engineering student. Whether or not they will ultimately be
found guilty or not, press reports that the Montreal Muslim community
of which they were part has put its wagons in a circle around them may
have the unfortunate effect of strengthening some people’s belief
that all Muslims living in Canada want the privileges, but not the responsibilities,
associated with living in, & have no loyalty to, this country.
The scope of the floods
in Pakistan, that now are abating but likely not soon or fast enough
to let farmers get on with the fall planting of grain, can be gauged
from the fact that at one point the flow of water in the Indus River
was 40x normal (prompted first in late July by a cloudburst in its upper
reaches that dumped over a foot of rain in a single day, i.e. more than
usually falls in an entire month of monsoon rains, the effect of which
was subsequently aggravated by weeks of unusually heavy monsoon rains).
US analysts are forecasting
38% corporate earnings growth this year & 22% more in 2011. But
only 29% of their 160,000 BUY/HOLD/ SELL recommendations identified
by Bloomberg fall in the BUY-, & 57% of them in the HOLD,
i.e. cop-out-, categories.
British scientists have
unlocked wheat’s genome secrets. This is said to clear the way for
developing higher-yielding strains that will help alleviate the global
grain situation. But there are two problems. First of all, this will
take time. And more importantly, farming is not simply a matter of creating
something out of nothing; it is an intricate process that converts solar
energy, water & plant nutrients into plant material. So higher-yielding
wheats will require more water & fertilizer inputs, in the right
amounts & at the right times to fulfill their promised potential
(the lack of which proved the Achilles heel of India’s earlier, Dr.
Norman Borlaug-inspired Green Revolution). And the availability
of water for irrigation purposes is becoming especially problematic.
Israel’s military spending,
at 7%, is the fifth highest globally in GDP terms, exceeded only by
Eritrea (20.9%), Georgia (8.5%), Saudi Arabia (8.2%) & Oman (7.7%)
and way above the US (4.3%), India & Pakistan (2.6% each), the UK
(2.5%) & China (2.0%)
-o-o-o-o-o-o-o-o-
GLEANINGS VERSION
II
No. 376 - September
2nd, 2010
VALUE OF GOODS
TRADE RISES (EJ, Business Browser)
· The Geneva-based
WTO reported on September 1st that in the First Half
of 2010 the value of total world merchandise trade was up 25%
YoY.
Outside the US 12-mile
zone things may be less gloomy than those inside are
being led to believe.
IMF WARNS NATIONS
OF RISKY DEBT BURDENS (WSJ, Bob Davis)
· Three IMF staff
papers made public on September 1st warn that a number of
countries are running perilously close to their “debt limit”, the
point at which markets start raising interest rates on new borrowing
out of concern of a possible default. Of the 23 wealthy countries they
analyzed, Greece, Iceland, Italy, Japan & Portugal were close to
that point, and Britain, Ireland, Spain & the US moving into ‘dangerous
territory’. But they were relatively upbeat on Greece; while the EU
& the IMF have loaned it US$142BN & by their own estimate its
debt-to-GDP ratio will hit 150% by 2013 despite drastic fiscal action,
and some analysts believe the Greek people won’t tolerate the austerity
needed & demand a default, the IMF economic hotshots say a number
of countries over the past 30 years have cut spending on the scale required
of Greece without defaulting, with one of them saying that ”Once countries
endure pain of adjustment, they persevere … rather than default”.
And with much of the debt problem being due to healthcare spending &
pension obligations, they say the debt problems can be solved by getting
healthcare spending & pension costs under control & boosting
growth
This is
‘economic PhD. talk’, remote from the real
world. Most of the countries they refer to were in the developing world
where the ‘will of the people’
is more inchoate than in Greece.
WEST FALLS AWAY
IN NEW WORLD ORDER (Troy Media, Gwyn Morgan)
· Who could have
predicted that the once invincible American greenback would have to
be propped up by China buying US Treasury Bills? HSBC’s London-based
Chairman Stephen Green sees the new world order as a triangle, with
the Asian “workshop” countries on one side, Western consuming nations
on another & resource producers on the third. As Western consumers
buy goods made in Asia with fuel & raw materials supplied by the
resource producers, the latter two end up with exchange reserves &
the former with debt. The West is past its “Best Before” date &
faces a secular decline in its standard of living.
· But Canada may
be an exception. It has a relatively
modest national debt. Its economy weathered the recession reasonably
well & is growing jobs. But most importantly, as both a consuming
& resource-based nation, it occupies two sides of the triangle.
So,as the third of the world’s population living in China & India
experience the most rapid improvement in living standards ever &
need a constant flow of resources to sustain this, Canada can help supply
them, thereby creating an opportunity to cut itself loose from the apron
strings of a weakening United States. But to do so we must quit worrying
about the accidental death of a few ducks & denigrating resource
developers as “hewers of wood and drawers of water”, ignore environmentalists
who want to turn Canada into a vast national park & turn the regulatory
process for developers from a nightmare into a responsible & constructive
process.
He makes some good
points. But as the ex-CEO of one of Calgary’s biggest oilpatch companies,
he myopically sees resource development as the be-all & end-all.
But letting development happen on a
‘let her rip’ basis is neither
“responsible” nor “constructive”. As to the national park idea,
there is growing empirical evidence that there is more long-term sustainable
development potential in tourism than in resource extraction, especially
for a country, like Canada in the period ahead, that
it is replete with space in a rapidly urbanizing world in which many
people have increasingly less of it.
THIS IS NO GARDEN
VARIETY RECESSION (G&M, David Rosenberg)
· “Plain vanilla”
recessions are caused by inflation & excessive manufacturing inventories
but depressions by the bursting of an asset bubble & a contraction
of credit. In a depression interest rates go to zero but there is no
revival in credit-sensitive spending. In a depression the banks sit
on bags of cash but won’t lend. In depressions attitudes towards debt,
discretionary spending & homeownership change. In a recession
the economy is revived, & in a depression sustained, by government.
You decide which best fits the bill today.
Toronto-based Gluskin
Sheff’s David Rosenberg, formerly Merrill’s North American Economist,
has been consistently bearish for some time & may be overstating
the case.
ANGER AGAINST POLITICIANS
GETTING MORE TOXIC (G&M, Judith Timson)
· Stress, ignorance
& fears that those in charge are not just not fixing anything
but making things worse are prompting anti-politician anger that’s
getting more palpable by the minute. In the New York Times, David Brooks
recounted how during a recent vacation in Montana everybody he met had
expressed disgust with Washington, leading him to the conclusion that
“the gap between the ... masters of the universe and the rest of the
country is just too wide. Nobody is listening. Minds are made up. The
situation is dangerous.” In Toronto a loud-mouthed populist
leads the polls in the mayoralty race despite his obstructionist record
at council meetings, and his having admitted to marijuana possession-
& DUI charges in the US & one of assaulting his wife in Toronto
(which was later withdrawn). But this may actually be a plus with the
big & growing “I’m mad as hell and I am not going to take
it anymore” crowd that feels short changed compared to, say, refugees,
immigrants & public servants.
The
“ME”-generation is more cognizant of the mote in others’ eyes
than of the beam in its own; thus the Republican tax-hating grandmother
running against Democratic Senate Leader Harry Reid in Nevada depends
for her lifestyle in part on her husband’s public servant’s pension.
ECONOMIC DOWNTURN
DEFYING SOLUTIONS (msnbc.com, John W. Schoen)
· The latest economic
data (that revised Second Quarter economic growth from an unexciting
2.4% to an anemic 1.6% annual rate) had doomsayers pronouncing that
the recovery was a mirage & that the recession that started in December
2007 never ended (interestingly enough, the National Bureau of Economic
Research panel that determines the onset & end of recessions has
yet to declare it officially ended - not unlike the early Thirties
when it refused to be beguiled by several false starts?). If the
unprecedented pump priming of 2008 & 2009 isn’t working it’s
because this recession is unlike any since WW II; thus according to
David Rosenberg, “After all the monetary, fiscal and bailout stimulus,
the economy should be roaring ahead ... this is not a traditional recession.”
· While Fed Chairman
Bernanke on August 27th told the world the Fed isn’t out
of “bullets” to pump more life into the economy (Congress, with
voters in a mid-term election year madder than hornets, being in no
mood for any new fiscal initiatives), the fact remains that with US$1+TR
on deposit with the Fed (earning a measly 0.25% interest) banks
aren’t short of cash to lend (validating once again the market
saying that “you cannot push on a string” - i.e. make lenders lend
or borrowers borrow if they see no sense in it & don’t want to).
· Other post-war
recessions were driven by drops in demand that in due course created
enough pent-up demand to prompt higher levels of output, more hiring
& renewed growth. What makes this one different is that household
wealth (much of it belonging to a generation nearing retirement)
has shrunk by US$11.7TR from its 2007 peak, that commercial banks had
to write off US$350BN in bad loans (which won’t be the end thereof),
that federal deficits have grown to unprecedented levels, that state
& local government face massive budget shortfalls (that have
forced them to slash spending since by law cannot run deficits,
thus undoing the effect of much of Washington’s pump priming) &
that the housing market is acting like a
“boat anchor” on the economy.
The hoi polloi’s
gut tells them the party is over; but that doesn’t mean they have
to like it, & they don’t; so they act
like petulant children upon first encountering the word
‘NO’.
ROUBINI SAYS FED
IS ‘RUNNING OUT OF POLICY BULLETS
(Bloomberg, Caroline
Salas)
· He told Bloomberg
Radio that “We cannot prevent slow growth for a number of years ...
We are running out of policy bullets” & that, with the banks sitting
on US$1+TR of excess reserves, “monetary policy is becoming ineffective.”
And he prophesied Third Quarter GDP growth of < 1% & a 40% chance
of a ‘double dip’ recession (while the consensus still expects decent
Second Half GDP growth, albeit shaded down from 2.80% to 2.55%).
His current economic
guru status is based on his having called the recession before anyone
else, & he has ever since been aggressively cashing in on it.
U.S. JOBLESS CLAIMS
DECREASE (EJ, Business Browser)
· The Labor Department
reported on August 26th that in the week before new jobless
benefit applications had declined for the first time in a month, &
more than expected, by 31,000 to 473,000. On the other hand, the number
of those getting pogey exceeded 10MM for the first time in four months,
due to an increase in those getting extended benefits.
At the macro level
we may be seeing a breather in a weak recovery, not the much- ballyhooed
“double-dip”; but at the micro level, on Main Street, ahead of the
mid-term elections, that doesn’t matter : the only thing that counts
there is the stubbornly high unemployment number. The Labor Department
also reported that productivity in the spring quarter fell by the most
in four years, indicating that companies had reached the limit of their
ability to squeeze more work out of their existing work force.
CONSUMER SPENDING
EDGED HIGHER IN JULY (AP, Martin Crutsinger)
· After three lacklustre
months (it fell 0.1% in April, rose 0.1% in May & was flat in June)
consumer spending rose by 0.4% in July, the most since March’s 0.5%,
helped by a jump in demand for automobiles (which in August fell
off dramatically to less than 1MM units in what traditionally is a good
month for car sales). While some remain concerned this may be unsustainable
if unemployment remains high, Peter Newland, an economist at Barclay’s
Capital Research views the higher July spending as a good omen for the
Third Quarter.
Factors supporting
Newland’s more-optimistic-than-the-common-wisdom view include the
savings rate declining to 5.9% of after-tax income from 6.2% in June
(the highest rate in nearly a year), private wages & salaries rising
at US$23.3BN annual rate in July after declining at a US$45BN rate in
June, & the Conference Board’s Index of Consumer Confidence in
August rising to 53.0, from an upwardly revised 51.0 in July,
rather than being flat at 51.0, as expected. Morgan Stanley’s
Richard Berner made an interesting &
seemingly relevant point in 2007, namely that, while a shift to a higher
savings rate initially has a disproportionate impact on consumption
spending (since every incremental dollar saved cuts into consumption
spending by the same amount), once the transition is completed, consumer
spending starts growing again in line with income growth.
MANUFACTURING SECTOR
EXPANDED IN AUGUST (MSNBC)
· The ISM’s Manufacturing
Index rose to 56.3, from 55.5 in July, while a decline to 53.0 had been
expected (with exports & higher domestic business capital spending
getting the credit). This was the 13th month in a row this
index has been in positive territory (i.e. > 50), although at its
current level it is still well below April’s 60.4 (which had been
a six-year high). And its index of manufacturing managers’ hiring
intentions rose to 60.4, a post- December 1983 high. On the other hand,
the flow of new orders abated to a 12-months’ low, after surging earlier
in the year, which could slow manufacturing growth in the second half.
Less positive developments
included construction spending slipping 1.0%, twice the rate expected,
to a US$805.2BN annual rate, an eight year low, & reports that private
employers may have cut 10,000 jobs in August (while
in July they had created 37,000 new ones, a
downward revision of the initially-reported 42,000).
ABBAS AND PALESTINIANS
SHOULD DIE (Reuters)
· The 89 year-old,
Iraqi-born rabbi Ovadia Yosef is the spiritual leader of the ultra-Orthodox
Shas Party, a key member of the Netanyahu coalition. In his weekly sermon
to the faithful on August 28th, a few days before face-to-face
negotiations were to resume in Washington, he told them “Abu Mazen
and all these evil people should perish from this earth ... God should
strike them and these Palestinians - evil haters of Israel - with a
plague.”
Coming from someone
who in the 90's broke with other Orthodox Jewish leaders by voicing
support for a territorial compromise with the Palestinians, this may
be more a sign of the hardening of attitudes (& of growing fears
they’re about to be sold ‘down the river’?) on the Right than
a function of his dotage. And with the ten-months’ building freeze
on the West Bank (but not East Jerusalem) set to expire on September
26th, right
wing settlers are already gunning their bulldozers’ engines in anticipation
of resuming building with a vengeance on that date (in fact, they announced
on September 1st that they
would resume building forthwith - further confirming
their fears of a for them adverse outcome
of the negotiation process that is
about to start in Washington?).
IT’S TOO EARLY
TO WRITE OFF DIRECT TALKS (HA’ARETZ, Aluf Benn)
· The common wisdom
is that “nothing will come of it”. But the domestic political environment
is more favourable than perceived by some; for Netanyahu has no challengers
&, due to greater security & an excellent economy, more political
strength than any of his recent predecessors. Abroad it’s a different
story : the country is increasingly isolated due to its endless conflicts
with its neighbours & the growing opposition to its occupation,
settlement expansion & excessive use of military force. Overarching
all is Iran’s growing nuclear threat, which he came to power to save
Israel from. But for that he needs US support, & it comes at a price.
So, while his regime is seen as “hard-line”, it really is the most
dovish since Yitzhak Rabin’s 15 years ago : he has obeyed every one
of Obama’s dictats, accepting a two-state solution he opposed his
entire career, declaring a 10 months’ moratorium on building in the
West Bank & slowing down building in East Jerusalem, and easing
the siege of Gaza after the Turkish flotilla debacle. The moment of
truth will come later this month with the end of the building moratorium
: if Netanyahu can show enough progress to keep his coalition intact
& Mahmoud Abbas at the table, there is hope that ’s one year deadline
may be met. And, since by then Iran is expected to take its next nuclear
step, next summer could be a double whammy decision time in the Middle
East.
Netanyahu may not
be as strong domestically as he claims. Defence Minister Ehud Barak
(who recently said Israel might be willing to turn parts of East Jerusalem
over to the Palestinians, only to be immediately countermanded by a
Netanyahu aide saying “Our position is that Jerusalem will remain
the undivided capital of Israel”) has told him his Labor Party will
leave the coalition by year end if there is more building & no serious
progress in the talks, and wants him to dump his hardline rightwing
coalition partners in favour of Tsipi Livni’s centrist Kadima Party
(which would be a bitter pill for Netanyahu to swallow
since her cooperation would come at a price). Either way Israel’s
political elite may soon be faced with nasty choices they have long
avoided. But what was fascinating was Netanyahu’s reaction to the
killing near Hebron in the West Bank, the day before the talks were
to start, of four settlers by a lone Palestinian gun man (for which
Hamas subsequently took credit, as it did for the wounding of two more
the following day near Ramallah). For, with Secretary Clinton by his
side, he told reporters “We will not let terror decide where Israelis
live or the configuration of our final borders. These and other issues
will be determined in the negotiations for peace we are conducting...”
For this was a stark departure from
the Israeli tradition to react in an
all but Pavlovian manner to let such incidents shipwreck
whatever peace discussions/negotiations
were ongoing at the time, thereby handing a few crazies with guns &
explosives a big hammer with which to
smash the process to smithereens (thus appearing
to validate both the writer’s claim that, outward appearances to the
contrary, Netanyahu is under Obama’s thumb, and
the settlers’ fears of a for them unhappy outcome).The primary outcome
of these talks was an agreement to meet every two weeks, starting on
September 14th in Egypt.
KEY INDEX INDICATES
REBOUND, EASING FEARS
(CD, Hu Yuanyuan &
Wang Xiaotian)
· In August China’s
Purchasing Managers’ Index rose 0.5, to 51.7.
This came after declining
for three months from April’s 55.7.
EUROZONE CONFIDENCE
GROWS (WSJ, Brian Blackstone)
· The EC’s Index
of Economic Sentiment, reflecting both business & household sentiments,
in August rose to 101.8, from 101.1 in July. In announcing this the
Commission also noted a remarkable three point increase in the Consumer
Confidence Index. Combined with the news of 3.9% annualized Second Quarter
growth, this prompted speculation that, when the ECB Board met on September
2nd, it would revise its 1% GDP growth forecast for 2010
from 1.0% to 1.5% (in the event it raised it to the
‘1.4% to 1.8% range, centered on 1.6%’, & for 2011 to the 0.5%
-2.3% range, centered on 1.4%, vs. its previous forecast of
1.2%).
· This is largely
due to improved economic activity in Germany (where a boom in exports
produced 9% annualized growth in the quarter) & other Northern European
countries which, however, is expected to decelerate as the year progresses,
due to a slowdown in demand from China & to fiscal tightening in
parts of Europe starting to bite. And while the ‘fringe countries’
(Portugal, Ireland, Greece & Spain) remain a drag on total Eurozone
growth, their combined GDP of less than 20% of the total won’t be
enough to derail the expansion.
The US may have become
a brake on, rather than an engine of, global growth.
U.K RETAIL SALES
SURGE (EJ, Business Browser)
· In August British
retail sales grew at a faster-than-expected, three year-high rate, suggesting
July’s surge in retail sales wasn’t a one-of event & that the
economic recovery seen in the Second Quarter was being sustained into
the Third
Clothing sales
growth was the strongest in the 22 years for which data are available.
HAS ZUMA PLAYED
HIS LAST CARD? (BBCNews, Pumza Fihlani)
· South Africa’s
World Cup’s success story is unravelling as its poverty-, unemployment-
& economic inequality problems resurface. Cosatu, the South African
Trade Union Congress, a key player in the “Zuma for President” campaign,
is now locked in a bitter pay dispute with his government just weeks
before an important ANC policy conference. One million public sector
workers are in the third week of a strike, seeking an 8.6% wage increase
while the government has offered 7.0%, twice the rate of inflation.
There are deep policy divisions between the government & Cosatu,
& even deeper ones with ANC’s youth wing, another traditional
Zuma core base of support (whose firebrand leader, Julius Malema, he
tolerated until he praised President Mugabe, upon which Malema made
things personal by accusing Zuma of kowtowing to the Queen while in
Britain. And now he is being criticized more widely for being on a trade-boosting
mission in to China rather than attending to matters at home.
Giving in to their
demands risks discombobulating the local & global business community
while giving more money to those
with jobs cuts into the resources available
to create new jobs for those
without any at all
in a country in which the unemployment rate is North of 25% (Cosatu
since turned down a new 7½ government offer).
DEADLY RIOTS IN
MOZAMBIQUE OVER RISING PRICES (BBCNews)
· During demonstrations
protesting against the recent rise in the prices of essential goods
six people were killed when the police used live rounds because they
“ran out of rubber bullets.” Bread prices have risen by up to 30%
due to the weakening of the local currency, the Metical, against the
South African Rand. One Maputo resident told Reuters “I can
hardly feed myself - I am enraged by this high cost of living.”
This may only be a
harbinger of things to come in the poorer parts of the world when the
recently higher wheat-, & other grain-, prices start percolating
down to the grass roots.
