from Global Investing:
Phew! Emerging from euro fog
Holding your breath for instant and comprehensive European Union policies solutions has never been terribly wise. And, as the past three months of summit-ology around the euro sovereign debt crisis attests, you'd be just a little blue in the face waiting for the 'big bazooka'. And, no doubt, there will still be elements of this latest plan knocking around a year or more from now. Yet, the history of euro decision making also shows that Europe tends to deliver some sort of solution eventually and it typically has the firepower if not the automatic will to prevent systemic collapse. And here's where most global investors stand following the "framework" euro stabilisation agreement reached late on Wednesday. It had the basic ingredients, even if the precise recipe still needs to be nailed down. The headline, box-ticking numbers -- a 50% Greek debt writedown, agreement to leverage the euro rescue fund to more than a trillion euros and provisions for bank recapitalisation of more than 100 billion euros -- were broadly what was called for, if not the "shock and awe" some demanded. Financial markets, who had fretted about the "tail risk" of a dysfunctional euro zone meltdown by yearend, have breathed a sigh of relief and equity and risk markets rose on Thursday. European bank stocks gained almost 6%, world equity indices and euro climbed to their highest in almost two months in an audible "Phew!".
Credit Suisse economists gave a qualified but positive spin to the deal in a note to clients this morning:
It would be clearly premature to declare the euro crisis as fully resolved. Nevertheless, it is our impression that EU leaders have made significant progress on all fronts. This suggests that the rebound in risk assets that has been underway in recent days may well continue for some time.
So what exactly have investors and been doing while waiting for the fog to clear in Brussels? The truth on most benchmark prices and indices is "not very much" -- at least not since world markets got the collywobbles in early August about US downgrades and debt ceilings, euro sovereign debt angst and double dip recession. Yet, since the European stocks nadir in late September prodded the Franco-German alliance into more serious action, there has been some impressive market gains of between 10 and 20% across most equity sectors and national indices. More broadly, after a year of intense political and financial turmoil across the globe, developed market equities are only down about 4% year-to-date -- a 10 point outperformance on emerging markets, for example.
And the clearing of the euro fog now allows investors to start looking beyond the Brussels cauldron and review how the rest of the world is shaping up. What they find, surprisingly for those drowning in disaster commentaries, is‘not all that bad – especially, but not exclusively in the United States. There's been a string of more positive economic data releases throughout October and these have continued through the back end of last week and early this week. The bellwether Philadelphia Fed industrial index rose to its highest in six months; U.S. durable goods orders (excluding volatile aircraft orders) rose at their fastest pace in six months in September; U.S. new home sales rose at their fastest in five months; business surveys show Chinese manufacturing is back expanding again in October for the first time in three months; U.S. power firms are reporting a pickup in industrial activity in H2, Ford has increased fourth quarter forecast for North American vehicle production. The U.S. Q3 earnings season hasn’t been half bad either – with a third of the S&P500 reported, some 70 percent beat forecasts and the main strength was in the industrial world. What’s more for markets, seasonal equity flows are typically in an updraft for the rest of the year, all things being equal. Fund managers already started rebuilding equity positions in September.
European business and consumer sentiment surveys have continued to push lower through the policy logjam, unsurprisingly, even if real data contradicts some of that anecdotal ‘evidence’. And this may well translate into the wider investment theme as the euro crisis ebbs. Europe may agree to adapt grudgingly to solve its immediate problem but tyhen pay the price in economic growth because it’s less worse than the alternative of financial chaos.
On the more immediate horizon, there may be groans from those hoping to escape summit mania as G20 leaders are set to meet in Cannes next Thursday and Friday -- with a hoped-for endorsement of the euro plan and a specific interest in the EFSF/IMF/SPV idea that seems to be courting sovereign wealth funds from China and other emerging giants from the BRICs to use a special conduit to buy euro sovereign bonds. ECB rate cuts too may be firmly back in the frame on Thursday as Mario Draghi takes the helm of the central bank for the first time. The Federal Reserve's Open Market Committee gives us its latest decision on Wednesday. US payrolls looms large on Friday, with a heavy European earnings sked including Barclays, BMW, ING, BNPP, Unilever, CS, ArcelorMittal, RBS, Commerzbank, and many more.
from The Great Debate:
A free lunch for America
By J. Bradford DeLong The opinions expressed are his own.
Former US Treasury Secretary Lawrence Summers had a good line at the International Monetary Fund meetings this year: governments, he said, are trying to treat a broken ankle when the patient is facing organ failure. Summers was criticizing Europe’s focus on the second-order issue of Greece while far graver imbalances – between the EU’s north and south, and between reckless banks’ creditors and governments that failed to regulate properly – worsen with each passing day.
But, on the other side of the Atlantic, Americans have no reason to feel smug. Summers could have used the same metaphor to criticize the United States, where the continued focus on the long-run funding dilemmas of social insurance is sucking all of the oxygen out of efforts to deal with America’s macroeconomic and unemployment crisis.
The US government can currently borrow for 30 years at a real (inflation-adjusted) interest rate of 1% per year. Suppose that the US government were to borrow an extra $500 billion over the next two years and spend it on infrastructure – even unproductively, on projects for which the social rate of return is a measly 25% per year. Suppose that – as seems to be the case – the simple Keynesian government-expenditure multiplier on this spending is only two.
In that case, the $500 billion of extra federal infrastructure spending over the next two years would produce $1 trillion of extra output of goods and services, generate approximately seven million person-years of extra employment, and push down the unemployment rate by two percentage points in each of those years. And, with tighter labor-force attachment on the part of those who have jobs, the unemployment rate thereafter would likely be about 0.1 percentage points lower in the indefinite future.
The impressive gains don’t stop there. Better infrastructure would mean an extra $20 billion a year of income and social welfare. A lower unemployment rate into the future would mean another $20 billion a year in higher production. And half of the extra $1 trillion of goods and services would show up as consumption goods and services for American households.
In sum, on the benefits side of the equation: more jobs now, $500 billion of additional consumption of goods and services over the next two years, and then a $40 billion a year flow of higher incomes and production each year thereafter. So, what are the likely costs of an extra $500 billion in infrastructure spending over the next two years?
Didn’t we just spend about 2 trillion dollars stimulating the economy? Why isn’t the economy any better than it is? The government has used other people’s money to do things that serve to get someone re-elected, not necessarily things that are of any benefit to the economy. I’m not an economist, but I agree with you on one thing – if the story is too good to be true, run, don’t walk from that deal.
The econ blogosphere speaks
The economic blogosphere has spoken — and it is not too happy with what it sees. The Kauffman Foundation has just published a survey of 68 economic (but not necessarily economist) bloggers showing that they are pretty gloomy about the U.S. economy’s progress.
Feedback from the likes of Oregon University’s Mark Thoma and UC San Diego’s James Hamilton suggests the U.S. is at some kind of tipping point with a good number expecting it to fall rather than maintain balance:
68 percent (said) that conditions are mixed, and the rest split three to one toward weakness rather than growth. For an economy in which growth is the norm, 47 percent of respondents think that the U.S. economy is worse than official statistics indicate, and only 5 percent believe it is better.
It is also worth noting, however, that only a minority, albeit a large one — 35 percent — thought the U.S. had a more than 60 percent chance of entering a double-dip recession. You can download the full survey here, but the gist of the report is summed up by a word cloud created by the Foundation. Uncertainty it is.
As a housing counselor in a top 10 foreclosure state and a top 5 unemployment state, I agree with the doom and gloom. Disagreeing with RufusDaddy, I find that most of my clients are more eager to believe things are getting better BUT more frustrated and desperate than ever before. I’m no expert or blogger, but I work with folks looking the economic downturn in the face every day. I wish I had more hope, and I wish they did too.
Chicago and the toddlin’ recovery
It may not get as much attention as the monthly employment report or GDP figures, but the U.S. Federal Reserve Bank of Chicago’s gauge of the national economy has a good track record of distinguishing economic expansions from recessions. And it’s suggesting that the U.S. recovery may be wobbling.
Over at the econbrowser blog, economist James Hamilton points us to a recent research paper that examines how accurate the various economic indicators are at telling us when the economy is growing or contracting. The Chicago Fed’s national index was one of the best. And Monday’s report shows it faded in October.
Not only that, but its three-month moving average fell to -0.91 in October from -0.67 in September, declining for the first time in 2009. That drop was especially significant because the Chicago Fed says a move below -0.70 in the three-month moving average following a period of economic expansion indicates an increasing likelihood that a recession has begun.
Of course, the people who are tasked with determining when recessions begin and end haven’t called the latest one over yet. So is this report showing a speed bump on the way to a recovery or something more ominous?
Buy now, pay later? It’s later.
Buy now, pay later was the mantra of U.S. consumers during a debt-fueled binge earlier this decade.
Banc of America Securities-Merrill Lynch economists think getting U.S. household debt-to-income back to the long-term trend will require eliminating $1.75 trillion in debt, assuming no change in disposable income. That will probably take years.
And that’s their more conservative forecast, just taking the ratio from its current level of 131 percent down to 115 percent. To get back to the average seen in the 1990s, $4.35 trillion in debt would have to be eliminated.
”Either way you look at it, U.S. households will remain mired in a period of balance sheet repair,” the economists wrote in a note to clients. “And, the continued debt elimination necessary to reach a more sustainable household balance sheet means that the ability of the U.S. consumer to lead the recovery on a sustained basis will be limited. This is why we do not expect the consumer to lead the economy out of the recession. This is also one of the risks to the view that th U.S. economy is on the verge of a V-shaped recovery.”
Now is the time more than ever for anyone with Debt to go Bankrupt! Do you realty think the goverment will ever pay off it’s debt? lol. Dont be a sucker! remember when you no longer have anything to loose there power over you is gone!
Rebalance or else, IMF says
The International Monetary Fund has been warning for years about the risk of global imbalances — namely huge U.S. current account deficits and surpluses in China. Today its chief economist offered a grim view of how the economy might suffer if the rebalancing act fails.
Olivier Blanchard says unless the United States can refocus its economy more toward exports and China more toward imports, the U.S. recovery will probably be anemic because American consumers aren’t going to quickly revert back to their pre-crisis free-spending ways.
And if the recovery is anemic, there will no doubt be intense political pressure for more stimulus, particular in 2010 when most members of Congress face re-election.
“Were that to happen, one can imagine various scenarios: political pressure may be resisted, the fiscal stimulus phased out, and the U.S. recovery would then be very slow. Or fiscal deficits might be maintained for too long, leading to issues of debt sustainability, worries about U.S. government bonds and the dollar, and causing large capital flows from the United States. Dollar depreciation may take place, but in a disorderly fashion, leading to another episode of instability and high uncertainty, which could itself derail the recovery,” Blanchard wrote in an article released by the IMF.
Blanchard builds a case for rebalancing being in everyone’s best interest, including China’s. What’s your take? Will China and the United States get this right?
Ban the Federal Reserve. Put money creation back in the hands of the people (a truly representative government)by creating a government bank for the purpose of money creation. Use government created money to rebuild a sustainable and viable economy working toward full employment. Rebuild the economy. Create the majority of economic activity to be within the country itself and support small, independent businesses. That’s just for starters.
Trending down
The global economic crisis has prompted a number of economists to argue that the world will from now on experience lower trend growth, that is, roughly, that normal growth will be lower. The argument is that the current crisis is structural, not cyclical.
UBS is the latest to latch on to this view. In a client note, the bank’s economists say they have revised their 10-year average global real growth estimates to 3.4 percent from 3.8 percent. They have done the same for most of the big economies. The U.S. economy is now seen averaging 2.3 percent versus about 2.8 percent; China goes to 7.5 percent from 8.0 percent.
Does this matter? In at least one area it does — calculating the needed yield for U.S. Treasuries to be attractive over stocks. The lower the growth rate the lower the needed yield.
Alan Brown, who as chief investment officer of fund firm Schroders steers around $161 billion in worldwide assets, reckons U.S. trend growth is now 2.5 percent. With that 2.5 percent and other factors such as moderate inflation, he calculates that long-term U.S. Treasury yields should be heading towards 6 percent. Today’s yield is 2.8 percent, meaning trouble waiting to happen.
A lower trend growth rate such as UBS estimates would lower that long-term yield. But not that much. Even at 5.8 percent (if UBS is right) U.S. paper could be in for what Brown reckons is a “painful” retreat, could it not?.
from Tales from the Trail:
Obama talk on economic troubles turns to religion
When things are down and out people tend to go in search of higher powers.
And President Barack Obama is, after all, a person (and does not walk on water like some fans might believe).
His speech on the economy, given in a hall with painted religious figures at Georgetown University, a Jesuit school, was sprinkled with religious metaphors. Perhaps he's hoping for some divine intervention out of the country's financial mess.
(The religious metaphors come on the heels of Obama's first attendance at a Sunday church service since he became president. Coincidence?)
"There is a parable at the end of the Sermon on the Mount that tells the story of two men. The first built his house on a pile of sand, and it was destroyed as soon as the storm hit," Obama said.
"But the second is known as the wise man, for when '...the rain descended, and the floods came, and the winds blew, and beat upon that house...it fell not: for it was founded upon a rock."
And wait for it... here it comes... the tying of the Sermon on the Mount to the U.S. economy...
The holiday shopping season that wasn’t
We knew U.S. consumers were retrenching, but today’s December retail sales figures from the Commerce Department show that households were cutting back even more than economists had thought. That suggests no end in sight for a U.S. recession already in its second year.
The headline number was bad enough, down 2.7 percent, which was more than double the decline that economists polled by Reuters had predicted. A lot of that had to do with the well-documented problems with U.S. auto makers, as well as falling oil prices which pushed down sales at gasoline stations.
But even if you strip out autos and gasoline, retail sales were down 1.5 percent last month, the biggest drop since September 2001 — a month when many Americans stayed away from shopping centers for fear of attack in the days after September 11.
“There were 1 percent-plus declines in most (retail) sectors, confirming that the holiday season was truly disastrous,” says Ian Shepherdson, chief U.S. economist at High Frequency Economics. “Surely the first quarter can’t be as bad?”
Reuters photo by Brian Snyder
U.S. economic growth? Wait ’til next year
The U.S. Federal Reserve seems to be growing gloomier each month. Sure, they’re not the only group whose economic forecasts have been a moving target of late, but check out how their staff view of the U.S. economy has changed in the past few months.
Back in 2007, the hope was that the housing market “correction” would taper off and 2008 would bring healthier growth. Then the best guess was that the economy would regain its footing in the second half of 2008. Now, the horizon is moving into 2010.
According to newly released minutes from the central bank’s December meeting, when it pushed short-term interest rates down to a range of zero to 0.25 percent, Fed staff now think the world’s biggest economy may be a year away from returning to normal growth.
Take a look at how the Fed’s thinking changed between a mid-September meeting of its rate-setting Federal Open Market Committee and the Dec. 16-17 gathering.
Fed staff forecast from the September meeting:
“The staff continued to expect that real GDP would advance slowly in the fourth quarter of 2008 and at a faster rate in 2009, but still less than that of its potential.”
Fed staff forecast from the October meeting:
$775 billion: Expected cost of the economic stimulus plan.
$1.2 trillion: Projected federal deficit for 2009
$30 billion: Annual shortfall to end world hunger.
Political priorities by the numbers. Read more about it on the Borgen Project website (borgenproject.org)
