Monday, May 16, 2011
Round The World In Three Hours
Posting and poetry is doomed to suffer.
A brief review: My theory in the last half of last year was that the US, and by extension a big hunk of the world, was going to hit a softer patch in the first half of this year. I thought then that things would unbend somewhat in the US economy and that we would strengthen up a bit in the summer, but that we were doomed to go into another short contraction next year (2012), unless Congress went crazy and dumped more money into the domestic economy by extending the FICA tax cuts and That would not be a cure, though. That would just produce a longer, deeper downturn somewhat later.
So far matters have unfolded pretty much as I expected, but I am getting more dubious about the strength of the second half uptick. Thus the endless reading regimen. Anyway, as I resolve these points I'll post about them.
Currently I am watching:
Asian Edge: For indicators I always like Australia and Singapore. The quality of the economic statistics in both countries is very high, and both countries have economies that are Asia-dependent. Singapore is showing the April weakness I expected, but it is not serious yet. Australia was hurt by the the spring flooding, which hit coal and crops. There is a bigger concern emerging in Australia's domestic economy related to housing. Non-resident mortgage lending is rising while resident mortgage lending is slipping a bit. This trend, if continued, is going to cause Australia's central bank some considerable angst, and I would expect them to move more conservatively over the summer than otherwise. In other words, the space available for inflation control measures is less.
It is worth watching the Singapore exports to South Korea; I did not expect the poor April performance there.
Brazil and India: I do not usually group these two economies, but for this cycle I will. Both have similar problems this go round. High inflation dictates tightness; some weakness in exports vs domestic demand threatens current account balances, and fiscal deficits could be problematic. Brazil exports a great deal to China; when Chinese imports drop a bit Brazil feels it. India's ongoing problem is inflation and the need to combat inflation, a persistent fiscal deficit, and a persistent current account deficit (but not nearly as bad as that of the US!) While its economy is growing the growth/inflation/pricing indicators are converging in a way that indicates some difficulty for companies this year.
However India could do pretty well if the rains come in at 80% or over; India gets a strong ag push when things work out. So far the monsoon looks to be at 80-90%. India succumbed to the inevitable and raised diesel prices over the weekend; this is going to push inflation a little higher. The central bank of India (RBI) has jacked reverse repo rates to 6.25% already. Public deposit rates are 4%; the repo rate is 7.25%. It should be obvious that India cannot fix its trade imbalance this way; the small saver can only buy gold and silver.
Europe: The entire zeitgeist has switched to a hunkered-down wariness. Everyone's now scanning the horizon for risks. Inflation keeps moving higher, but the bigger issues are the problems of years past which have just been papered over. We still have the foreign currency loans in eastern Europe. We have the impending Greek default. Ireland is going to give Europe the finger sooner or later. Portugal is not that likely to be able to pay up. Ackermann of Deutsche Bank's modern day Lady Godiva schtick just can't inspire confidence. In this situation, the problems of certain IMF bank chiefs are big news. The lamentable failure of the last round of European bank stress tests, the habit of disrobing and either running screaming through the streets over restructuring of debt everyone knows will default, or running nude around your hotel suite chasing screaming maids - these sorts of behaviors indicate an underlying anxiety involving banks. And loans. Loans being carried on balance sheets at valuations that are not real!
On the other hand, the actual European economy isn't doing that badly. Oil prices are hitting consumers, but German exporters could use a few more nude, hysterical banking bigwigs legging it through Geneva. Every time a banking chief screams and runs, the Euro drops, and German manufacturers quaff a satisfying lager. Furthermore, the Japanese nuclear incident has unexpectedly (don't we all love that word?) created an opportunity for diffusing a bit of that German manufacturing mojo to France in the form of nuclear-generated electricity. The Germans panicked and shut down some of their nuclear plants, and France is now exporting electricity to Germany. Over the longer term, the demands of German manufacturers and Scotland (wind, it's not what it's cracked up to be) are going to create overreliance on those French nukes, but in the meantime it is something of a help to the French economy, which has high public debt, a demanding public and a trade imbalance. So all is not lost. A lower Euro would help Italy as well if their power problem could be fixed. It might be time for them to do nuclear power - when all else fails, one can always try something that works. They could hire some Germans to run them; Italians are fond of their vacations.
too few consumers able to spend freely. Combined
with competitive currency devaluations and
high debt levels something has got to give.
Links to this post: