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    February 2015 Economic Overview

    February 1st, 2015

    US Economy

    Consumers are snatching at any evidence of indications that this recession is ended. Reported 3rd Q GNP was impressive. Durable good orders were positive for the first time in over 18 months last month and anything indicating that the worse is past makes headlines. The drug addict wants to know he is cured.

    No question that the stimulus package prevented a collapse of not only our economy, but also of the worlds’ economy. Without ours, other countries such as the UK, Ireland, and Spain would have failed miserably. Without it, we would have had an economic debacle in 2008, every bit as bad as we had in 1929. We dodged a bullet.

    But debt accumulation is bad, its bad for government, bad for industry, and 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 dipping into 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 West entered a 30 years war with fundamentalist Islam.

    What was lost, can be restored. But it will take time , time to establish some goals and objectives and changes. 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 to regulation. These institutions are of no visible benefit to the everyday citizen; institutions where there is little or no trickle down, save for the salaries of its employees.
    After the economic implosion, the US populace wanted a ‘Roosevelt Moment’ with the election of Obama…..
    What is needed to restore economic strength? A ‘New Deal’ at grass roots is called for. Creation of jobs is the first requirement. Recognize everyone’s right to have a job, a right to earn enough to make a decent living; to create trade in an atmosphere of freedom; provide programs that achieve good health and good education. This in turn will create a sense of security. Without security at home, you cannot have security abroad.


    There is a broader issue about the rights of democracies. Voters’ views should clearly hold sway over domestic conditions but only if those policies can be funded internally. This is a lesson Greece should embrace as they embark on efforts to dis-mantle the Eurozone. Compromise, however, may be much more difficult. SYRIZA’S unequivocal victory in Sunday’s Greek elections reverberated all over Europe.
    His victory had been assumed but the margin of victory was at the high end of expectations. Around European countries, his win gave inspiration to populist anti-austerity parties on the left and right.

    For the rest of Europe, the question is how strongly Mr. Tsipras will press his demands for a renegotiation of the bail-out program agreed with the so-called “troika” of the European Commission, the European Central Bank, and the IMF. Mr Tsipras has demanded a significant haircut in Greece’s national debt, and has vowed to rehire laid-off government workers, raise the minimum wage, and hike government spending to pay for free electricity and health care for the poor. That uncompromising anti-austerity agenda has inspired many Europeans, while giving their governments the shivers.

    The most important response will be that of Germany. Angela Merkel, the chancellor, is reviled in Greece for her leading role in negotiating the bail-out’s terms, and has been diplomatic about Mr Tsipras’s victory to avoid further provocation. But other politicians from her coalition are doing the talking for her. Günther Oettinger, a commissioner in Brussels and a member of Mrs Merkel’s center-right Christian Democrat party, told German public radio that although nobody wants Greece to exit the euro, another debt haircut is out of the question. Hans-Peter Friedrich of the CSU, the Christian Democrats’ Bavarian sister party, urged the Greeks to continue with austerity because German taxpayers should not bear their burdens. Even the center-left Social Democrats in Mrs Merkel’s coalition joined the chorus. Thomas Oppermann, their parliamentary leader, said Greece would do better to fight corruption at home than to break its commitments abroad.

    The picture is very different in France, where Marine Le Pen and her Euro-sceptic, far-right National Front are riding high in the opinion polls, in part by opposing austerity and economic reforms demanded by Brussels. In a classic example of right- and left-wing alignment, Ms Le Pen has backed Syriza on the basis of its opposition to austerity, though she has always criticized its relatively tolerant immigration policies. But Syriza’s win could present Mr Hollande with a headache by emboldening the left-wing rebels within his Socialist party, who consider the current prime minister, Manuel Valls, and his finance minister, Emmanuel Macron, unforgivably liberal.

    Within the eurozone, Italy is the country whose position is closest to Greece’s. It faces a debt load of 132% of GDP and has its own populist left-wing party, the Five Star Movement, which like Syriza clamors for an end to austerity. Italy’s center-left prime minister, Matteo Renzi, was the first foreign leader to congratulate Mr Tsipras on his win. Yet Mr Renzi has generated growing political opposition with his ambitious agenda of liberal reforms, and his foes have been appropriating Mr Tsipras’s win as their own. “Our Euro-sceptic vision will continue to be confirmed everywhere,” declared the Five Star Movement in its response.

    But in most of Europe Mr Tsipras’s win was taken as a defeat for Brussels, especially in the European capitals where such a defeat is most welcome. For the Kremlin, which sees the disintegration of the euro zone and the weakening of the European Union as among its main strategic interests, the Greek election results were a gift. Vladimir Putin was quick to congratulate Alexis Tsipras on his victory, and Russian state television gleefully reported that Syriza’s landslide means the end of the EU’s hold over Greece, which “brought the country nothing but unemployment and misery”.

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    February 2014 Economic Overview

    January 31st, 2014

    No Capitalism

    Strong household spending and robust exports kept the U.S. economy on solid ground in the fourth quarter, but stagnant wages could chip away some of the momentum in early 2014. Gross domestic product grew at an expected 3.2 percent annual rate. The economy was firing on almost all cylinders as 2013 came to a close, a far stronger performance than had been anticipated earlier in the quarter and welcome news in light of some drag from October’s partial government shutdown.

    Consumer spending rose 3.3 percent, highest since fourth quarter of 2010, was the main driver of fourth-quarter growth, but there was also a strong boost from trade. Business investment also lent support as did the restocking of warehouses, but not at the same scale as in the third quarter. Wage growth has been listless as the economy deals with slack in the labor market. Consumption in the fourth quarter came at the expense of saving. The saving rate slowed to 4.3 percent in the fourth quarter from 4.9 percent in the prior period.
    A run-up in mortgage rates, which held back home sales and renovations, saw residential investment falling for the first time since the third quarter of 2010. Home sales have been slow in recent months and that trend is likely to persist for a while as the market adjusts to higher loan rates. Home sales in 2013 were the highest since 2006.


    XXII Winter Olympics

    The euro zone’s private sector started 2014 in much better shape than expected, with stronger growth across the region marred only by a continued downturn in France. Eurozone Composite Purchasing Managers’ Index (PMI), which gauges business activity across thousands of companies and is seen as a good guide to economic health, jumped to 53.2 in January from 52.1 last month. Germany’s composite PMI rose to a 31 month high. France’s PMI contracted.

    New orders rose across the bloc for the sixth month, with the sub-index matching December’s 30-month record of 52.2, indicating the PMIs might rise higher next month. The upturn was broad based, with growth in both the services and manufacturing industries, and the data comes after Ireland and Spain saw strong demand for their bonds this month, while European shares climbed to fresh 5-1/2 year peaks on Tuesday as investors become increasingly bullish.

    The British economy is now the envy of the rich world. On January 21st the IMF predicted growth of 2.4% in 2014. Among large advanced economies only America is expected to do better. Firms are rushing to take on staff, sending the unemployment rate tumbling—and creating a conundrum for the Bank of England.


    China and Japan are eyeing each other dangerously. As long as China keeps trying to chip away at Japan’s sovereignty, risks will remain high. The territorial dispute between China and Japan is worrying. Commentary from both sides is strengthening the hand of hawks in both camps. Japanese ‘proactive pacifism’ and China’s ADIZ is a gambit by the People’s Liberation Army to extend its regional influence. Fear is that Beijing’s belligerent assertion is a sign of things to come from China. Southeast Asian nations are not persuaded by China’s rhetoric about its ‘peaceful rise.’ They are relieved of the US rebalance of its military and diplomatic focus toward Asia. One positive sign is that trade between Japan and China is almost back to the level it was 18 months ago. People to people exchanges are picking up, too. Unfortunately, there exists NO hot-line between the two.

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    August 2012 Economic Overview

    July 31st, 2012

    US Economy

    The US economy is in a tender state. Being led by an inventive private sector, the economy is reinventing itself. Old weaknesses remedied and new ones discovered. News headlines give credence, however, to Nouriel Roubini’s perfect storm in 2013 scenario: stalling growth in the US, debt troubles in Europe, a slowdown in emerging markets, particularly in China and military conflict in Iran.


    While growth prospects for the rest of the economy are dimming, the housing market is showing feint signs of life. New residential construction is at its highest level in nearly four years and prices too are lifting slightly. Consumers have cut debt to a manageable 114% of income. Exports are dynamic, helped by a weaker dollar. China is now the US’ third largest export destination. High value service exporters such as engineering and financial services and our ‘App” economy which employs over 300,000 have joined our traditional exporters. Unemployment will remain inordinately high. We must settle a credible long-term debt plan that will require tax hikes. And entitlements will have to be cut. Ahead is the threat of an euro break up, a slow growth in China and in India; a withering year-end combination of tax increase and spending cuts. A perfect storm did you say, Dr. Roubini?


    The poor performance opens additional room for criticism of President Obama by challenger Romney. But slow growth has typically been enough to carry incumbents to victory. President Obama can point to performance in other large economies. The UK, and the Eurozone are in recession, emerging markets are slowing. That should add to reasons for the Fed to be more activist in shielding the US economy from the ill winds blowing from abroad.

    Euro zone
    The Euro crisis seems trapped in an endless cycle of financial debacles and policy quick-fix remedies. Optimists argue that things are improving ever so slowly, but improving nonetheless. Pessimists claim things are so bad that no resolution is possible. The only practical solution to this dilemma revolves around making the euro rescue vehicle into a bank.

    Then any financial remedy would be at least regulated. There would be no blank check for borrowers. Europe still needs growth. That would give time to the periphery euro countries to get their houses in order. Rising inflation must be managed. Meeting these periodic financial outbreaks must be met with flexible and aggressive commitments to act quickly and decisively. The creation of a credit insurance vehicle, similar to the FDIC would be helpful. The pace of legislative reaction must also be raised markedly.


    Need I say more? The ticking bomb…

    The neatest and most logical solution would be to turn the ESM into a bank, giving it access to ECB liquidity and thereby dramatically expanding its firepower. The ultimate resolution hinges on a simple concept. For the euro to succeed, risk in sovereign bonds and banking systems has to be mutualized across the entire euro area.

    Spain is falling apart. Its regions are going bankrupt. Bond yields are an unsustainable 7.5%. Spain’s stock market is down 30% this year and things are looking worse. A mix of recession, sinking property values and public profligacy made worse by cronyism and corruption is rife. Greece remains in the headlights too. The European Commission warned that Greece has only a few weeks to put its economic reforms on track. Italy, in the name of Sicily, 5.5% of Italian GDP might default.


    If Spain fails, yet another new plan for the euro zone will be needed, as Spain’s woes means three sets of existing ideas have been exhausted. First, Spain has already received the short-term treatment that was supposed to save it. A €100 billion bailout has already been set up, and approved last week by Germany. Second, another favored response—booting out the head of government, to put in place a more market friendly leader—isn’t really justified. Since taking over in December 2011 Spanish prime minister, Mariano Rajoy, has worked hard to talk up its debt position and its banks; he has also largely put in place the policies demanded by Brussels. Third, other potential boosts to the Spanish economy—things like productivity enhancing structural.

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    December 2010 Economic Overview

    November 30th, 2010

    Eurozone crisis: Sovereign debt back in the headlines. Portugal, Ireland and Greece bond spreads near their highest yields, again. Irish bankruptcy was avoided with a 130 Billion bailout for its banking sector. Greece and Portugal’s prospects are dismal. Germany said that if borrower nations are unable to repay their debts, then it is their creditors that ought to bear the losses, not the Eurozone in total. Brave hope.

    G20 meeting in Seoul worried about the unbalanced world recovery, but did not come up with any solutions.  Countries blame each other for distorting global demand. There are three battles: China’s unwillingness to address its currency formula; second is the rich world’s monetary policy. The US Fed may restart printing money; third, how developing economies use the capital inflows. Since sluggish growth may infest the rich world for many years, the prospect of a currency war cannot be ignored. Global demand needs rebalancing towards spending in the emerging world. China needs to get more of its growth from domestic consumption. Core economies fear the US decision of quantitative easing which will pump additional $600 Billion into its economy. They fear it will create capital flows into weaker economies less capable of adequately using the capital, thus creating inflation and of course they worry that the program will further weaken the US dollar.

    China holds by far the largest stockpile of foreign exchange reserves- $2.6 Trillion, 65% in US dollars. China is interested in diversifying. What they do with those reserves is subject of much speculation. Recently it purchased Japanese sovereign debt, amounting to $25.5 Billion, thus driving up the value of the yen versus US dollar 15%. Once Japan released the Chinese fisherman held for fishing in Japanese waters, China sold its Yen bond holdings creating a commensurate lowering of the yen/us dollar rate. Chinese currency undervaluation results from its currency policy, pegging to the US dollar. Only if it were to peg its currency to a basket of currencies, would it gain leeway in exporting its reserves.   All this cries out for a multilateral approach using IMF and the G20 to forge a consensus among the big economies. Re-double efforts that avert, not fight a currency war.

    Creating jobs is the number one task of the US economy. Unemployment hovers around 9.5% with scant evidence of improvement. Why the scant evidence? High household debt and a shift away from how many employers think about hiring. High mortgage debt allows little spendable cash. Government should consider calming the foreclosure wave. Some program of reducing loan defaults and improving household finances might prompt banks to write down the principal value of at risk loans.

    As for jobs, the traditional floor job model no longer applies. Unemployment remains at 9.6% in spite of adding over 150,000 jobs last month. US requires innovative jobs using technologies recently minted and the government should grant a payroll-tax holiday; extend the Bush tax cuts; cut back on government spending because high public debt harms the economy.   More could be done to provide re-training, re-education for unemployed by, for example, easing access to community colleges where more appropriate skills can be learned.

    Bond markets have had it. Obama’s Deficit Reduction Commission means deficit needs to be addressed. Medium debt reduction would provide room to create more fiscal stimulus.

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    November 2010 Economic Overview

    November 3rd, 2010

    Euro zone turmoil continues. Unemployment for the period reached 10.1%. Germany is being pushed to the center stage in the Euro area for its economic strength, but also, unfortunately, for Germany’s limited success at multiculturalism. The publicity seems to limit its alternatives in taking a strong stance against the weaker Euro zone economies.

    Germany celebrated unification day on October 3rd. East/West still have mixed emotions but generally agree though costing about $2 Trillion, the cost is worth the investment. East still has some catching up to do, but it provides a flexible pool of workers to West Germany. And they already speak the language.

    This is the third unification for West Germany. This one is between native Germans. After WWII, when West Germany accepted refugees from communism. The 1950/60s saw an influx of mostly Muslim guest workers. Workers, many now citizens, are subject of some debate. Federal President Christian Wulff said, ‘Islam belongs to Germany, too’. Many Germans, including Prime Minister Merkel, are saying otherwise. That may be a pill too big to swallow at the moment. She was recently quoted, saying Multiculturalism has failed in Germany.

    Sovereign debt offerings for the Euro zone ugly stepsisters, Greece, Spain, Ireland, and Portugal were barely able to complete financing needs, though over-subscribed. This could be more the need for portfolio managers to show some profit on their books for yearend, than any vote of confidence. Irish debt soared because of its banking crisis, and investors continue to be nervous about Portugal. All need spending cuts and to increase taxes. Also Hungary’s debt is ballooning. Rates have moved steadily higher should any want to repeat trips to the well.

    Evidence that the US economy has reached escape velocity is maddenly elusive. There is simply a lack of demand.  The Federal stimulus program is winding down and local governments are contracting.  The entire burden of stimulating demand falls squarely on the shoulders of the Federal Reserve.

    The economy is the single most important issue confronting democrats in the mid-term elections. Foreclosures and unemployment are the other two issues on voters’ minds.

    American Anxiety for the future is the highest ever before measured.  Confidence is essential for the recovery. And the main thing that is hurting business is uncertainty. Business, as Winston Churchill put it, “is the strong horse that pulls the whole cart”. President Obama does little to counter the impression that he dislikes business. A Bloomberg survey recently found that fully 75% of US investors believe he is against business. American equities delivered a slightly negative return over the ten years up to the end of July.

    Low interest rates entice investors out of cash and into riskier assets.  Hi-yield, junk bonds, exceeds $168 billion, more than was raised entirely in 2009. However, the outlook for economic growth and thus corporate profits continues subdued.

    Markets have snapped out of their slump, and some moderately better data from America on non-farm payrolls and manufacturing activity is in evidence, but that evidence is far from being upbeat. So long as bad mortgage debt weighs on lender balance sheets, the longer the economy will mimic that of Japan. Japanese equity investors have had to endure two decades of frustration.

    American founders had no doubt that they were embarking on a daring experiment, inspired by the ideals of the Enlightenment. Martin Luther nailed his 95 Theses on the door of the Wittenberg Cathedral 493 years ago, yesterday. America still towers over rivals in scientific virtuosity, military power, and the vitality of democracy. Americans are among the most patriotic in the world.  America is indeed a great and exceptional country, but it is not talking about its greatness that makes it so. Roll up your sleeves! Presently, there is an excess of pessimism. We Will recover.

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