Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
E.S. Finley
The new Prime Minister Theresa May put former Mayor of London in charge of foreign policy and David Davis to head the UK Brexit unit, both were in favor of leaving the EU. The PM promptly visited Scotland to assure that country will be consulted and protected under the new agreement. Meanwhile the BOE announced that they expect to launch fresh stimulus on multiple fronts in August, as the economy stumbles under decision to exit the European Union. That will include rate cuts, a bond-buying program extending purchases of corporate debt and other assets; and boosting supply of credit to households and businesses at very cheap rates. After meeting with the queen she said “We are living through an important moment in our country’s history. Following the referendum, we face the time of great national change. And I know, because we’re Great Britain, that we will rise to the challenge.”
As China’s credibility has been hurt by violent swings of the stock market and devaluation of the Yuan, President Xi Jinping has ordered a plan to fix the fragmented system in which the central bank and regulators oversee banking, securities and insurance often in isolation and cross-purposes. The proposal discussed involves centralization of oversight by putting all regulation under the People’s Bank of China. Over 15 years ago the government took away regulatory authority from PBOC and put it hands of three separate agencies; banking, securities and insurance, to set up an independent monetary policy which failed. The new plan might be a super regulator, which has not to be effective over past three years.
In the meantime China invested globally $80 billion in the first six months of 2016, and for the first time this overseas investment made by China’s private enterprises is larger than that by state-owned enterprises. In 2016, 67% of the increase in China’s investment was over 2015, and 34% in 2015 was made in the U.S. Also China’s private investors are keenly interested interested to get their money out of China to escape losses in the decline of Yuan.
According to the Census Bureau, U.S. exports to China shrank more as we shipped just $42.4 billion in the first 5-months of the year, or 8.2% less than in the year earlier-period, and 13.8% below the peak export year of 2014. While China’s economy is expanding at a slower annual pace of 6.7%, U.S. imports from China amounted to $174 billion so far this year, or 400% of our exports to China, in line with accusations by the presumptive Republican nominee Donald Trump and including possible violations of WTO principles.
The WSJ’s latest monthly survey of economists found forecasters making fractional changes to their projections for economic growths this year and next, following the U.K. vote to exit the EU.The average respondents’ forecasts for economic growth were less than 0.1% different from last month’s survey, which came several weeks before the 23 June vote. Since then dollar strengthened and the Pound plunged, which would tend to raise the cost of U.S. exports, harming our manufacturers while reducing the price of commodities Georgia’s State Forecasting Center claims that “Brexit positives and negatives almost cancel out.” However, the most concern was still voiced by manufacturers because of the effect of the strong dollar’s ill-effect on our exports.
The Citigroup U.S.Economic Surprise Index came up with new highs including retail sales, consumer prices, industrial production and consumer sentiment. Employment, housing, and inflation are higher than expected and the index is rising after it had been in mostly negative territory of the past 18 months, just like the stock market. With more positive surprises on the way, the stock rally might have substance to it than appearance. Retail sales increased 0.6% in June and were up up 2.7% from a year ago. Total retail sales were up 1.4% in 2Q and up 3.1% in second half 2016 over a year ago. while CPI core rate rose 2.3% in a year. The Fed could consider raising short-term interest rates as soon as September.
The Congressional Budget Office annual report of long-term federal spending and revenue reveals the national debt remains firmly on upward trajectory, but its rate of acceleration remains increasingly uncertain owing to lower interest rates and slower economic growth. The debt doubled since 2008 to about 75% of the GDP, rising to 122% in 2040, up from an estimate of 107% last year, well above peak set after WWII. The latest forecasts showed the debt would exceed GDP by 2033, while last year that stood by 2039. With lower interest rates, the CBO projects now that the debt will reach 141% of GDP in 2046, down from an earlier estimate of 155% made the past January. The report shows how even minor changes in economic assumptions can produce major shifts in outcomes. CBO have shown that health-care programs and Social Security are by far the largest drivers of spending over the coming decades as an aging workforce will leave fewer workers to support more retirees.
As China’s credibility has been hurt by violent swings of the stock market and devaluation of the Yuan, President Xi Jinping has ordered a plan to fix the fragmented system in which the central bank and regulators oversee banking, securities and insurance often in isolation and cross-purposes. The proposal discussed involves centralization of oversight by putting all regulation under the People’s Bank of China. Over 15 years ago the government took away regulatory authority from PBOC and put it hands of three separate agencies; banking, securities and insurance, to set up an independent monetary policy which failed. The new plan might be a super regulator, which has not to be effective over past three years.
In the meantime China invested globally $80 billion in the first six months of 2016, and for the first time this overseas investment made by China’s private enterprises is larger than that by state-owned enterprises. In 2016, 67% of the increase in China’s investment was over 2015, and 34% in 2015 was made in the U.S. Also China’s private investors are keenly interested interested to get their money out of China to escape losses in the decline of Yuan.
According to the Census Bureau, U.S. exports to China shrank more as we shipped just $42.4 billion in the first 5-months of the year, or 8.2% less than in the year earlier-period, and 13.8% below the peak export year of 2014. While China’s economy is expanding at a slower annual pace of 6.7%, U.S. imports from China amounted to $174 billion so far this year, or 400% of our exports to China, in line with accusations by the presumptive Republican nominee Donald Trump and including possible violations of WTO principles.
The WSJ’s latest monthly survey of economists found forecasters making fractional changes to their projections for economic growths this year and next, following the U.K. vote to exit the EU.The average respondents’ forecasts for economic growth were less than 0.1% different from last month’s survey, which came several weeks before the 23 June vote. Since then dollar strengthened and the Pound plunged, which would tend to raise the cost of U.S. exports, harming our manufacturers while reducing the price of commodities Georgia’s State Forecasting Center claims that “Brexit positives and negatives almost cancel out.” However, the most concern was still voiced by manufacturers because of the effect of the strong dollar’s ill-effect on our exports.
The Citigroup U.S.Economic Surprise Index came up with new highs including retail sales, consumer prices, industrial production and consumer sentiment. Employment, housing, and inflation are higher than expected and the index is rising after it had been in mostly negative territory of the past 18 months, just like the stock market. With more positive surprises on the way, the stock rally might have substance to it than appearance. Retail sales increased 0.6% in June and were up up 2.7% from a year ago. Total retail sales were up 1.4% in 2Q and up 3.1% in second half 2016 over a year ago. while CPI core rate rose 2.3% in a year. The Fed could consider raising short-term interest rates as soon as September.
The Congressional Budget Office annual report of long-term federal spending and revenue reveals the national debt remains firmly on upward trajectory, but its rate of acceleration remains increasingly uncertain owing to lower interest rates and slower economic growth. The debt doubled since 2008 to about 75% of the GDP, rising to 122% in 2040, up from an estimate of 107% last year, well above peak set after WWII. The latest forecasts showed the debt would exceed GDP by 2033, while last year that stood by 2039. With lower interest rates, the CBO projects now that the debt will reach 141% of GDP in 2046, down from an earlier estimate of 155% made the past January. The report shows how even minor changes in economic assumptions can produce major shifts in outcomes. CBO have shown that health-care programs and Social Security are by far the largest drivers of spending over the coming decades as an aging workforce will leave fewer workers to support more retirees.
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
E.S. Finley
The fallout from Brexit roiled the stock markets globally and sent many investors to flee to haven assets. Many others saw opportunities to pur- chase stocks at the selloff. As markets had over- reacted in the recent past so they did this time, by rebounding in a few days to around the pre-Brexit level. At the same time they set a new round of currency volatility complicating plans of central banks to accelerate the global GDP’s growth. The U.S. dollar, Japanese yen, and Swiss franc showed further gains. Government bonds benefit- ted from haven seekers, but wide currency moves pose risks for business and in particular for econ- omies that have shown poor growth. The yield on the 10-year Treasuries sank briefly to 1.385% while the yields on the 30-year bond and 10-year UK debt reached record lows. These low yields together with Fed’s hesitation to raise rates spurred the highest bullion price in over two years, and added more than 500 metric tons to global gold holdings since bottoming out six months ago. Silver also reached a two-year high, with Brent crude above $50 pushing other commodities’ levels higher as well.
The latest statistics on China’s economy are dis- appointing. The two gauges of the manufacturing activities weakened further, revealing loss in battle against overcapacity. After the economy grew at the rate of 6.7% annual rate in the first quarter, the figures point to even slower growth in the second quarter, likely about 6.5% and lower in the second half. Caixin PMI index came in at 48.6 in June, down from 49.2 in May, the fastest decline in four months. The official manufacturing pur- chasing managers index edged down to 50 in June from 50.1 in May, the level that separates contraction from expansion. To revive the economy the central bank favor further depreciation of the Yuan in its fifth week of decline. Meanwhile the International Tribunal in the Hague rejected China’s territorial claims in the South China Sea, raising tension.
Immediately after Brexit, London, as a premier financial center was threatened by Paris, Ireland and Frankfurt. The UK financial industry comprises about 12% of UK’s annual GDP, with 2.2 mil- lion people of which over 700,000 work in London alone. Frankfurt set up a hot line for banks to shift their operations outside Britain. Paris and Dublin offered all kinds of tax benefits to transfer Lon- don’s operations to these new locations. The ECB officials called on Britain, the world’s fifth largest economy, to draw up a post-referendum road map urgently, warning that the “uncertainty shock” would weigh on the Eurozone's economic recov- ery too. To encourage business investing in the UK, Chancellor of the Exchequer George Os- borne, who campaigned to remain in EU, plans to lower the corporate tax rate to 15% as it is prepar- ing to leave the EU. Theresa May, the new Prime Minister looks forward to tough talks over terms of the U.K.’s exit from EU.
On the third working day after Brexit, leaders of the U.S., Mexico and Canada met in Ottawa, to underscore their commitment to free trade and integrated market, as a counterpoint to a popular trend in the opposite direction. President Obama said “I am not prepared to concede the notion that some of the rhetoric (Trump’s) that has been pop- ping up is ‘populist’”. In a major shift, GOP’s plat- form largely adopted Trump’s protectionist policies.
In a stirring “opinion” WSJ article, Robert B. Zoel- lick a former World Bank president, U.S. trade representative and deputy secretary of state, de- fined in detail why the U.S. must recognize the interrelationship between economics and security. He points out that over years that oceans that once barred foreign armies became highways for the U.S. Navy and mariners seeking markets, citing historical examples beginning in 1787 through 1854,1899, 1941 and after WWII. He claims that “abandoning the TPP will tell America’s allies that the U.S. is yielding to China. They will accommodate accordingly.” Every generation recognized since founding that “economic strength at home is vital for U.S. security. In the 19th century, the U.S. became a Pacific power. The 20th century demonstrated that conflicts in East Asia can threaten the U.S. The U.S. now needs to cre- ate an economic and security network in the Asia- Pacific for the 21st century. Historians will look back on America’s embrace of TPP or its failure to do so-as a turning point in U.S global strategy.”
In the U.S., the Commerce Department initially estimated the economy grew at a 0.8% rate in the first quarter. That annual pace was revised up- ward to a 1.1%. Most of the revision was due to an increase in exports. Personal spending also appears to have improved. After rising 1.1% in April, the sharpest jump in almost 7 years, it in- creased 0.4% in May. Macro-economic Advisers raised their GDP estimate by 0.2% to 2.8% from 2.6% and other forecasters did similarly as consumer confidence index was unchanged during the Brexit period, as income personal income including wages and government benefits and other sources, went up 0.2% in May. After rising 4.48% in April, consumer borrowing increased 6.18% in May reaching $16,56 billion. U.S.
businesses however cut back on investment and slowed down hiring. In line with global stock markets, the DJIA returned to its previous three months level of 18,000 with high degree of continued volatility. At the same time the ISM services index jumped to 56.5 in June from 52.9. Similarly new orders rose to 59.9 from 54.2. Though most of the analysts expected maintain record car sales annual rate of 17 million, it may be difficult for the industry to achieve this. The pace fell to 16.67 million in June, the lowest in over a year, owing mainly to slower demand for passenger cars.
Puerto Rico defaulted on its constitutionally guaranteed debt for the first time on July 1, when it failed to make about one-half of $2 bil- lion in payment. The island has been in recession for almost a decade and has lost much of its population. Municipal Market Analytics believes that “The market has been waiting for this default for two years, but really it’s been 15 tears in making.” Puerto Rico built up over years over $69 billion in debt.
The minutes of the FOMC June meeting revealed that the policymakers were divided; six wished to raise rates once this year, while nine favored two rate increases if their economic forecasts are realized. The annotated meeting details covered the question how the UK, the second-biggest economy in the EU, with population of 64 million, will find a new working relationship with EU. The FOMC meetings late July and second-half September may provide some initial guidance.
Meanwhile the job-growth figure was 287,000 in June, the best figure this year and one of the best in 5 years. It helped move the S&P 500 to 2150 above its record of 2130.82 achieved over a year ago, and despite the Merrill Lynch prediction that S&P 500 will shed 3% of the EPS this year. Simultaneously the DJIA reached 18,350, a historic peak. WSJ claims in its front page article that “among the most prominent drivers of the 2016 stock rally has been companies’ willingness to buy back shares. The strategy has been embraced by firms and outside investors alike, because it drives up share prices and improves per share earnings by reducing the number of shares outstanding. Some investors decry the buybacks as financial engineering.” While the higher employment figure appears impressive, the labor-force participation rate still stands at 62.7%, where it was 40 years ago. This translates to 22 million unemployed including the underemployed and those who quit look- ing for a job. The celebration of one month’s employment data could be premature at this point in time.
The latest statistics on China’s economy are dis- appointing. The two gauges of the manufacturing activities weakened further, revealing loss in battle against overcapacity. After the economy grew at the rate of 6.7% annual rate in the first quarter, the figures point to even slower growth in the second quarter, likely about 6.5% and lower in the second half. Caixin PMI index came in at 48.6 in June, down from 49.2 in May, the fastest decline in four months. The official manufacturing pur- chasing managers index edged down to 50 in June from 50.1 in May, the level that separates contraction from expansion. To revive the economy the central bank favor further depreciation of the Yuan in its fifth week of decline. Meanwhile the International Tribunal in the Hague rejected China’s territorial claims in the South China Sea, raising tension.
Immediately after Brexit, London, as a premier financial center was threatened by Paris, Ireland and Frankfurt. The UK financial industry comprises about 12% of UK’s annual GDP, with 2.2 mil- lion people of which over 700,000 work in London alone. Frankfurt set up a hot line for banks to shift their operations outside Britain. Paris and Dublin offered all kinds of tax benefits to transfer Lon- don’s operations to these new locations. The ECB officials called on Britain, the world’s fifth largest economy, to draw up a post-referendum road map urgently, warning that the “uncertainty shock” would weigh on the Eurozone's economic recov- ery too. To encourage business investing in the UK, Chancellor of the Exchequer George Os- borne, who campaigned to remain in EU, plans to lower the corporate tax rate to 15% as it is prepar- ing to leave the EU. Theresa May, the new Prime Minister looks forward to tough talks over terms of the U.K.’s exit from EU.
On the third working day after Brexit, leaders of the U.S., Mexico and Canada met in Ottawa, to underscore their commitment to free trade and integrated market, as a counterpoint to a popular trend in the opposite direction. President Obama said “I am not prepared to concede the notion that some of the rhetoric (Trump’s) that has been pop- ping up is ‘populist’”. In a major shift, GOP’s plat- form largely adopted Trump’s protectionist policies.
In a stirring “opinion” WSJ article, Robert B. Zoel- lick a former World Bank president, U.S. trade representative and deputy secretary of state, de- fined in detail why the U.S. must recognize the interrelationship between economics and security. He points out that over years that oceans that once barred foreign armies became highways for the U.S. Navy and mariners seeking markets, citing historical examples beginning in 1787 through 1854,1899, 1941 and after WWII. He claims that “abandoning the TPP will tell America’s allies that the U.S. is yielding to China. They will accommodate accordingly.” Every generation recognized since founding that “economic strength at home is vital for U.S. security. In the 19th century, the U.S. became a Pacific power. The 20th century demonstrated that conflicts in East Asia can threaten the U.S. The U.S. now needs to cre- ate an economic and security network in the Asia- Pacific for the 21st century. Historians will look back on America’s embrace of TPP or its failure to do so-as a turning point in U.S global strategy.”
In the U.S., the Commerce Department initially estimated the economy grew at a 0.8% rate in the first quarter. That annual pace was revised up- ward to a 1.1%. Most of the revision was due to an increase in exports. Personal spending also appears to have improved. After rising 1.1% in April, the sharpest jump in almost 7 years, it in- creased 0.4% in May. Macro-economic Advisers raised their GDP estimate by 0.2% to 2.8% from 2.6% and other forecasters did similarly as consumer confidence index was unchanged during the Brexit period, as income personal income including wages and government benefits and other sources, went up 0.2% in May. After rising 4.48% in April, consumer borrowing increased 6.18% in May reaching $16,56 billion. U.S.
businesses however cut back on investment and slowed down hiring. In line with global stock markets, the DJIA returned to its previous three months level of 18,000 with high degree of continued volatility. At the same time the ISM services index jumped to 56.5 in June from 52.9. Similarly new orders rose to 59.9 from 54.2. Though most of the analysts expected maintain record car sales annual rate of 17 million, it may be difficult for the industry to achieve this. The pace fell to 16.67 million in June, the lowest in over a year, owing mainly to slower demand for passenger cars.
Puerto Rico defaulted on its constitutionally guaranteed debt for the first time on July 1, when it failed to make about one-half of $2 bil- lion in payment. The island has been in recession for almost a decade and has lost much of its population. Municipal Market Analytics believes that “The market has been waiting for this default for two years, but really it’s been 15 tears in making.” Puerto Rico built up over years over $69 billion in debt.
The minutes of the FOMC June meeting revealed that the policymakers were divided; six wished to raise rates once this year, while nine favored two rate increases if their economic forecasts are realized. The annotated meeting details covered the question how the UK, the second-biggest economy in the EU, with population of 64 million, will find a new working relationship with EU. The FOMC meetings late July and second-half September may provide some initial guidance.
Meanwhile the job-growth figure was 287,000 in June, the best figure this year and one of the best in 5 years. It helped move the S&P 500 to 2150 above its record of 2130.82 achieved over a year ago, and despite the Merrill Lynch prediction that S&P 500 will shed 3% of the EPS this year. Simultaneously the DJIA reached 18,350, a historic peak. WSJ claims in its front page article that “among the most prominent drivers of the 2016 stock rally has been companies’ willingness to buy back shares. The strategy has been embraced by firms and outside investors alike, because it drives up share prices and improves per share earnings by reducing the number of shares outstanding. Some investors decry the buybacks as financial engineering.” While the higher employment figure appears impressive, the labor-force participation rate still stands at 62.7%, where it was 40 years ago. This translates to 22 million unemployed including the underemployed and those who quit look- ing for a job. The celebration of one month’s employment data could be premature at this point in time.
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Developments of historic proportions, notably Brexit discussed later, have taken place in the month of June. In another extraordinary effort to stimulate slowing economies, the market value of all government bond world trading at negative rates reached over $8 trillion. After subtracting inflation it gets down to $6.8 trillion, half the level of just a few months ago, according to J.P Morgan Chase & Co. Two weeks ago yields on 10-year bonds in Germany and Japan hit new all-time lows, while the yield on 10-year U.S. Treasury sank to 1.639%. In frustration over negative rates, Japan’s biggest bank is ending its role as primary dealer of government bonds. Global corporate yields plunged anew, Yield on euro-denominated corporate bonds fell to circa 10%, as the central banks began buying. Two years ago the level stood at about 23% and near 15% a year ago.
Policy makers of the central banks including our Fed have run out of tools. New stimulae could be pernicious the same as fresh attempts at QEs. Perhaps the time has come to turn back the reigns to the market forces by finally raising the rates and at the same time examin- ing opportunities on the fiscal scene. Chair- woman Yellen hinted strongly that the Fed might raise the rates in June or July; instead, she emphasized the bank’s uncertainty when they will act, and where the rates are headed with expected growth near 2% annually over the next three years. Of the 17 officials, James Bullard President of the St. Louis Fed is the only “dovish” one. He is reluctant to raise the rates, except for one through 2018, expecting GDP growth above 2% annual pace. There is too much uncertainty in the global financial market, and inaction only adds to that and may lead to an uncontrollable situation. Forecasts see the rate to rise to 2.4% by the end 2018 and to 3% in the long run. Following Brexit, the Fed is likely to lower the rate to zero instead of raising it.
To stay ahead with innovation and technology, China is on a buying spree of German companies. Since the beginning of this year, they offered to purchase 24 companies for $9.1 billion, and this pace will soon surpass the record of 28 German acquisitions concluded at $2.6 billion in 2014. Meanwhile, there is much concern as the Yuan fell to its weakest level in over five years, partly due to the MSCI’s decision not to include China’s local currency shares to its benchmark emerging market index, thus depriving the country of badly needed billions of dollars.
In the U.S., despite an unadjusted, for season or price, decline of 1.2% in the 1Q, the total revenue at service companies rose an estimated 3.6% in the1Q, Interestingly it was up in 10 out of 12 categories, including the largest sec- tors, finance, healthcare and social assistance.The gain followed an annual pace growth of 2.2% in the 4Q and 3.1% in the 3Q. After a climb of 1.3% in April, retail sales had a solid increase of 0.5% in May. Prices of imports rose by the most in 4 years, an indication that inflation could be moving the Fed’s 2% target.
Sales of existing homes surged 1.8% in May, the highest level in over nine years, to an annual rate of 5.53 million. The April sales were revised down to 54.3 million annual pace. The national median sale price for a previously owned home was $239,700, up 4.7% from a year ago and the highest ever recorded.
The increase in the residential real estate value of $498 billion lowered by the decline of $160 billion in equities, still reached the wealth of Americans to a record of $88.1 trillion in the first quarter. After the recession began, house- holds lost $12 trillion bottoming at $55 trillion in 2009. Since then it rose over $33 trillion, unadjusted for inflation. Despite an unadjusted for season or price decline of 1.2% in the 1Q, household liabilities rose by $17 billion, and remained below the level during the financial crisis. Housing starts declined 0.3% in May to an annual rate of 1.164 million. Nevertheless, the housing market is one of the economy’s brighter spots, although under historical norms, showing thin inventories and rising prices.
Our economy showed a third consecutive month of lowered prospects for the job outlook. The estimates fell in March, April and May, making it the worst year for job growth in 6 years. WSJ surveyed 66 economists from June 3 to June 7 and they saw the economy in “peril surrounded by risks from around the world, in addition to the potential fallout from Britain leaving the EU.” A slowdown in China could hurt the U.S. economy. A strong dollar and lower energy prices could continue to hurt U.S. exporters and manufacturers, although a number of economists forecast oil prices to reach $60 before the end of the year, together with price recovery of many commodities.
Early in June Rep. Jeb Hensarling (R., Texas) delivered a speech to the Economic Club of New York on the subject of Dodd-Frank. WSJ quoted some excerpts of which we selected a few. When voted for it, supporters said that it would “promote financial stability,” “end too big to fall,” and “lift the economy.” None of this came to pass. Today the big banks are bigger and small banks are fewer. More banking as- sets are now concentrated in the so-called “Too Big to Fall” firms. Pray tell how does this pro- mote financial stability? Dodd-Frank’s Volcker Rules and Basel provisions have led to dramatic bond illiquidity and volatility which could lead to the next financial panic, instead of lifting our economy. Republican victory in November could lead to a significant scaling back off financial regulations enacted since 2008 crisis.
After four decades of membership the U.K voted 52% to 48% to exit from the European Union, sending longstanding resentment of the cession of power by the government to an unelected supranational Brussels bureaucracy. By the same token UK rejected EU’s economic and political policies, of which cru- cial factors were immigration issues. This historic and stunning change has turned the world markets overnight into turmoil which make take two to three years to unwind. It could cause other EU members to quit, and trigger unity of the U.K. including Scotland’s independence and vitality of London as world’s financial capital could erode. In the meantime the EU and U.K. could face a recession, which in turn could push the U.S. growth down from a modest 2% to the edge of a mild recession. The DJIA fell overnight 611 points while in Europe Stoxx 600 index lost 7%, in its worst day since October 2008. The pound was at its lowest level in 30 years. Treasury yield dropped to 1.46%, the lowest level in almost five years, while gold rose above $1,300 an ounce. Commodities plunged, Brent crude lost 6.5%, copper dropped the most in six months. Currencies wobbled while the U.S. dollar surged. Central banks came with assurances that they were ready to intervene. It is estimated that on a global basis investors’ paper and/or real loss- es exceeded $2.5 trillion. The trade however will not stop where money is to be made. Meanwhile volatility will climb, while global GDP will likely fall 0.3% during the immediate future of several months. EU insists on a quick Brexit, likely of punishing nature, while 3.5 million U.K. citizens signed petition for a re-referendum, which was promptly killed by P.M. Cameron, who said the U.K. will wait until new Prime Minister is in place before triggering exit talks. Over a period of one or two years a new relationship may likely de- velop between U.K. and EU when many differences might be worked out to mutual benefit.
Page 1 MID-SHIP Report July 14, 2016
Policy makers of the central banks including our Fed have run out of tools. New stimulae could be pernicious the same as fresh attempts at QEs. Perhaps the time has come to turn back the reigns to the market forces by finally raising the rates and at the same time examin- ing opportunities on the fiscal scene. Chair- woman Yellen hinted strongly that the Fed might raise the rates in June or July; instead, she emphasized the bank’s uncertainty when they will act, and where the rates are headed with expected growth near 2% annually over the next three years. Of the 17 officials, James Bullard President of the St. Louis Fed is the only “dovish” one. He is reluctant to raise the rates, except for one through 2018, expecting GDP growth above 2% annual pace. There is too much uncertainty in the global financial market, and inaction only adds to that and may lead to an uncontrollable situation. Forecasts see the rate to rise to 2.4% by the end 2018 and to 3% in the long run. Following Brexit, the Fed is likely to lower the rate to zero instead of raising it.
To stay ahead with innovation and technology, China is on a buying spree of German companies. Since the beginning of this year, they offered to purchase 24 companies for $9.1 billion, and this pace will soon surpass the record of 28 German acquisitions concluded at $2.6 billion in 2014. Meanwhile, there is much concern as the Yuan fell to its weakest level in over five years, partly due to the MSCI’s decision not to include China’s local currency shares to its benchmark emerging market index, thus depriving the country of badly needed billions of dollars.
In the U.S., despite an unadjusted, for season or price, decline of 1.2% in the 1Q, the total revenue at service companies rose an estimated 3.6% in the1Q, Interestingly it was up in 10 out of 12 categories, including the largest sec- tors, finance, healthcare and social assistance.The gain followed an annual pace growth of 2.2% in the 4Q and 3.1% in the 3Q. After a climb of 1.3% in April, retail sales had a solid increase of 0.5% in May. Prices of imports rose by the most in 4 years, an indication that inflation could be moving the Fed’s 2% target.
Sales of existing homes surged 1.8% in May, the highest level in over nine years, to an annual rate of 5.53 million. The April sales were revised down to 54.3 million annual pace. The national median sale price for a previously owned home was $239,700, up 4.7% from a year ago and the highest ever recorded.
The increase in the residential real estate value of $498 billion lowered by the decline of $160 billion in equities, still reached the wealth of Americans to a record of $88.1 trillion in the first quarter. After the recession began, house- holds lost $12 trillion bottoming at $55 trillion in 2009. Since then it rose over $33 trillion, unadjusted for inflation. Despite an unadjusted for season or price decline of 1.2% in the 1Q, household liabilities rose by $17 billion, and remained below the level during the financial crisis. Housing starts declined 0.3% in May to an annual rate of 1.164 million. Nevertheless, the housing market is one of the economy’s brighter spots, although under historical norms, showing thin inventories and rising prices.
Our economy showed a third consecutive month of lowered prospects for the job outlook. The estimates fell in March, April and May, making it the worst year for job growth in 6 years. WSJ surveyed 66 economists from June 3 to June 7 and they saw the economy in “peril surrounded by risks from around the world, in addition to the potential fallout from Britain leaving the EU.” A slowdown in China could hurt the U.S. economy. A strong dollar and lower energy prices could continue to hurt U.S. exporters and manufacturers, although a number of economists forecast oil prices to reach $60 before the end of the year, together with price recovery of many commodities.
Early in June Rep. Jeb Hensarling (R., Texas) delivered a speech to the Economic Club of New York on the subject of Dodd-Frank. WSJ quoted some excerpts of which we selected a few. When voted for it, supporters said that it would “promote financial stability,” “end too big to fall,” and “lift the economy.” None of this came to pass. Today the big banks are bigger and small banks are fewer. More banking as- sets are now concentrated in the so-called “Too Big to Fall” firms. Pray tell how does this pro- mote financial stability? Dodd-Frank’s Volcker Rules and Basel provisions have led to dramatic bond illiquidity and volatility which could lead to the next financial panic, instead of lifting our economy. Republican victory in November could lead to a significant scaling back off financial regulations enacted since 2008 crisis.
After four decades of membership the U.K voted 52% to 48% to exit from the European Union, sending longstanding resentment of the cession of power by the government to an unelected supranational Brussels bureaucracy. By the same token UK rejected EU’s economic and political policies, of which cru- cial factors were immigration issues. This historic and stunning change has turned the world markets overnight into turmoil which make take two to three years to unwind. It could cause other EU members to quit, and trigger unity of the U.K. including Scotland’s independence and vitality of London as world’s financial capital could erode. In the meantime the EU and U.K. could face a recession, which in turn could push the U.S. growth down from a modest 2% to the edge of a mild recession. The DJIA fell overnight 611 points while in Europe Stoxx 600 index lost 7%, in its worst day since October 2008. The pound was at its lowest level in 30 years. Treasury yield dropped to 1.46%, the lowest level in almost five years, while gold rose above $1,300 an ounce. Commodities plunged, Brent crude lost 6.5%, copper dropped the most in six months. Currencies wobbled while the U.S. dollar surged. Central banks came with assurances that they were ready to intervene. It is estimated that on a global basis investors’ paper and/or real loss- es exceeded $2.5 trillion. The trade however will not stop where money is to be made. Meanwhile volatility will climb, while global GDP will likely fall 0.3% during the immediate future of several months. EU insists on a quick Brexit, likely of punishing nature, while 3.5 million U.K. citizens signed petition for a re-referendum, which was promptly killed by P.M. Cameron, who said the U.K. will wait until new Prime Minister is in place before triggering exit talks. Over a period of one or two years a new relationship may likely de- velop between U.K. and EU when many differences might be worked out to mutual benefit.
Page 1 MID-SHIP Report July 14, 2016
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Opinion polls reveal that Britain is leaning to stay in the European Union in the June 23 referendum. Early this year, on the prospect of brexit, there was a big selloff in stocks and the pound weakened. However, since the middle of May we saw a clear reversal in both, after the Bank of England and IMF warned Britain of dire consequences should they leave the EU. An- other global warning came from the G-7 in Tokyo of rising risks to the world economy if it did not coordinate fiscal spending. A week ago a new brexit poll showed a jump in support of leaving the EU causing sterling to fall against all of its 16 major peers. At the same time yields on 10-year debt of U.K and Germany hit respective all time lows of 1.253 and 0.049. Elsewhere, Indian Prime Minister Narendra Modi was criticized for failing to pursue “big bang” liberalization measures to revamp the nation's economy, Mr. Modi defended his action by stating that he opened up more of the economy to foreign investment and made changes to curb corruption, filled gaps in rural infrastructure and facilitated doing business easier. He claimed that he had undertaken the maximum reforms possible. India is the world’s fastest growing economy with current GDP annual growth rate standing at 7.6 %. Mr. Modi is to meet President Obama and address a joint session of the U.S. Congress in June, at which time he will state that he is ready for India to take a more prominent role on the world stage.
In the U.S. the GDP growth rate has been amended up from 0.5% to 0.8% for the first quarter this year. Corporate profits also in- creased slightly by 0.6% or $8.1 billion in the first quarter, after a sharp fall in the 4Q last year. Dividends also rose 0.8% or $7.4 billion in the 1Q. Undistributed profits increased 0.2% compared with 18.6% drop in the 4Q. Corporate profits averaged $402 billion from 1950 until 2015, with a high of $1,542 billion in the 3Q 2014. Help for improving profits would come from a higher degree of growth of the GDP.
Consumer spending has been steadily pulling back since the middle of last year. However, spending increased 1% in April, the biggest one-month jump since August 2009, with 0.2% rise in February and unchanged in March. Personal income rose 0.4% in April. The personal saving rate was 5.4%, down from March 5.9% and the lowest of the year. Business investment is down for two straight quarters, typical for a recession. The personal-consumption expenditures price index, Fed’s preferred inflation gauge, rose 0.3% in April, the highest reading since May a year ago.
The number of homes going under contract for sale jumped in April to the highest level in over 10 years. Pending sales of previously owned homes rose 5.1%. The sales index rose to 115.3, the most since February 2006. Clearly U.S. housing market activity continues to im- prove. Pending sales in April rose 4.6% com- pared with a year ago, the 20th consecutive month of year-over-year gains. The S&P/Case- Shiller national home-price index has come back to within 4% of its 2006 peak. a steep jump, from 30% decline at the bottom in 2012. New homes showed the strongest month in eight years soaring almost 17% in April. Sales of existing homes were at a 5.45 million annual rate in April. Second consecutive month rise, still below the peak during the last boom. Residential construction has contributed to an over- all output for eight straight quarters, growing at a 17% annual pace in the 1Q, with slow growth in other sectors.
After 5 months of contraction, the ISM index of manufacturing rose to a higher than expected 51.3 in May. Exports rose 1.5% in April, the highest this year, but not enough to offset a 2.1% rise in imports, widening the trade deficit 5.3% to $37.44 billion. Labor productivity fell at a 0.6% annual pace in the first quarter, Mean- while, employers added a mere 38,000 workers in May, the fewest number in six years, after an increase of 123,000 in April. The report showed a broad slowdown in hiring. Part-time jobs climbed 6.4 million in May, the highest since August, from 6 million in April. By leaving the labor force, the jobless rate fell to 4.7%, a very questionable number considering that employment rate of the labor force is still below 63%, where it stood over 40 years ago. In the light of this weak hiring, the Fed may again push back raising interest rates.
U.S stocks capped a third month of gains, the longest rally in two years, with the dollar having shown the biggest rise at the same time. Fed- eral Reserve Chairwoman Janet Yellen hinted recently that the Fed will raise the interest rates within months provided the U.S. economy keeps gaining strength. She said that after a couple of weak quarters “growth looks to be picking up from the various data that we monitor. It is appropriate to gradually and cautiously increase the overnight interest rate over time, and probably in the coming months.” The move could come any time in June, July or September. The policy-making FOMC will meet June 14-15. Other forecasters believe that consumer confidence, spending, housing market activity and industrial production showed gains in recent months, leading the economy to a growing rate of 2.5% in the second quarter.
Jim Thomas, economist of private equity Carlyle Group, theorizes that lower interest rates are hurting business investment by encouraging companies to buy back stock and pay dividends. Since 2009, after the Fed brought down the interest rate to zero, buy- backs skyrocketed by 194% and dividends jumped 66.5% but investment rose only 43%. Many critics contend that Fed’s extraordinary monetary policy and bond purchases foment- ed uncertainty and have hurt the economy by undermining investment.
Mr. George Melloan, former deputy editor of the WSJ, made the case in his recent “opinion” article that we pay more attention to our deficit. He refers to Jeffrey Miron, an economist who estimates in his “U.S. Fiscal Imbalance”, a monograph for the Cato
Institute, that looking out 75 years ahead, the present value of future U.S. government expenses will exceed the present value of future government revenues by $117.9 trillion. In the introduction to the booklet, retired Cato president John Allison, says that this huge gap exceeds the total annual U.S. GDP by 6.8 times and also by far exceeds the nation’s total private wealth currently of $63.5 trillion. In only seven years the federal deficits doubled the national debt. “The only real answer is that entitlement programs will have to be reformed, and sooner rather than later.” – to prevent paralyzing the economy and the needed government activities.” The article ends –“But as for utopia, we’re certainly not there yet. And we may be going in the opposite direction.”
In the U.S. the GDP growth rate has been amended up from 0.5% to 0.8% for the first quarter this year. Corporate profits also in- creased slightly by 0.6% or $8.1 billion in the first quarter, after a sharp fall in the 4Q last year. Dividends also rose 0.8% or $7.4 billion in the 1Q. Undistributed profits increased 0.2% compared with 18.6% drop in the 4Q. Corporate profits averaged $402 billion from 1950 until 2015, with a high of $1,542 billion in the 3Q 2014. Help for improving profits would come from a higher degree of growth of the GDP.
Consumer spending has been steadily pulling back since the middle of last year. However, spending increased 1% in April, the biggest one-month jump since August 2009, with 0.2% rise in February and unchanged in March. Personal income rose 0.4% in April. The personal saving rate was 5.4%, down from March 5.9% and the lowest of the year. Business investment is down for two straight quarters, typical for a recession. The personal-consumption expenditures price index, Fed’s preferred inflation gauge, rose 0.3% in April, the highest reading since May a year ago.
The number of homes going under contract for sale jumped in April to the highest level in over 10 years. Pending sales of previously owned homes rose 5.1%. The sales index rose to 115.3, the most since February 2006. Clearly U.S. housing market activity continues to im- prove. Pending sales in April rose 4.6% com- pared with a year ago, the 20th consecutive month of year-over-year gains. The S&P/Case- Shiller national home-price index has come back to within 4% of its 2006 peak. a steep jump, from 30% decline at the bottom in 2012. New homes showed the strongest month in eight years soaring almost 17% in April. Sales of existing homes were at a 5.45 million annual rate in April. Second consecutive month rise, still below the peak during the last boom. Residential construction has contributed to an over- all output for eight straight quarters, growing at a 17% annual pace in the 1Q, with slow growth in other sectors.
After 5 months of contraction, the ISM index of manufacturing rose to a higher than expected 51.3 in May. Exports rose 1.5% in April, the highest this year, but not enough to offset a 2.1% rise in imports, widening the trade deficit 5.3% to $37.44 billion. Labor productivity fell at a 0.6% annual pace in the first quarter, Mean- while, employers added a mere 38,000 workers in May, the fewest number in six years, after an increase of 123,000 in April. The report showed a broad slowdown in hiring. Part-time jobs climbed 6.4 million in May, the highest since August, from 6 million in April. By leaving the labor force, the jobless rate fell to 4.7%, a very questionable number considering that employment rate of the labor force is still below 63%, where it stood over 40 years ago. In the light of this weak hiring, the Fed may again push back raising interest rates.
U.S stocks capped a third month of gains, the longest rally in two years, with the dollar having shown the biggest rise at the same time. Fed- eral Reserve Chairwoman Janet Yellen hinted recently that the Fed will raise the interest rates within months provided the U.S. economy keeps gaining strength. She said that after a couple of weak quarters “growth looks to be picking up from the various data that we monitor. It is appropriate to gradually and cautiously increase the overnight interest rate over time, and probably in the coming months.” The move could come any time in June, July or September. The policy-making FOMC will meet June 14-15. Other forecasters believe that consumer confidence, spending, housing market activity and industrial production showed gains in recent months, leading the economy to a growing rate of 2.5% in the second quarter.
Jim Thomas, economist of private equity Carlyle Group, theorizes that lower interest rates are hurting business investment by encouraging companies to buy back stock and pay dividends. Since 2009, after the Fed brought down the interest rate to zero, buy- backs skyrocketed by 194% and dividends jumped 66.5% but investment rose only 43%. Many critics contend that Fed’s extraordinary monetary policy and bond purchases foment- ed uncertainty and have hurt the economy by undermining investment.
Mr. George Melloan, former deputy editor of the WSJ, made the case in his recent “opinion” article that we pay more attention to our deficit. He refers to Jeffrey Miron, an economist who estimates in his “U.S. Fiscal Imbalance”, a monograph for the Cato
Institute, that looking out 75 years ahead, the present value of future U.S. government expenses will exceed the present value of future government revenues by $117.9 trillion. In the introduction to the booklet, retired Cato president John Allison, says that this huge gap exceeds the total annual U.S. GDP by 6.8 times and also by far exceeds the nation’s total private wealth currently of $63.5 trillion. In only seven years the federal deficits doubled the national debt. “The only real answer is that entitlement programs will have to be reformed, and sooner rather than later.” – to prevent paralyzing the economy and the needed government activities.” The article ends –“But as for utopia, we’re certainly not there yet. And we may be going in the opposite direction.”
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
European Union lawmakers voted overwhelmingly, 546 against, and 28 in favor of the EU recognizing China as a market economy. The 2001 agreement allowing it to join the WTO by December 2016 would make it harder for EU to protect its industries from unfair trade practices by Beijing, such as subsidizing exports and undercutting overseas competition. They say that China is still controlled by the state. At the same time IMF demanded that EU free Greece from all payments until 2040, pitting IMF against Germany. Two weeks ago the Brazilian Senate suspended Ms. Dilma Rousseff and put her on trial, yielding her post to Vice President Michel Temer, a renowned lawyer and backroom deal maker. Mr. Temer said that “our main challenge is to stop the freefall of the economy that is causing unemployment and we need to reconstruct the pillar of the Brazilian economy and strengthen the business environment.”
Academic and financial economists in the Wall Street Journal’s monthly survey of business were asked whether living standards were higher today or at certain points in the past. Around 80% said those standards are higher today than during the 1990s or earlier. The Pew Research Center recently polled voters on the question- “Compared with 50 years ago, life for people like you in America is better or worse?” A plurality of 46% said things were worse now. Only 34% said life today is better than in the 1960s. WSJ quoted other economists who felt that for some demographic groups, wages and jobs deteriorated with average workers losing ground. Current standards may be higher but uncertainties are much, much higher still. About 42% of the economists say uncertainty over switching presidents is so high the economy is already suffering. “Businesses may defer investment and hiring decisions until they have a better sense of the direction of the next administration.” After declining for four weeks, the DJIA climbed 213 points to 17,706 this week.
As oil reversed an earlier advance, U.S. stocks fell while investors waited for additional data about direction of the economy. Technology stocks were the biggest drag on the market. However, dollar resumed its rise, and crude oil traded up near the $50 level, without benefitting Venezuela which is in a catastrophic situation. Facing inflation at over 200%, that country is forced to sell oil to the U.S. at unprecedented low discounts. When Bret Stephens of the WSJ was asked by his young son “What’s social- ism?”, Stephens responded in his Opinion article, including the following excerpt: – “Democratic socialism had no shortage of
prominent Western cheerleaders as it set Venezuela on its road to hyperinflation, hyper-criminality, water shortages, beer shortages, electricity blackouts, political repression and national collapse. Chavez and his successor, Nicholas Maduro, gained prestige and legitimacy from these paladins of the left. They are complicit in Venezuela's current agony.”
U.S. consumer spending in April reached the highest level in over a year widening the gap between online sales and store retailers. The overall sales rose 1.3% in April while websites gained 2.4%. Internet and catalog sales have grown three times as fast as overall sales, up 10.2%, while department-store sales dropped 1.7% over the past year. Amazon is now the second largest apparel seller in the U.S. after WalMart showed a 1% increase in total sales. Economists expect the GDP growth to reach 2.3% annualized advance in the second-quarter, while the Fed projects the growth to reach 2.8%. Sales of existing homes rose 1.7% in April, 6% higher than a year ago, to a 5.45 million annual rate. The national sale price for such home was $232,500, up 6.3% than a year ago. The new single-family home sales jumped 16.6% in April, the strongest month’s rise in eight years, to an annual rate of 619,000. The median price of a new home rose at the same time to $321,000, up 9.7% from a year ago, to the highest record level. Half of homes sold under and half above that median price. Inventories of new homes tightened in April. Based on the current sales pace, it would take 4.7 months to move the supply, compared with 6.5 months in March. The UoM preliminary
consumer sentiment for May climbed to a high of 95.8 from April’s 89. Meanwhile, Paul Ryan agreed with the White House and the Democrats to let Puerto Rico restructure its $70 billion debt.
Two Fed bank presidents said last week that at least two interest-rate increases may be warranted this year because the economy continues to expand and inflation is picking up. Atlanta Fed President Dennis Lockhart commented “currently my assumption is two, possibly three”, and Atlanta Fed President John Williams concurred saying “gradual means two to three rate increases this year.” The dollar had a biggest three-week rally since November as the odds of a Fed rate-rise jumped and global shares rebounded from a six-week low, while commodities and crude oil prices gained. The yield on the 10-year note was unchanged at 1.86% last week, after rising 16 points the week before. Japan’s 10-year yield fell 3 points to minus 0.106 % as investors bought 3.6 tril- lion yen {$32.7 billion} in April, the most since August 2007. A surging yen is pushing Tokyo
and Washington into a standoff over exchange rates, stoking anti-trade sentiment in the U.S. Last week the Obama
administration increased a tariff on “dumped” steel to 522%, which will hurt U.S. manufacturers who need the steel to remain competitive. Likely a bad development.
In this connection, we quote a paragraph from a recent WSJ “Opinion” article by Robert B. Zoellic, former World Bank president, U.S. trade representative and deputy secretary of state: “America’s Founding Fathers, and every generation since, recognized that economic strength at home is vital for U.S. security. In the 19th century, the U.S. became a Pacific power. The 20th century demonstrated that conflicts in East Asia can threaten the U.S., but also that U.S. security can underpin Asia’s prosperity. The U.S. now needs to create a network in the Asia-Pacific for the 21st century. Historians will look back on America’s embrace of TTP- or its failure to do so – as a turning point in U.S. global strategy.”
Japan is hosting the G-7 this year on May 26-27, with Prime Minister Shinzo Abe chairing the event in Kashikojima Island of Wisdom. At this critical time, the summit’s main focus, according to Mr. Abe, will be on revitalizing the global economy, aiming to bring together monetary policies with accelerated structural reforms and flexible fiscal policies in a well balanced cooperative way. Also to address challenges in key areas, including infrastructure, terrorism, global health, and international maritime laws. Free and fair competition should be encouraged while addressing harmful dumping of commodities, setting the world on a trajectory for growth, productivity and greater prosperity.
Page 1 MID-SHIP Report May 26, 2016
Academic and financial economists in the Wall Street Journal’s monthly survey of business were asked whether living standards were higher today or at certain points in the past. Around 80% said those standards are higher today than during the 1990s or earlier. The Pew Research Center recently polled voters on the question- “Compared with 50 years ago, life for people like you in America is better or worse?” A plurality of 46% said things were worse now. Only 34% said life today is better than in the 1960s. WSJ quoted other economists who felt that for some demographic groups, wages and jobs deteriorated with average workers losing ground. Current standards may be higher but uncertainties are much, much higher still. About 42% of the economists say uncertainty over switching presidents is so high the economy is already suffering. “Businesses may defer investment and hiring decisions until they have a better sense of the direction of the next administration.” After declining for four weeks, the DJIA climbed 213 points to 17,706 this week.
As oil reversed an earlier advance, U.S. stocks fell while investors waited for additional data about direction of the economy. Technology stocks were the biggest drag on the market. However, dollar resumed its rise, and crude oil traded up near the $50 level, without benefitting Venezuela which is in a catastrophic situation. Facing inflation at over 200%, that country is forced to sell oil to the U.S. at unprecedented low discounts. When Bret Stephens of the WSJ was asked by his young son “What’s social- ism?”, Stephens responded in his Opinion article, including the following excerpt: – “Democratic socialism had no shortage of
prominent Western cheerleaders as it set Venezuela on its road to hyperinflation, hyper-criminality, water shortages, beer shortages, electricity blackouts, political repression and national collapse. Chavez and his successor, Nicholas Maduro, gained prestige and legitimacy from these paladins of the left. They are complicit in Venezuela's current agony.”
U.S. consumer spending in April reached the highest level in over a year widening the gap between online sales and store retailers. The overall sales rose 1.3% in April while websites gained 2.4%. Internet and catalog sales have grown three times as fast as overall sales, up 10.2%, while department-store sales dropped 1.7% over the past year. Amazon is now the second largest apparel seller in the U.S. after WalMart showed a 1% increase in total sales. Economists expect the GDP growth to reach 2.3% annualized advance in the second-quarter, while the Fed projects the growth to reach 2.8%. Sales of existing homes rose 1.7% in April, 6% higher than a year ago, to a 5.45 million annual rate. The national sale price for such home was $232,500, up 6.3% than a year ago. The new single-family home sales jumped 16.6% in April, the strongest month’s rise in eight years, to an annual rate of 619,000. The median price of a new home rose at the same time to $321,000, up 9.7% from a year ago, to the highest record level. Half of homes sold under and half above that median price. Inventories of new homes tightened in April. Based on the current sales pace, it would take 4.7 months to move the supply, compared with 6.5 months in March. The UoM preliminary
consumer sentiment for May climbed to a high of 95.8 from April’s 89. Meanwhile, Paul Ryan agreed with the White House and the Democrats to let Puerto Rico restructure its $70 billion debt.
Two Fed bank presidents said last week that at least two interest-rate increases may be warranted this year because the economy continues to expand and inflation is picking up. Atlanta Fed President Dennis Lockhart commented “currently my assumption is two, possibly three”, and Atlanta Fed President John Williams concurred saying “gradual means two to three rate increases this year.” The dollar had a biggest three-week rally since November as the odds of a Fed rate-rise jumped and global shares rebounded from a six-week low, while commodities and crude oil prices gained. The yield on the 10-year note was unchanged at 1.86% last week, after rising 16 points the week before. Japan’s 10-year yield fell 3 points to minus 0.106 % as investors bought 3.6 tril- lion yen {$32.7 billion} in April, the most since August 2007. A surging yen is pushing Tokyo
and Washington into a standoff over exchange rates, stoking anti-trade sentiment in the U.S. Last week the Obama
administration increased a tariff on “dumped” steel to 522%, which will hurt U.S. manufacturers who need the steel to remain competitive. Likely a bad development.
In this connection, we quote a paragraph from a recent WSJ “Opinion” article by Robert B. Zoellic, former World Bank president, U.S. trade representative and deputy secretary of state: “America’s Founding Fathers, and every generation since, recognized that economic strength at home is vital for U.S. security. In the 19th century, the U.S. became a Pacific power. The 20th century demonstrated that conflicts in East Asia can threaten the U.S., but also that U.S. security can underpin Asia’s prosperity. The U.S. now needs to create a network in the Asia-Pacific for the 21st century. Historians will look back on America’s embrace of TTP- or its failure to do so – as a turning point in U.S. global strategy.”
Japan is hosting the G-7 this year on May 26-27, with Prime Minister Shinzo Abe chairing the event in Kashikojima Island of Wisdom. At this critical time, the summit’s main focus, according to Mr. Abe, will be on revitalizing the global economy, aiming to bring together monetary policies with accelerated structural reforms and flexible fiscal policies in a well balanced cooperative way. Also to address challenges in key areas, including infrastructure, terrorism, global health, and international maritime laws. Free and fair competition should be encouraged while addressing harmful dumping of commodities, setting the world on a trajectory for growth, productivity and greater prosperity.
Page 1 MID-SHIP Report May 26, 2016
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Federal Reserve Chairwoman Janet Yellen with three former Fed heads, Greenspan, Bernanke and Volcker, attempted to assuage worries about the U.S. moving back into recession. The group saw our economy progressing without breeding obvious new financial bubbles that could derail growth. Ms. Yellen said “This is an economy on the solid course not a bubble economy. It has made tremendous progress from the damage of the 2007 and 2009 financial crisis.” Mr. Bernanke commented that “The U.S. economy is moving forward and I don’t see any particular reason to believe a recession is any more likely in 2016 than it was in 2015 or 2014.” Both Mr. Volcker and Mr. Greenspan concurred. In another public statement Ms. Yellen said “We think a gradual path of rate increases will be appropriate and stand ready to adjust what we do based on how our views of the economy evolve.”
The latest developments from BRIC countries were electrified by Brazil’s Congress releasing a report recommending that lawmakers vote to impeach President Rousseff. There are diverse claims about the current economy of India. The business community thinks the Government maintains that there is no recession, just a lack of demand for Indian exports. The President of the Center of Indian Industry Naushad Forbes claims that India’s GDP will attain 8% this year. In the event that the U.K. decides to leave the European Union, many economists anticipate that the EU would disintegrate. IMF said that a British exit from EU “could do severe damage by disrupting established trading relationships.” Meanwhile, after a two months rally in prices of riskier assets bond yields tumbled as the yen surged to its highest level in a year and a half. Improvement in China’s economic outlook spurred a rally in assets. However, China’s $3 trillion corporate bond market is unraveling, as fresh defaults of state-enterprises have driven yields for the past two weeks, and caused the biggest selloff in junk debt since 2014. A wave of interest rate cuts by developing countries have boosted emerging stock and bond markets. The MSFCI World Index gained 14% since its February low; equities erased losses for the year and many commodities surged. U.S. stocks climbed to a four-month high as some earnings topped estimates. DJIA closed above 18,000 for the first time since July and 15% since its Feb. 11 low, up 3.3% this year.
Bank of Japan negative interest rate experiment had unintentional consequences. Instead of spurring investment, the Tokyo stock market rallied but after a few days, rather than falling, the yen surged to a 18-month high; banks’ got hit by lower profits and households refused to borrow, destabilizing the system and leaving BOJ to run out of bonds to buy. That happens when governments rely too heavily on monetary policy and limitless spending.
WSJ analyzed an opinion article “Monetary Reform or Trade War” by Messrs.' Lehrman and Mueller. They stated - “Foreign countries use expansive monetary policy to depreciate their currencies relative to the U.S. dollar, hop- ing to gain a trade advantage by exporting un- employment. Thus the solution can only be a currency or monetary arrangement that does not encourage predatory currency depreciation.” They point out that “Neither tax, nor regulatory , nor budget reforms, however desira- ble, will eliminate currency wars. To restore America’s competitive position in production and world trade, stable exchange rates are the only solution tested in the laboratory of U.S. history – from 1789 to 1971 as stable exchange rates have proven to establish the most reliable level for free and fair world trade.”
Over the weekend Saudi Arabia ended its decades-long policy of separating commercial from political considerations by killing an agreement between major oil producers to freeze output owing to Iran’s refusal to participate in it.
In the U.S. the rental market cooled in the first quarter. Average rents rose 4.1% to $1,248 from a year ago, compared with the 2015 first quarter 5% rise. Demand for new apartments in the first quarter was about half its typical level. The number of occupied new apartments rose by over 20,000 units, compared with the 5-year average of about 40,000 for the quarter. U.S. rent growth is coming down from 15-year highs and vacancy rates are easing from their lowest levels in as many years. New business investments are constrained by weaker earnings. A strong dollar restrains exports. After declining in January and February retail sales again fell 3% in March, the third straight month, though furniture and home-furnishing sales rose 0.3%.
After discovering onerous requirements in the new retirement rules, the administration decid- ed to scale them back, which was greatly welcomed. This was not the case with the U.S. Treasury announcing a third set of new rules governing corporate inversions. In response Ian Read, Chairman and CEO of Pfizer Inc. said in a NYT article that “companies like Pfizer, Allergan contribute to the communities in which we operate. To be pilloried as ‘deserters’ when we are trying to stay competitive on s global stage so that we can continue to invest in the U.S., is wrongheaded. Government should encourage investment certainty and job creation.”
The Federal Reserve report showed that the long awaited upward pressure in wages and prices may be beginning to make a mark. Of the Fed’s twelve regional banks only Cleve- land and Kansas City last week showed that manufacturing had declined. The U.S. ran a $461 billion deficit from October to March. The Congressional Budget Office projects a $534 billion deficit for the fiscal year. Over 40% of those who borrowed from the govern- ment's student loan program are behind on payments or in default. At the same time the demand for foreign skilled workers visas, often used by technology firms, surpassed the entire year’s allocation within five days.
After 100 years of serving our financial market, the Federal Reserve went through a very critical test during the seven years plowing through largely untested waters, following the financial crisis. It is not surprising that someone would offer a critique. A former aide to Chairwoman Yellen, Dartmouth College Professor Andrew Levin broke the ranks by offering changes. He defined four segments to be subjected to them; the Fed should be a truly public institution; en- sure a transparent selection of regional Fed Presidents: establish seven year-term limit for these Presidents and Board Governors; have the Federal Reserve submit to external review. Several well run foreign central banks are subject to such reviews.
Page 1 MID-SHIP Report April 21, 2016
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
The overall global economic situation has changed very little during the last two weeks. Brazil has reached a critical point. China, de- spite serious financial challenges, decided to invest $24 billion to build a world class semi- conductor industry in partnership with a U.S. company. At the same time, to convince the world that its finances have stabilized, China is now allowing brokerages to short-sell stocks and margin trade with borrowed money. The uncertainty about the United Kingdom leaving the EU in June has significantly brought down the British Pound.
After six sessions in the last week of March, the dollar rebounded higher in the wake of better than expected stats on growth in the U.S., leading to expectations of interest rate increase. For the first time in a number of months, there is less dissent among the Federal Reserve officials. St. Louis Fed President, James Bullard, suggested that a rate increase in April is a possibility. Dallas Fed President Robert Steven Kaplan considers himself a centrist, while his predecessor, Richard Fisher, was considered a hawk and resisted the easy- money policy, as was Charles Plosser, former Philadelphia Fed President. His successor, Patrick Harker has centrist views, while Nara-yana Kocherlakota, the former Minneapolis Fed President, advocated more aggressive easy-money policy. Thus Chairwoman Yellen is now more aligned with current officials, as she plans to raise the interest rate twice this year instead of four times. She promised however to retain her flexibility about raising the rate, with a keen eye on global growth, and U.S. employment and inflation stats. In the immediate re- sponse to this policy, stocks and gold rose, (gold with the biggest gain in decades) while Treasuries and the dollar fell. Investors appear less bullish on the dollar since May 2014 which would help our GDP to grow.
When the stock market rally of several weeks ended, Mohamed El-Erian, a Bloomberg View columnist, and chief economic adviser to Allanz SE, wrote a paper in the Bloomberg View on the subject “Why Investors Face Roller-Coaster Markets?” He highlighted several conditions which brought the prevailing global financial scenario:
1. Trading range fluctuations reflect a tug of war between a weakening global economy and liquidi- ty injection from central
banks and corporate as- sets.
2. On the way up, prices overshoot, warranted by exceptional funding.
3. This is likely to continue in the short-term, shift- ing for higher quarterly returns from conventional long-term positioning.
4. Today’s markets are influenced by central banks with correlations among asset classes which are less reliable, weakening the
effectiveness of risk.
5. Over time, the trading range is more likely to get wider than smaller, creating probability of either a policy mistake or a market
accident, in- creasing the range itself as it is becoming more fragile.
6. It is too early to determine whether the eventu- al dismantling of the trading range will result in an upward or downward
breakout, depending on the policy responses in the important economies of Asia, Europe and North America.
7. A constructive policy response would require a transition from excessive reliance on central banks to a set of policies that
reinvigorates growth engines, deals with aggregate demand imbalances, addresses excessive pockets of indebtedness and
makes progress in completing regional and global economic/financial architectures. If successful, range-bound trading would
yield to genuinely high- er financial asset prices that are firmly supported by strengthening fundamentals.
8. The more this policy is delayed, the greater the political polarization and the higher the probability of notably lower markets
that, in turn, would risk making the politics even messier. The article states at its close that it does not necessarily reflect the
opinion of the editorial board of Bloom- berg LP and its owners.
After growing 2% in the third quarter, the U.S. economy grew 1.4% in the fourth quarter, previously estimated at 1%, marking a slowdown from the 2.2% pace of the first three quarters of 2015. For the entire last year, the economy grew 2.4%, same as in 2014. There was higher spending on services in the fourth quarter 2015. Profits in the U.S. dropped 3.1% in 2015, the most since 2008, pushed down by lower productivity, higher labor costs and a crash in energy prices. The data from the Commerce Department also showed that pretax earnings declined 7.8% in 2016, the most since first quarter 2011. Thus the economy is still struggling with global slowdown, low commodities prices combined with reduced demand, lower export and curtailed business investment purchases. Household purchases, which comprise almost 70% of our economy, increased at a 2.4% annual rate, up from a 2% earlier estimated level. Corporate spending for equipment fell at a 2.1% annual pace, owing mainly to weak global growth. While major stock market indexes climbed about 13% in the last few weeks, the market for initial public offerings is in its slowest period since the first quarter 2009.
New orders for durable goods fell 2.8% in February. After receiving orders for 68 aircraft in January, Boeing Co. booked only two in February. Spending on defense aircraft and parts led the decline, falling 29.2% in the month, while civilian orders dropped 27.1%. New orders for nondefense capital goods, excluding aircraft, fell 1.8% in February after rising 3.1% in January. The manufacturing sector which generates about one-eighth of U.S. GDP looked better. In January the increase was revised to a 4.2% gain from an earlier estimate of a 4.7% rise. The ISM manufacturing index expended in March for the first time in seven months. A six-year old bull market in the U.S. commercial real estate ended in February when sales dropped to $25.1 billion from $42.3 billion in January. The Valuation index was 8.7% higher from a year ago, after rising by 11% last year. Consumer spending shows softness, having grown only 0.1% in February, for the third consecutive month. 213,000 payrolls were added in March. The U.S. trade deficit rose 2.6% in February to $47.06 billion, the highest since August. Imports rose 1.3% in February. Exports rose 1%, but were down 4.2% from a year ago. The unemployment rate is seemingly holding at 4.9%. The real unemployment is material- ly higher. The labor participation rate edged slightly to 62.9% in February, the highest in a year, but just about where it was 46 years ago! People entering the labor force were mostly able to find part-time employment, raising Chairwoman Yellen’s concern about abnormally high levels of involuntary part- time, which rose by 135,000 to 6.12 million.
After starting the year under a dark cloud of concern, the U.S economy managed to over- come the financial markets and retain gains in retail, housing and autos despite the continuing slowdown abroad. Average hourly earnings rose 0.3% in March to $25.43, after dropping in February. Wages rose 2.3% from a year ago, slightly lower than the 2.6% year-over-year wage growth in December, the best improvement since 2009. The Fed is waiting for a breakout in wages to push inflation to its 2% goal before raising the fund’s rate, which could possibly occur in June. Meanwhile, the Treasury Department imposed new curbs on corporate inversions which would remove benefits from them and eventually shut them down.
Page 1 MID-SHIP Report April 7, 2016
After six sessions in the last week of March, the dollar rebounded higher in the wake of better than expected stats on growth in the U.S., leading to expectations of interest rate increase. For the first time in a number of months, there is less dissent among the Federal Reserve officials. St. Louis Fed President, James Bullard, suggested that a rate increase in April is a possibility. Dallas Fed President Robert Steven Kaplan considers himself a centrist, while his predecessor, Richard Fisher, was considered a hawk and resisted the easy- money policy, as was Charles Plosser, former Philadelphia Fed President. His successor, Patrick Harker has centrist views, while Nara-yana Kocherlakota, the former Minneapolis Fed President, advocated more aggressive easy-money policy. Thus Chairwoman Yellen is now more aligned with current officials, as she plans to raise the interest rate twice this year instead of four times. She promised however to retain her flexibility about raising the rate, with a keen eye on global growth, and U.S. employment and inflation stats. In the immediate re- sponse to this policy, stocks and gold rose, (gold with the biggest gain in decades) while Treasuries and the dollar fell. Investors appear less bullish on the dollar since May 2014 which would help our GDP to grow.
When the stock market rally of several weeks ended, Mohamed El-Erian, a Bloomberg View columnist, and chief economic adviser to Allanz SE, wrote a paper in the Bloomberg View on the subject “Why Investors Face Roller-Coaster Markets?” He highlighted several conditions which brought the prevailing global financial scenario:
1. Trading range fluctuations reflect a tug of war between a weakening global economy and liquidi- ty injection from central
banks and corporate as- sets.
2. On the way up, prices overshoot, warranted by exceptional funding.
3. This is likely to continue in the short-term, shift- ing for higher quarterly returns from conventional long-term positioning.
4. Today’s markets are influenced by central banks with correlations among asset classes which are less reliable, weakening the
effectiveness of risk.
5. Over time, the trading range is more likely to get wider than smaller, creating probability of either a policy mistake or a market
accident, in- creasing the range itself as it is becoming more fragile.
6. It is too early to determine whether the eventu- al dismantling of the trading range will result in an upward or downward
breakout, depending on the policy responses in the important economies of Asia, Europe and North America.
7. A constructive policy response would require a transition from excessive reliance on central banks to a set of policies that
reinvigorates growth engines, deals with aggregate demand imbalances, addresses excessive pockets of indebtedness and
makes progress in completing regional and global economic/financial architectures. If successful, range-bound trading would
yield to genuinely high- er financial asset prices that are firmly supported by strengthening fundamentals.
8. The more this policy is delayed, the greater the political polarization and the higher the probability of notably lower markets
that, in turn, would risk making the politics even messier. The article states at its close that it does not necessarily reflect the
opinion of the editorial board of Bloom- berg LP and its owners.
After growing 2% in the third quarter, the U.S. economy grew 1.4% in the fourth quarter, previously estimated at 1%, marking a slowdown from the 2.2% pace of the first three quarters of 2015. For the entire last year, the economy grew 2.4%, same as in 2014. There was higher spending on services in the fourth quarter 2015. Profits in the U.S. dropped 3.1% in 2015, the most since 2008, pushed down by lower productivity, higher labor costs and a crash in energy prices. The data from the Commerce Department also showed that pretax earnings declined 7.8% in 2016, the most since first quarter 2011. Thus the economy is still struggling with global slowdown, low commodities prices combined with reduced demand, lower export and curtailed business investment purchases. Household purchases, which comprise almost 70% of our economy, increased at a 2.4% annual rate, up from a 2% earlier estimated level. Corporate spending for equipment fell at a 2.1% annual pace, owing mainly to weak global growth. While major stock market indexes climbed about 13% in the last few weeks, the market for initial public offerings is in its slowest period since the first quarter 2009.
New orders for durable goods fell 2.8% in February. After receiving orders for 68 aircraft in January, Boeing Co. booked only two in February. Spending on defense aircraft and parts led the decline, falling 29.2% in the month, while civilian orders dropped 27.1%. New orders for nondefense capital goods, excluding aircraft, fell 1.8% in February after rising 3.1% in January. The manufacturing sector which generates about one-eighth of U.S. GDP looked better. In January the increase was revised to a 4.2% gain from an earlier estimate of a 4.7% rise. The ISM manufacturing index expended in March for the first time in seven months. A six-year old bull market in the U.S. commercial real estate ended in February when sales dropped to $25.1 billion from $42.3 billion in January. The Valuation index was 8.7% higher from a year ago, after rising by 11% last year. Consumer spending shows softness, having grown only 0.1% in February, for the third consecutive month. 213,000 payrolls were added in March. The U.S. trade deficit rose 2.6% in February to $47.06 billion, the highest since August. Imports rose 1.3% in February. Exports rose 1%, but were down 4.2% from a year ago. The unemployment rate is seemingly holding at 4.9%. The real unemployment is material- ly higher. The labor participation rate edged slightly to 62.9% in February, the highest in a year, but just about where it was 46 years ago! People entering the labor force were mostly able to find part-time employment, raising Chairwoman Yellen’s concern about abnormally high levels of involuntary part- time, which rose by 135,000 to 6.12 million.
After starting the year under a dark cloud of concern, the U.S economy managed to over- come the financial markets and retain gains in retail, housing and autos despite the continuing slowdown abroad. Average hourly earnings rose 0.3% in March to $25.43, after dropping in February. Wages rose 2.3% from a year ago, slightly lower than the 2.6% year-over-year wage growth in December, the best improvement since 2009. The Fed is waiting for a breakout in wages to push inflation to its 2% goal before raising the fund’s rate, which could possibly occur in June. Meanwhile, the Treasury Department imposed new curbs on corporate inversions which would remove benefits from them and eventually shut them down.
Page 1 MID-SHIP Report April 7, 2016
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
After reaching the deepest rout in global equities, most of the markets have recouped from this year’s losses, seemingly led by increased price of oil and some commodities. It may take a year before the oversupply of oil is worked off and another year or two before its price can climb back to $50s per barrel. Meanwhile, as shown below, the BRIC countries generate enough financial instability with a high degree of anxiety for the world. The GDP of BRIC is approximately $15 trillion or about 20% of world GDP and 26% of global GDP in terms of purchasing power parity, and an estimated $4.5 trillion of combined foreign reserves. China’s aggregate financing soared to a record 3.42 trillion Yuan, while new Yuan loans hit an unprecedented level of 2.51 trillion. Although the aggregate financing fell to 780 billion Yu- an ($120 billion) in February, the overall debt situation is unchanged. As a result, China established rules to make it easier for lenders to convert bank loans into equity stakes of debtor companies, helping authorities to clean up the nation’s highest levels of soured credit in ten years. They also did that in the 1990s banking crisis, involving 30% of the nation’s 1.4 trillion Yuan ($216 billion). China’s money supply rose 13.3% from a year ago, and supporting economic growth has taken over as the top priority over reduction of financial risks. China’s total debt stands between 280% and 300% of its GDP. The official PMI fell to 49 in February indicating that conditions deteriorated for a record 7 months. A private PMI fell to 48, signaling deterioration over 12 months.
Russia has been badly hit by a nosedive of the price of oil from $105 in 2014 to $30. About 25% of Russia’s GDP comes from energy with the government owning almost one-half of Russian oil output. One major producer lost close to 90% of its market value. Despite heavy intervention by the government in the currency mar- ket, the ruble is down to 70 to the dollar from the low 30s in one year. Russia’s external debt stands at over half a trillion dollars which is costing more as the ruble sinks lower. The foreign reserves totaled about $371 billion in January. The Russian economy is in recession and the IMF predicted that it will contract 1% this year, while other economists think it may be closer to 5%.
Brazilian economy is in a real mess. After con- tracting 4% in 2015, it finds itself in the worst recession in decades, with a good possibility a worse contraction will occur this year. Because of the failed administration and a high degree of corruption the country cannot escape consequences of an unprecedented stalemate. The budget deficit widened to 10.8% in January. After unprecedented millions of protesters in
the streets, Brazil’s Congress revived the impeachment process against President Rousseff.
To help the fragile Eurozone economy and raise inflation, the ECB launched more intensive measures than those of the U.S. and Ja- pan. However, the results have been disappointing. Despite many world central banks trying to weaken their currencies, they largely failed, as the Yen, British pound and Euro are up, creating distortion and instability in the market. On a positive note, the Euro zone industrial output returned to strong growth in January. Comparing EU Member States on an annual basis, the highest increases in industrial production were registered in Ireland (42.7%), Lithuania (10.5%), and Croatia (9.3%)
London’s World Finance Magazine recently stated - “combined with huge amounts of quantitative easing and reduction of interest rates to rock bottom levels, resulted in advanced economies in their highest public debt-to-GDP ratios that have ever been seen.” The McKinsey Global Institute revealed last year that all types of Global Debt grew by $57 trillion from 2007 to 2014 to a total of $100 trillion which is 286% of global GDP, compared with 260% in 2007. The current ratio is in excess of 300% which “poses new risks to financial stability and may under- mine global economic growth.”
In the United States, consumers cut back on spending. Retail sales in January were revised down to 0.4% from 0.2%. They fell 0.1% in February to $447.31 billion. Even though households benefitted from cheaper gasoline, other measures of the economy were mixed with cautious spending in the light of financial uncertainties and an incline to save at a higher rate than before the recession. As retail sales account for 70% of GDP, this trend will have a retarding effect on economic growth. U.S. oil prices are up 45% after reaching a 13 year low in February. As oil prices sank, financially strapped shale producers may not be able to start-up output, also slowing the growth of GDP. At the same time, by the end of 2015 households ended up with home equity at the highest level since 2006, having reached a record net worth of $86.8 trillion. About 61 million homeowners have at least 25% equity in their homes, an increase of 10 million in one year. However, 4.4 million homes are still under water compared to 12 million in 2009.
At the March meeting, the FOMC decided to keep the benchmark federal funds rate at 0.25% to 0.5%. The policy makers indicated that the updated quarterly projections show the rate of 0.875 % at the end of 2016, implying two quarter-point raises this year, down from having forecast four raises in December. They view the economy more pessimistically now in that the economy will expand 2.2% in 2016, –.0.2 % point less than they projected in December. Slow growth overseas hurt our exports and was a factor in a reduced estimate. Inflation has run below the Fed’s 2% goal for almost four years with only recent firming. The Fed’s preferred measure, the personal expenditures price index, rose 2.3% in January and core inflation was up 1.7%. The consumer price index rose 1% in February from a year ago, but core CPI was up 2.3%, the largest yearly increase since May 2012. The Fed was clearly concerned stating “market developments and the global slowdown continue to pose risks.” The Fed is likely to be cautious and wait until they have a clearer view of the outlook before moving. Immediate reaction to the Fed’s policy was good. The Dow and the S&P 500 have risen about 12% from their lows on Feb. 11; - the S&P 500 erasing its losses for the year. Also, oil recovered and economic data show that the economy continues to grow avoiding a recession. The 10-year yield came down to 1.81% from 1.977% the week earlier. Fed officials see the federal fund rate at 1.875% at the end of 2017 and 3% at the end of 2018, and at 3.25% beyond that, but under 3.50%, which had been anticipated earlier.
Some economists attribute stock market rises to short covering and corporate buy- backs which pushed the 90-day moving aver- age to the strongest level since the start of the bull market in 2009, making it ripe for a correction. The next FOMC meeting is scheduled for April 26-27. In this connection, Atlanta Fed President, Dennis Lockhart, said in several speeches that the U.S. economy is strong enough to weather another rate in- crease as early as next month. He stressed – “There is sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings scheduled for end of April. We shall see!
Page 1 MID-SHIP Report March 24, 2016
Russia has been badly hit by a nosedive of the price of oil from $105 in 2014 to $30. About 25% of Russia’s GDP comes from energy with the government owning almost one-half of Russian oil output. One major producer lost close to 90% of its market value. Despite heavy intervention by the government in the currency mar- ket, the ruble is down to 70 to the dollar from the low 30s in one year. Russia’s external debt stands at over half a trillion dollars which is costing more as the ruble sinks lower. The foreign reserves totaled about $371 billion in January. The Russian economy is in recession and the IMF predicted that it will contract 1% this year, while other economists think it may be closer to 5%.
Brazilian economy is in a real mess. After con- tracting 4% in 2015, it finds itself in the worst recession in decades, with a good possibility a worse contraction will occur this year. Because of the failed administration and a high degree of corruption the country cannot escape consequences of an unprecedented stalemate. The budget deficit widened to 10.8% in January. After unprecedented millions of protesters in
the streets, Brazil’s Congress revived the impeachment process against President Rousseff.
To help the fragile Eurozone economy and raise inflation, the ECB launched more intensive measures than those of the U.S. and Ja- pan. However, the results have been disappointing. Despite many world central banks trying to weaken their currencies, they largely failed, as the Yen, British pound and Euro are up, creating distortion and instability in the market. On a positive note, the Euro zone industrial output returned to strong growth in January. Comparing EU Member States on an annual basis, the highest increases in industrial production were registered in Ireland (42.7%), Lithuania (10.5%), and Croatia (9.3%)
London’s World Finance Magazine recently stated - “combined with huge amounts of quantitative easing and reduction of interest rates to rock bottom levels, resulted in advanced economies in their highest public debt-to-GDP ratios that have ever been seen.” The McKinsey Global Institute revealed last year that all types of Global Debt grew by $57 trillion from 2007 to 2014 to a total of $100 trillion which is 286% of global GDP, compared with 260% in 2007. The current ratio is in excess of 300% which “poses new risks to financial stability and may under- mine global economic growth.”
In the United States, consumers cut back on spending. Retail sales in January were revised down to 0.4% from 0.2%. They fell 0.1% in February to $447.31 billion. Even though households benefitted from cheaper gasoline, other measures of the economy were mixed with cautious spending in the light of financial uncertainties and an incline to save at a higher rate than before the recession. As retail sales account for 70% of GDP, this trend will have a retarding effect on economic growth. U.S. oil prices are up 45% after reaching a 13 year low in February. As oil prices sank, financially strapped shale producers may not be able to start-up output, also slowing the growth of GDP. At the same time, by the end of 2015 households ended up with home equity at the highest level since 2006, having reached a record net worth of $86.8 trillion. About 61 million homeowners have at least 25% equity in their homes, an increase of 10 million in one year. However, 4.4 million homes are still under water compared to 12 million in 2009.
At the March meeting, the FOMC decided to keep the benchmark federal funds rate at 0.25% to 0.5%. The policy makers indicated that the updated quarterly projections show the rate of 0.875 % at the end of 2016, implying two quarter-point raises this year, down from having forecast four raises in December. They view the economy more pessimistically now in that the economy will expand 2.2% in 2016, –.0.2 % point less than they projected in December. Slow growth overseas hurt our exports and was a factor in a reduced estimate. Inflation has run below the Fed’s 2% goal for almost four years with only recent firming. The Fed’s preferred measure, the personal expenditures price index, rose 2.3% in January and core inflation was up 1.7%. The consumer price index rose 1% in February from a year ago, but core CPI was up 2.3%, the largest yearly increase since May 2012. The Fed was clearly concerned stating “market developments and the global slowdown continue to pose risks.” The Fed is likely to be cautious and wait until they have a clearer view of the outlook before moving. Immediate reaction to the Fed’s policy was good. The Dow and the S&P 500 have risen about 12% from their lows on Feb. 11; - the S&P 500 erasing its losses for the year. Also, oil recovered and economic data show that the economy continues to grow avoiding a recession. The 10-year yield came down to 1.81% from 1.977% the week earlier. Fed officials see the federal fund rate at 1.875% at the end of 2017 and 3% at the end of 2018, and at 3.25% beyond that, but under 3.50%, which had been anticipated earlier.
Some economists attribute stock market rises to short covering and corporate buy- backs which pushed the 90-day moving aver- age to the strongest level since the start of the bull market in 2009, making it ripe for a correction. The next FOMC meeting is scheduled for April 26-27. In this connection, Atlanta Fed President, Dennis Lockhart, said in several speeches that the U.S. economy is strong enough to weather another rate in- crease as early as next month. He stressed – “There is sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings scheduled for end of April. We shall see!
Page 1 MID-SHIP Report March 24, 2016
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Global equities have recouped more than half of this year’s losses, since sinking to a 2 1/2 year low on February 11. Most central banks rushed to provide additional stimulus. The price of oil rose above $30 while gold climbed over 4%, with other commodities strengthening as well.
After slumping 10% in the first three weeks of January, the DJIA surged to 17,000, a seven-week high, and the S&P 500 climbed back to 2,000, a level last seen beginning of January. The 10-year U.S. Treasury yield rose closer to $2.00, as higher prices for “haven” assets revealed continued investor anxiety. Even a 6.4% plunge in Chinese stocks on Febru- ary 25 did not budge stocks in Europe and the U.S., while the dollar strengthened.
Earlier, on February 14, G-20 officials decided on reforms to boost global output by $2 trillion to revive a weak global economy. At the G-20 meeting in Shanghai leading economists crafted a coordinated strategy to achieve that goal. U.S. Secretary, Jacob Lew, said “The burden should not be on any one of the policy levers, either excessively or certainly not exclusively’.” At the same time China’s central bank officials urged Beijing to tolerate a sharply wider fiscal deficit to help stabilize growth, realizing that continued bank loans are not going to boost the economy. China's State Council is expected to somewhat widen the country’s fiscal defi- cit to 3% of its GDP from 2.3%. In response, the price of metals went up, and oil headed for the biggest weekly gain in five years. China’s manufacturing PMI Index fell sharply to 49 in February from 49.4 in January, its lowest level in four years. As a result, In addition to previous measures, China’s central bank reduced reserve requirements, freeing banks to lend more, despite risks to the Yuan value.
In a major reversal of a trend, assets of hedge funds fell to $2.96 trillion in January, for the first time since 2012, after hitting a milestone in May 2014. Investors pulled a net $21.5 billion, in the first month of this year, the most since 2009, while
losses caused a $43.2 billion drop in as- sets. In Latin America, the Argentine government agreed with four hedge funds to a $4.65 billion settlement. Brazil’s economy shrank the most in 25 years. It contracted 1.7% in the 3Q and another 1.4% in the 4Q. There is no recovery in sight with lagging demand, political crisis and seven consecutive quarters without new investment. As risks are rising among emerging economies, the ECB pledged to “review and possibly reconsider” the $1.5 trillion stimulus for the EU.
Despite weak global demand, low commodity prices and a strong dollar, U.S. manufacturing may be recovering after the worst annual performance since the re- cession. New orders for durable goods rose 4.9% in January; but they are still below their level of January 2015, raising the question, whether this is a blip or trend reversal. The encouraging signals are new orders for capital goods (excluding air- craft) reflecting business spending on equipment, rising 3.9%. The overall in- crease was driven by an 11.5% rise in transportation equipment, a material up- tick in aircraft orders and orders for cars and parts. The revised data on 3Q GDP showed that our economy grew at a 1% annual rate, faster than the 0.7% gain re- ported last month. ISM’s index of
manufacturing on the other hand shrank in January, a fourth straight month of contraction. Earlier this month the Fed showed a rise in industrial production output from manufacturing, mining and utilities. There were some improvements in the domestic economy including resilient consumer spending, which climbed 0.5% in January; the most in eight months, aided by higher prices. In contrast, the Bloomberg Consumer Comfort Index fell to 43.6 during the week ended February 28 from 44.2 the preceding week.
Disappointingly, after the strongest year in a decade, pending sales of existing homes fell 2.5 to 106.0 in January. An index of 100 is equal to an average of contract activity during 2001, which NAR views as balanced. The index averaged 108.0 or 8% over 2014, its highest level since 2006. Pending sales tend to track sales of existing homes, but lately the latter figures have been choppy. Some slowdowns are caused by permit delays.
After an increase of 171,000 jobs in January, employers added 242,000 workers in February. Jobless weekly claims
unexpectedly climbed by 6,000 to 278,000 in the week ended February 27. Unhappily, average hourly wages dropped, the first monthly decline in over a year, with workers putting in fewer hours. Official unemployment rate held at 4.9%, how- ever, real unemployment is closer to 18%, showing workers’ participation rate in the labor force at 62.9% in February, a 40 year low. At the same time productivity fell at a 2.2% rate in the fourth quarter of last year, one of the worst declines in more than two decades.
Some economists see the probability of a recession within a year because historically we have experienced them every 4 to 7 years. Nevertheless, a majority sees a much smaller (below 33%) chance of a U.S. recession within that span. Regretfully, the growing economic uncertainty is being fed by the race for the White House, which does not point to the cardinal objectives of cutting entitlements, balancing our budget and arriving at a long-term solution for our $20 trillion national debt. While the U.S. economy continues to strengthen, the pace is not strong enough to compel the Federal Reserve to raise the interest rates, at least not until its inflation goal of 2% is reached later this year.
Page 1 MID-SHIP Report March 10, 2016
After slumping 10% in the first three weeks of January, the DJIA surged to 17,000, a seven-week high, and the S&P 500 climbed back to 2,000, a level last seen beginning of January. The 10-year U.S. Treasury yield rose closer to $2.00, as higher prices for “haven” assets revealed continued investor anxiety. Even a 6.4% plunge in Chinese stocks on Febru- ary 25 did not budge stocks in Europe and the U.S., while the dollar strengthened.
Earlier, on February 14, G-20 officials decided on reforms to boost global output by $2 trillion to revive a weak global economy. At the G-20 meeting in Shanghai leading economists crafted a coordinated strategy to achieve that goal. U.S. Secretary, Jacob Lew, said “The burden should not be on any one of the policy levers, either excessively or certainly not exclusively’.” At the same time China’s central bank officials urged Beijing to tolerate a sharply wider fiscal deficit to help stabilize growth, realizing that continued bank loans are not going to boost the economy. China's State Council is expected to somewhat widen the country’s fiscal defi- cit to 3% of its GDP from 2.3%. In response, the price of metals went up, and oil headed for the biggest weekly gain in five years. China’s manufacturing PMI Index fell sharply to 49 in February from 49.4 in January, its lowest level in four years. As a result, In addition to previous measures, China’s central bank reduced reserve requirements, freeing banks to lend more, despite risks to the Yuan value.
In a major reversal of a trend, assets of hedge funds fell to $2.96 trillion in January, for the first time since 2012, after hitting a milestone in May 2014. Investors pulled a net $21.5 billion, in the first month of this year, the most since 2009, while
losses caused a $43.2 billion drop in as- sets. In Latin America, the Argentine government agreed with four hedge funds to a $4.65 billion settlement. Brazil’s economy shrank the most in 25 years. It contracted 1.7% in the 3Q and another 1.4% in the 4Q. There is no recovery in sight with lagging demand, political crisis and seven consecutive quarters without new investment. As risks are rising among emerging economies, the ECB pledged to “review and possibly reconsider” the $1.5 trillion stimulus for the EU.
Despite weak global demand, low commodity prices and a strong dollar, U.S. manufacturing may be recovering after the worst annual performance since the re- cession. New orders for durable goods rose 4.9% in January; but they are still below their level of January 2015, raising the question, whether this is a blip or trend reversal. The encouraging signals are new orders for capital goods (excluding air- craft) reflecting business spending on equipment, rising 3.9%. The overall in- crease was driven by an 11.5% rise in transportation equipment, a material up- tick in aircraft orders and orders for cars and parts. The revised data on 3Q GDP showed that our economy grew at a 1% annual rate, faster than the 0.7% gain re- ported last month. ISM’s index of
manufacturing on the other hand shrank in January, a fourth straight month of contraction. Earlier this month the Fed showed a rise in industrial production output from manufacturing, mining and utilities. There were some improvements in the domestic economy including resilient consumer spending, which climbed 0.5% in January; the most in eight months, aided by higher prices. In contrast, the Bloomberg Consumer Comfort Index fell to 43.6 during the week ended February 28 from 44.2 the preceding week.
Disappointingly, after the strongest year in a decade, pending sales of existing homes fell 2.5 to 106.0 in January. An index of 100 is equal to an average of contract activity during 2001, which NAR views as balanced. The index averaged 108.0 or 8% over 2014, its highest level since 2006. Pending sales tend to track sales of existing homes, but lately the latter figures have been choppy. Some slowdowns are caused by permit delays.
After an increase of 171,000 jobs in January, employers added 242,000 workers in February. Jobless weekly claims
unexpectedly climbed by 6,000 to 278,000 in the week ended February 27. Unhappily, average hourly wages dropped, the first monthly decline in over a year, with workers putting in fewer hours. Official unemployment rate held at 4.9%, how- ever, real unemployment is closer to 18%, showing workers’ participation rate in the labor force at 62.9% in February, a 40 year low. At the same time productivity fell at a 2.2% rate in the fourth quarter of last year, one of the worst declines in more than two decades.
Some economists see the probability of a recession within a year because historically we have experienced them every 4 to 7 years. Nevertheless, a majority sees a much smaller (below 33%) chance of a U.S. recession within that span. Regretfully, the growing economic uncertainty is being fed by the race for the White House, which does not point to the cardinal objectives of cutting entitlements, balancing our budget and arriving at a long-term solution for our $20 trillion national debt. While the U.S. economy continues to strengthen, the pace is not strong enough to compel the Federal Reserve to raise the interest rates, at least not until its inflation goal of 2% is reached later this year.
Page 1 MID-SHIP Report March 10, 2016
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Continued depressed energy prices, the slowing growth of the world's economy, and the advent of negative interest rates
aggravated the financial markets. The rout of overleveraged European banks spilled into the debt market. Most of the banks are healthier than they were in 2008, still, EU bank stocks are down this year on the aver- age close to 30%. Deutsche Bank alone fell over 40%. Bank of America analysts esti- mated that European banks could lose $27 billion from energy exposure, or about 6% of their pretax earnings over three years. The problem is that, on the one hand, banks may not tolerate lower rates, but at the same time slowing economies may not tolerate any higher rates. In Latin America, Brazil’s econ- omy contracted over 4% in 2015. Venezue- la’s economy shrank 6.7% last year and its inflation surged to 180.9%.
Meanwhile U.K. Prime Minister David Cam- eron struck a deal with the EU for a changed relationship, opening a path for Britain to vote whether to remain in the Union. There is opposition, including Mr. Cameron's allies in his own Conservative Party. Cameron warned that “leaving EU would threaten our economic and our national security- risking a leap in the dark.”
Japan’s negative rate pushed the Yen up instead of bringing it down. Stocks in Tokyo fell to their lowest level in a year. DJIA came down in New York to 15660, losing 14.5% from its all-time high in May, with oil at $26 a barrel, a more than 12 year low, and gold at $1,247, up 4.5%, pushed the yield down on 10-year Treasury to 1.62%. Until recent weeks, economic data did not suggest a recession. However, in the wake of recent adverse developments, one index comprising financials such as the stock market and corporate bond yields, puts the prob- ability that the U.S. is now in recession at 50%. The other index which adds
macroeconomic data such as delinquencies and infla- tion adjusted income, puts the probability at 28%. Both could be wro
ng, as psychology is a potent factor, and fear could bring a self- fulfilling result. In fact the DJIA had a good 3 -day recovery of 700 points, the largest gain, in the third week of February, reaching 16453. It may have been the result of Saudi Arabia and Russia having proposed a plan to cap production of oil, including other pro- ducers. This plan sparked a rally in oil prices and a number of other commodities which promptly faded when Saudi Arabia suddenly declared that it would not rescue the industry from low prices by cutting its production.
Bloomberg View published an article on Feb- ruary 19th, entitled “Bear Markets Don’t Pre- dict Recessions, But Liquidity Might.” Among others, it states that examin- ing data from 1947 to 2008, the researchers found that “market liquidity seems to be
particularly strong and robust predictor of real GDP growth, unemployment and investment growth”. Conversely, rising levels of illiquidity consistently signaled that a recession was on the horizon. There were a few false alarms but in general the evidence is rather striking.
In her recent testimony before Congress, Federal Reserve Chairwoman Yellen pointed out that the strong dollar raised the cost of funding and damped the growth more quick- ly than expected. She stated –“Financial conditions in the U.S. have recently become less supportive of growth. ’The Fed's policy toward normalizing the interest rate by raising it gradually became a very daunting problem. Prof. Martin Feldstein voiced a different opinion in the NYT that after shak- ing off past Fed policy many signs of our economy are good, but the 2016 political race has floated some alarming proposals.
After retail sales were revised up 0.2% for December, in lieu of a drop, they also rose 0.2% in January, offering some hope that the U.S. economy, which heavily relies on con- sumer spending, might handle, with some difficulty, the effect of the global slowdown. January was the fourth consecutive month of retail gains. Investors were encouraged by these modest figures, despite some thirty days of high volatility and stock market oscil- lations beginning mid-January. Meanwhile import prices fell 1.1% in January, a sharp decline.
The producer-price index barely advanced 0.1%. Excluding food and energy, core prices grew 0.4%. Overall producer prices were down 0.2% from a year ago, the 12th straight year-over-year decline. Despite a lengthy slide in energy prices and a strong dollar, the downward pressure on inflation may be easing. Core prices rose 2.2% from a year ago, mainly due to a rise of services cost. However, U.S. Consumer Price Index held flat in January but from a year ago prices were up 1.4%, the fastest annual gain since October 2014. Industrial production climbed 0.9% in January, the best incline since May 2010, owing to a surge in electricity generation triggered by cold weather, and a higher output to meet the demand for new cars. U.S. housing starts fell 3.8% in January to an adjusted annual rate of 1.099 million, as new applications for building permits also fell 0.2% to 1.202 million. Existing home sales rose 0.4% in January, the fastest sales pace since July, to an annual pace of 5.47 million. At the same time, UoM’s preliminary February Consumer Index dropped to 90.7 from 92.0 in January.
The innumerable about global stock markets turmoil in January crowded out the deliberations of the World Economic Forum’s Annual meeting in Davos. Its focus centered on the impact of technology on business and society in the years and decades to come. They referred to the “Fourth Industrial Revolution”, the new book by WEF Founder and Chairman, Klaus Schwab. That work gave rise to much optimism but it also exposed new risks. Earlier industrial revolutions brought growth and jobs, this fourth industrial revolution generates social instability, with joblessness as a major factor. Andrew McAfee, Co- director, MIT Initiative on the Digital Economy, said at Davos –“Technologies are rapidly getting better at work that we used to think of as a little bit less routine – recognizing patterns, understanding human speech and responding to it. Jobs doing that kind of routine work are not coming back.”
Page 1 MID-SHIP Report February 25, 2016
aggravated the financial markets. The rout of overleveraged European banks spilled into the debt market. Most of the banks are healthier than they were in 2008, still, EU bank stocks are down this year on the aver- age close to 30%. Deutsche Bank alone fell over 40%. Bank of America analysts esti- mated that European banks could lose $27 billion from energy exposure, or about 6% of their pretax earnings over three years. The problem is that, on the one hand, banks may not tolerate lower rates, but at the same time slowing economies may not tolerate any higher rates. In Latin America, Brazil’s econ- omy contracted over 4% in 2015. Venezue- la’s economy shrank 6.7% last year and its inflation surged to 180.9%.
Meanwhile U.K. Prime Minister David Cam- eron struck a deal with the EU for a changed relationship, opening a path for Britain to vote whether to remain in the Union. There is opposition, including Mr. Cameron's allies in his own Conservative Party. Cameron warned that “leaving EU would threaten our economic and our national security- risking a leap in the dark.”
Japan’s negative rate pushed the Yen up instead of bringing it down. Stocks in Tokyo fell to their lowest level in a year. DJIA came down in New York to 15660, losing 14.5% from its all-time high in May, with oil at $26 a barrel, a more than 12 year low, and gold at $1,247, up 4.5%, pushed the yield down on 10-year Treasury to 1.62%. Until recent weeks, economic data did not suggest a recession. However, in the wake of recent adverse developments, one index comprising financials such as the stock market and corporate bond yields, puts the prob- ability that the U.S. is now in recession at 50%. The other index which adds
macroeconomic data such as delinquencies and infla- tion adjusted income, puts the probability at 28%. Both could be wro
ng, as psychology is a potent factor, and fear could bring a self- fulfilling result. In fact the DJIA had a good 3 -day recovery of 700 points, the largest gain, in the third week of February, reaching 16453. It may have been the result of Saudi Arabia and Russia having proposed a plan to cap production of oil, including other pro- ducers. This plan sparked a rally in oil prices and a number of other commodities which promptly faded when Saudi Arabia suddenly declared that it would not rescue the industry from low prices by cutting its production.
Bloomberg View published an article on Feb- ruary 19th, entitled “Bear Markets Don’t Pre- dict Recessions, But Liquidity Might.” Among others, it states that examin- ing data from 1947 to 2008, the researchers found that “market liquidity seems to be
particularly strong and robust predictor of real GDP growth, unemployment and investment growth”. Conversely, rising levels of illiquidity consistently signaled that a recession was on the horizon. There were a few false alarms but in general the evidence is rather striking.
In her recent testimony before Congress, Federal Reserve Chairwoman Yellen pointed out that the strong dollar raised the cost of funding and damped the growth more quick- ly than expected. She stated –“Financial conditions in the U.S. have recently become less supportive of growth. ’The Fed's policy toward normalizing the interest rate by raising it gradually became a very daunting problem. Prof. Martin Feldstein voiced a different opinion in the NYT that after shak- ing off past Fed policy many signs of our economy are good, but the 2016 political race has floated some alarming proposals.
After retail sales were revised up 0.2% for December, in lieu of a drop, they also rose 0.2% in January, offering some hope that the U.S. economy, which heavily relies on con- sumer spending, might handle, with some difficulty, the effect of the global slowdown. January was the fourth consecutive month of retail gains. Investors were encouraged by these modest figures, despite some thirty days of high volatility and stock market oscil- lations beginning mid-January. Meanwhile import prices fell 1.1% in January, a sharp decline.
The producer-price index barely advanced 0.1%. Excluding food and energy, core prices grew 0.4%. Overall producer prices were down 0.2% from a year ago, the 12th straight year-over-year decline. Despite a lengthy slide in energy prices and a strong dollar, the downward pressure on inflation may be easing. Core prices rose 2.2% from a year ago, mainly due to a rise of services cost. However, U.S. Consumer Price Index held flat in January but from a year ago prices were up 1.4%, the fastest annual gain since October 2014. Industrial production climbed 0.9% in January, the best incline since May 2010, owing to a surge in electricity generation triggered by cold weather, and a higher output to meet the demand for new cars. U.S. housing starts fell 3.8% in January to an adjusted annual rate of 1.099 million, as new applications for building permits also fell 0.2% to 1.202 million. Existing home sales rose 0.4% in January, the fastest sales pace since July, to an annual pace of 5.47 million. At the same time, UoM’s preliminary February Consumer Index dropped to 90.7 from 92.0 in January.
The innumerable about global stock markets turmoil in January crowded out the deliberations of the World Economic Forum’s Annual meeting in Davos. Its focus centered on the impact of technology on business and society in the years and decades to come. They referred to the “Fourth Industrial Revolution”, the new book by WEF Founder and Chairman, Klaus Schwab. That work gave rise to much optimism but it also exposed new risks. Earlier industrial revolutions brought growth and jobs, this fourth industrial revolution generates social instability, with joblessness as a major factor. Andrew McAfee, Co- director, MIT Initiative on the Digital Economy, said at Davos –“Technologies are rapidly getting better at work that we used to think of as a little bit less routine – recognizing patterns, understanding human speech and responding to it. Jobs doing that kind of routine work are not coming back.”
Page 1 MID-SHIP Report February 25, 2016
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Global concerns sharply increased the anxiety of investors. They brought about the worst January in seven years to more than 40 world stock markets, with a value of about $27 trillion. European stocks dropped over 6% and Japan’s more than 7%. Strong demand for assets’ haven sent the yield on 10-year Treasury notes to 1.92 %, the lowest level since April, while gold had a best monthly rally in a year. The rebound in the last two weeks of the month did not re- verse the selloff from its lowest point. The biggest one-day rally limited the S&P’s 500 to the monthly loss of 5.1%. Yet, some analysts predicted a modest gain in 2016, as oil surged to $33 and some commodity prices stabilized. But when oil renewed its plunge below $30, the steepest 2-day selloff since 2009, DJIA lost 290 points, driving yield on 10-year Treasury below 1.84%, following fresh fears for global growth.. Meanwhile the Fed has asked the banks to consider the possibility of negative interest on the three-month U.S Treasury bill below zero as occurred in recent years, touch- ing a low of 0.05% on October 2. High volatility persists, showing among others, an apparent correlation between oil prices and stocks value. A week ago another 7.7 million barrels of oil poured into an existing overhang of 507.3 mil- lion barrels, pointing to the possibility that its price recovery might not come until 2017/18 with marked intermediate negative influence on other industries and commerce. The poor growth rates in unsettled world mar- kets have prompted central banks to boost their economies. A week after Europeans reset their short-term interest rate below zero and announced an additional stimulus in March, Bank of Japan followed suit after the yen lost 30% of its value, and even so its exports fell to 6.5% in 2013-15, from 8% in 2005-07. Some economists predict that ECB and Swedish and Danish central banks would cut their policy rates even further into negative territory. Should world economic conditions get weaker than presently expected, Australia, Canada, Norway and China may do the same. It is clear that central banks are running out of new ideas. Passing China, India’s economy grew 6.6% in 2014 and 7.2% in 12 months ended March 15, 2015.
In the U.S., economic reports have been mixed. GDP barely rose at 0.7% annualized rate in the fourth quarter of 2015, causing the Fed to express worries about market turbulence and is not expected to raise interest rate in March. The economy expanded 2.4% from 2014, a little better than the 2.1% average since 2010. The Volatility Index rose 32% from
18.03 to an average of 23.72 in December, the biggest average monthly gain since August. Multinationals felt the impact of a strong dollar in the Q4 2015, particularly technological companies, such as Apple, Microsoft and IBM. Subsequently, due to market turmoil, there were no U.S. IPOs in January, the first month-long drought since September 2011, caused then by the EU crisis and the down- grading of U.S. debt rating. If the market re- mains dormant, a number of large companies would be open to acquisitions and partnerships in order to boost soft revenue growths.
Although the ISM index of manufacturing activity rose to 48.2 in January from 48 in Decem- ber, it actually shrank for the fourth month, as a reading under 50 indicates contraction. There is hope that the slight increase promises a reversal from hitting the bottom of the cycle. The gauge of new orders rose to its highest level since August with expanding production and easing of backlog orders. Generally, the factory sector has weakened over the past year due to slower demand and stronger dollar. Excluding energy companies, adjusted earnings for S&P 500 companies are expected to rise 2.1% on sales growth of 0.9%. While incomes rose 0.3% in December, consumer spending stayed flat after a 0.5% rise in November. The personal saving rate rose to 5.5% from 5.3% a month earlier, matching a three year high. Adjusting after reduced spending, the ISM index of non- manufacturing sector, accounting for 90% of the economy, fell in January to 53.5, the lowest since February 2014, from 55.8. There was an advance of 151,000 in payrolls in January, less than forecast, and December payrolls were revised down to 262,000 from 292,000. The official unemployment rate dropped to 4.9%, notwithstanding the underemployed and those who quit looking for work, brought the job participation rate only to 62.7%, a 40-year low. 15 million are still looking for a job. Hiring rate is slowing down, jobs are difficult to find, but hourly earnings rose a modest 2.5% from a year ago, and 0.5% from a month earlier, to $25,39.
The WSJ and the Heritage Foundation re- leased the 2016 Index of Economic Freedom, showing “the urgent need for the U.S. to change its course.” It revealed that for the eighth time in the past 10 years the U.S. has lost ground with its score of 75.4 points out of possible 100, tying the country's previous low in 1998.” Countries are graded on 10 factors of economic freedom including the size of the government, regulations, corruption, taxes and the openness of the markets. We rank 11th out of 178 rated economies, behind developed countries including Switzerland (4th), Austral- ia (5th) and Canada (6th). The U.S. score declined repeatedly during the Obama administration owing to dramatically increased government spending and regulations, a failed stimulus program that enriched the well -connected and left average Americans be- hind. 32 countries now enjoy higher levels of economic freedom than ever. Of the 186 countries in the index 97 improved their position relative to 2015. Many Americans are angry this election year; as the index notes, they have endured a full decade in which “government favoritism toward entrenched interests has hurt innovation and contributed to a lackluster recovery and stagnant income growth.”
U.S. debt of more than $19 trillion will continue on an unsustainable path unless entitle- ments are curtailed. The Congressional Budget Office, like the Fed, has a history of being overly optimistic. In their latest study, Doug Ehnendorf (head of CBO from 2009 to 2015, together with Louise Sheiner (director Brookings Institution's Center) state that in 2009 the CBO predicted that with then cur- rent spending the debt would top 100% of GDP by 2023. However, by last year, it had moved that date to 2032, due to changed behavior by consumers, employers and private insurers. Another factor is the interest rate. When interest rates exceed the economic growth rate, debt tends to grow faster than the country's ability to support it. Since the Fed and CBO believe that the rates are going to be lower and below growth rate, it justifies extending the topping by 12-years. We would not bet on it without cuts in the entitlement level.
Page 1 MID-SHIP Report February 11, 2016
In the U.S., economic reports have been mixed. GDP barely rose at 0.7% annualized rate in the fourth quarter of 2015, causing the Fed to express worries about market turbulence and is not expected to raise interest rate in March. The economy expanded 2.4% from 2014, a little better than the 2.1% average since 2010. The Volatility Index rose 32% from
18.03 to an average of 23.72 in December, the biggest average monthly gain since August. Multinationals felt the impact of a strong dollar in the Q4 2015, particularly technological companies, such as Apple, Microsoft and IBM. Subsequently, due to market turmoil, there were no U.S. IPOs in January, the first month-long drought since September 2011, caused then by the EU crisis and the down- grading of U.S. debt rating. If the market re- mains dormant, a number of large companies would be open to acquisitions and partnerships in order to boost soft revenue growths.
Although the ISM index of manufacturing activity rose to 48.2 in January from 48 in Decem- ber, it actually shrank for the fourth month, as a reading under 50 indicates contraction. There is hope that the slight increase promises a reversal from hitting the bottom of the cycle. The gauge of new orders rose to its highest level since August with expanding production and easing of backlog orders. Generally, the factory sector has weakened over the past year due to slower demand and stronger dollar. Excluding energy companies, adjusted earnings for S&P 500 companies are expected to rise 2.1% on sales growth of 0.9%. While incomes rose 0.3% in December, consumer spending stayed flat after a 0.5% rise in November. The personal saving rate rose to 5.5% from 5.3% a month earlier, matching a three year high. Adjusting after reduced spending, the ISM index of non- manufacturing sector, accounting for 90% of the economy, fell in January to 53.5, the lowest since February 2014, from 55.8. There was an advance of 151,000 in payrolls in January, less than forecast, and December payrolls were revised down to 262,000 from 292,000. The official unemployment rate dropped to 4.9%, notwithstanding the underemployed and those who quit looking for work, brought the job participation rate only to 62.7%, a 40-year low. 15 million are still looking for a job. Hiring rate is slowing down, jobs are difficult to find, but hourly earnings rose a modest 2.5% from a year ago, and 0.5% from a month earlier, to $25,39.
The WSJ and the Heritage Foundation re- leased the 2016 Index of Economic Freedom, showing “the urgent need for the U.S. to change its course.” It revealed that for the eighth time in the past 10 years the U.S. has lost ground with its score of 75.4 points out of possible 100, tying the country's previous low in 1998.” Countries are graded on 10 factors of economic freedom including the size of the government, regulations, corruption, taxes and the openness of the markets. We rank 11th out of 178 rated economies, behind developed countries including Switzerland (4th), Austral- ia (5th) and Canada (6th). The U.S. score declined repeatedly during the Obama administration owing to dramatically increased government spending and regulations, a failed stimulus program that enriched the well -connected and left average Americans be- hind. 32 countries now enjoy higher levels of economic freedom than ever. Of the 186 countries in the index 97 improved their position relative to 2015. Many Americans are angry this election year; as the index notes, they have endured a full decade in which “government favoritism toward entrenched interests has hurt innovation and contributed to a lackluster recovery and stagnant income growth.”
U.S. debt of more than $19 trillion will continue on an unsustainable path unless entitle- ments are curtailed. The Congressional Budget Office, like the Fed, has a history of being overly optimistic. In their latest study, Doug Ehnendorf (head of CBO from 2009 to 2015, together with Louise Sheiner (director Brookings Institution's Center) state that in 2009 the CBO predicted that with then cur- rent spending the debt would top 100% of GDP by 2023. However, by last year, it had moved that date to 2032, due to changed behavior by consumers, employers and private insurers. Another factor is the interest rate. When interest rates exceed the economic growth rate, debt tends to grow faster than the country's ability to support it. Since the Fed and CBO believe that the rates are going to be lower and below growth rate, it justifies extending the topping by 12-years. We would not bet on it without cuts in the entitlement level.
Page 1 MID-SHIP Report February 11, 2016
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Last year China’s $10 trillion economy expand- ed 6.9%%, its slowest economic growth in 25 years, which continues to affect the entire world activity. Economists question the reliability of the official data and suspect the actual growth rate to be between 4% to 6%. Growing debt, overbuilt housing and excessive manufacturing capacity will weaken their economy further. Infrastructure spending, easy credit, and propped up exports turned out to be ineffective. Consequently the World bank lowered the global growth estimate twice in 2015. To assume a measure of control, Beijing took steps to prop up the currency through a surge of Yuan buying by state-owned banks, and shutting down the offshore market in which traders were betting on a decline of the Yuan.. The cost of borrowing Yuan overnight leaped from 13.4% to 66%. China is very sensitive by the $230 billion-a-day offshore Yuan market in Hong Kong, where the gap between the value of the Yuan in Hong Kong and in mainland China widened recently to a record. Their central bank is concerned about boosting liquidity without weakening the Yuan. According to Raghuram Rajan, Governor of Central Bank of India, and a distinguished professor of the Uni- versity of Chicago, there is underlying growth in China, contributing to global growth and it “is not falling off the cliff.”
For a number of years emerging markets materially helped the global economy to grow. How- ever, the stock market rout deepened a mount- ing debt in developing economies, particularly in South America and Asia, wherein half-trillion dollars is thought to have left these countries in 2015, with detrimental effect on corporate borrowing costs and ratings. Emerging markets are putting curbs on outflows of money. How- ever, foreign banks lent $3.6 trillion to companies in emerging markets, and thus 25% of local debt in developing countries are in the hands of foreign investors. S&P claims that corporate defaults in emerging markets rose in 2015 to the highest levels since 2004. Develop- ing nations grew under 4% last year, or 3% under IMF’s forecast in 2011. The plunge of energy prices caused Russia’s GDP to contract 3.7% in 2015, the most since 2009.The uncertainty of growth of the global economy is the underlying cause of the high volatility of the financial markets. Having over-intervened, world’s central banks appear to have run out of options and failed to reach their inflation goals. ECB President Draghi thinks “monetary policies will be on divergent paths and reflected in different interest rates.”
The Fed is concerned that as low inflation becomes more embedded, the harder it will be to reach inflation targets. The financial market’s response to the last State of the Union message of President Obama was not as good as the spirit of the speech. The DJIA lost 400 points the next day. Fresh lows in oil prices and weak U.S. economic data sent the DJIA to its biggest one-day rout since September. A number of senators and congressmen severely criticized the President for appearing to be in a fairy or fantasy land when assessing the current State of the Union.
Soon after the world economy slowdown began, Chairwoman Yellen attempted to assure the nation that the slowdown would not materially affect our growth rate. Unfortunately that prediction proved to be as wrong, as some of the others. Despite the fact that only 13% of our economy account for foreign trade, the slowdown contributed in large measure in bringing down our exports and our manufacturing, and ultimately our GDP, adding to the un- certainty in which we now find ourselves.
The dichotomy of view between two groups of the Fed’s policy makers still prevails. Some feel that the sluggishness of the world economy and our slow growth rate demand maintaining easy money, while others believe that the serious financial imbalance created by the Fed’s seven years of unprecedented policy require raising the rates sooner rather than later. Martin Feldstein, a professor at Harvard, chairman of the Council of Economic Advisers under President Reagan, sides with the latter group in that employment goal has essentially been reached, and the inflation of 2% will soon reach its target, hence the economy would be better served by a more rapid normalization of short-term interest rates. We agree with this point of view. In contrast, Larry Summers, the former Secretary of Treasury, prefers to continue the easy money policy.
In housing, National Association of Realtors (NAR) reported previously-owned home sales to have climbed 14.7% in December, and reached a 5.46 million annual pace. The sales price rose 7.4% from $220,000 in November to $224,000 in December. The S&P/Case-Shiller index of property values rose 5.8% from November 2014. Sales of new homes surged in December to a 544,000 annualized pace, the highest level in 10 months. For all of 2015 sales total climbed 14.6% to 501,000. The Fed’s Beige Book describes the labor market being solid, contrasting with modest growth, lagging manufacturing and slow spending. After retail sales rose 0.4% in November they dropped 0.1% in December. Unexpectedly, applications for unemployment benefits rose by 10,000 to 293,000 the week ended January 16, a six-month high, showing a weaker labor situation.
Interestingly, Fed Vice Chairman Stanley Fisher contends that the $4.5 trillion balance money policy could be maintained as a way of holding down longer term Treasury yield, as the short-term policy is being lifted. New York Fed President William Dudley believes in reinvesting maturing bonds and putting off a reduction in the balance sheet until the Federal funds rate is raised somewhat higher which “makes sense, creating dry powder in the form of higher short-term rates as more desirable than less dry powder and small balance sheet”. The Conference Board’s index of consumer sentiment rose to 98.1 in January, a three month high, from a revised 96.3. Consumers’ expectations for the next six months rose to a three months high of 85.9 in January from 83. Confidence improved among younger consumers under 35, it deteriorated among households with in- comes exceeding $75,000 a year. A majority of economists project GDP to grow be- tween 2.1% to 2.3% in 2016, and a recession is unlikely this year.
In the wake of financial market turmoil, the Fed tuned around from last month when they assessed risks, overoptimistically, as “balanced”. Now the Fed is not so sure about its outlook, showing concern about market turbulence and slow growth abroad. After a two-day meeting the FOMC decided, to leave the benchmark rate unchanged at 0.25% to 0.5%, leaving its options open, and still believing that U.S. economy will continue to grow modestly. Having raised the rate for the first time in seven years, just six weeks ago, it said it is “closely monitoring global economic and financial developments” while assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” Consequently, the inter- est-rise at the next FOMC meeting in March is less likely. The immediate market’s reac- tion was exemplified by DJIA falling 222 points or 1,38% to 15,944; it is now down 8.5% for the year.
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MID-SHIP Report January 29, 2016
For a number of years emerging markets materially helped the global economy to grow. How- ever, the stock market rout deepened a mount- ing debt in developing economies, particularly in South America and Asia, wherein half-trillion dollars is thought to have left these countries in 2015, with detrimental effect on corporate borrowing costs and ratings. Emerging markets are putting curbs on outflows of money. How- ever, foreign banks lent $3.6 trillion to companies in emerging markets, and thus 25% of local debt in developing countries are in the hands of foreign investors. S&P claims that corporate defaults in emerging markets rose in 2015 to the highest levels since 2004. Develop- ing nations grew under 4% last year, or 3% under IMF’s forecast in 2011. The plunge of energy prices caused Russia’s GDP to contract 3.7% in 2015, the most since 2009.The uncertainty of growth of the global economy is the underlying cause of the high volatility of the financial markets. Having over-intervened, world’s central banks appear to have run out of options and failed to reach their inflation goals. ECB President Draghi thinks “monetary policies will be on divergent paths and reflected in different interest rates.”
The Fed is concerned that as low inflation becomes more embedded, the harder it will be to reach inflation targets. The financial market’s response to the last State of the Union message of President Obama was not as good as the spirit of the speech. The DJIA lost 400 points the next day. Fresh lows in oil prices and weak U.S. economic data sent the DJIA to its biggest one-day rout since September. A number of senators and congressmen severely criticized the President for appearing to be in a fairy or fantasy land when assessing the current State of the Union.
Soon after the world economy slowdown began, Chairwoman Yellen attempted to assure the nation that the slowdown would not materially affect our growth rate. Unfortunately that prediction proved to be as wrong, as some of the others. Despite the fact that only 13% of our economy account for foreign trade, the slowdown contributed in large measure in bringing down our exports and our manufacturing, and ultimately our GDP, adding to the un- certainty in which we now find ourselves.
The dichotomy of view between two groups of the Fed’s policy makers still prevails. Some feel that the sluggishness of the world economy and our slow growth rate demand maintaining easy money, while others believe that the serious financial imbalance created by the Fed’s seven years of unprecedented policy require raising the rates sooner rather than later. Martin Feldstein, a professor at Harvard, chairman of the Council of Economic Advisers under President Reagan, sides with the latter group in that employment goal has essentially been reached, and the inflation of 2% will soon reach its target, hence the economy would be better served by a more rapid normalization of short-term interest rates. We agree with this point of view. In contrast, Larry Summers, the former Secretary of Treasury, prefers to continue the easy money policy.
In housing, National Association of Realtors (NAR) reported previously-owned home sales to have climbed 14.7% in December, and reached a 5.46 million annual pace. The sales price rose 7.4% from $220,000 in November to $224,000 in December. The S&P/Case-Shiller index of property values rose 5.8% from November 2014. Sales of new homes surged in December to a 544,000 annualized pace, the highest level in 10 months. For all of 2015 sales total climbed 14.6% to 501,000. The Fed’s Beige Book describes the labor market being solid, contrasting with modest growth, lagging manufacturing and slow spending. After retail sales rose 0.4% in November they dropped 0.1% in December. Unexpectedly, applications for unemployment benefits rose by 10,000 to 293,000 the week ended January 16, a six-month high, showing a weaker labor situation.
Interestingly, Fed Vice Chairman Stanley Fisher contends that the $4.5 trillion balance money policy could be maintained as a way of holding down longer term Treasury yield, as the short-term policy is being lifted. New York Fed President William Dudley believes in reinvesting maturing bonds and putting off a reduction in the balance sheet until the Federal funds rate is raised somewhat higher which “makes sense, creating dry powder in the form of higher short-term rates as more desirable than less dry powder and small balance sheet”. The Conference Board’s index of consumer sentiment rose to 98.1 in January, a three month high, from a revised 96.3. Consumers’ expectations for the next six months rose to a three months high of 85.9 in January from 83. Confidence improved among younger consumers under 35, it deteriorated among households with in- comes exceeding $75,000 a year. A majority of economists project GDP to grow be- tween 2.1% to 2.3% in 2016, and a recession is unlikely this year.
In the wake of financial market turmoil, the Fed tuned around from last month when they assessed risks, overoptimistically, as “balanced”. Now the Fed is not so sure about its outlook, showing concern about market turbulence and slow growth abroad. After a two-day meeting the FOMC decided, to leave the benchmark rate unchanged at 0.25% to 0.5%, leaving its options open, and still believing that U.S. economy will continue to grow modestly. Having raised the rate for the first time in seven years, just six weeks ago, it said it is “closely monitoring global economic and financial developments” while assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” Consequently, the inter- est-rise at the next FOMC meeting in March is less likely. The immediate market’s reac- tion was exemplified by DJIA falling 222 points or 1,38% to 15,944; it is now down 8.5% for the year.
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MID-SHIP Report January 29, 2016
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
The most anticipated financial event in December came not with a bang but a whimper. For the first time in seven years of a very easy money policy, the Federal Reserve, after many months of hesitation, decided at the mid -December FOMC meetings to raise the benchmark rate by 0.25%. The financial markets were undisturbed. The stock market response was positive with DJIA continuing to hover around 17,500, while the 10-year Treasury remained around 2.25%. Raising the rate by 0.25% did not really signify abandoning the easy money policy, particularly with repeated assurances by the Fed that further increases will be gradual and spread over an undefined time. Only yields on money-market mutual funds began to move up. World central banks showed a mixed reaction; some increased the rates while others kept them steady.
The geopolitical problems did not get better over the past few weeks, in fact they got more complicated and created a greater degree of uncertainty, leading to higher financial risks. The BRIC economies continued limping poorly, while Greece appears on the verge of another bankruptcy. The U.K faces a referendum whether to stay within the E.U. Since reaching the milestone of becoming a world elite currency, the Yuan started slowly but steadily falling, as China's companies and individuals moved huge amounts of money out of the country. China's manufacturing sector contracted for the 10th consecutive month. The promised reforms of the economy are left neglected. Emerging countries' currencies tumbled against the U.S. dollar.
However, according to the IMF and the World Bank the effects of currency movements have been reduced over time by 30%, and no longer boost exports as they once did. Hence the divergence between the Fed and the ECB will have less impact than expected. The latest Saudi conflict with Iran pushed oil prices down further. The purported H-bomb test by North Korea and the turmoil in China led to the fall of world stock markets, triggered by three setbacks of several percent each at the Shanghai exchange, pushing DJIA down 1,079 points to 16,346, and causing the worst -ever five-day start of the year ever. Crude oil settled at a 12-year low, and copper fell below $2, for the first time since 2009. Few economists anticipate crude oil to go down to below $30 which could cause some energy companies to go bankrupt.
According to Bloomberg, investors went on the biggest 3-day spree in gold-backed exchange traded funds; ETFs climbed 19.8 metric ton to 1,477.7 tons, the largest increase since January 2015. Bullion jumped 4.1%, for the best performance since August while global equity was in a bad slump. Goldman Sachs suggests that stock market may get worse, and if it does it will create opportunities to invest.
In the U.S. the GDP rose at a 2% annual rate in the third quarter, driven by a 3% rise in consumer spending. The strong dollar and low commodities prices weighed heavier on exports and business spending, following the GDP 3.9% growth rate in the second quarter. Sales at physical stores fell 6.7% over the weekend preceding Christmas, while traffic declined 1.4%. In contrast, e-commerce sales rose 11.8% from November 26 through December 20 compared with a year ago. Some researchers expected e-commerce to account for 14% of retail sales in November and December. Some estimated total sales up 3.1% for the season.
In housing, existing-home sales sank 10,5% in November to an annualized rate of 4.76 million, well below the estimated 5.32 million. The NAR blamed the fall on delays caused by new federal rules of the Consumer Financial Protection Bureau, required by the 2010 Dodd-Frank financial law. The median home price rose in November to $220,300, making it 6.3% higher than a year ago.
U.S. car and light truck sales rose 5.7% reaching 17.5 million and broke a 15 year—old record. However, ISM's index of manufacturing fell to 48.2 in December, for a few consecutive months of contraction to the lowest level since 2009, from 48.6 in November, highlighting the global situation's effect on U.S. factories' business. Manufacturing accounts for 12% of U.S economic output. The Atlanta Fed Bank's estimate for fourth-quarter GDP fell to 0.7% from 2.3%. J.P. Morgan predicts 2,25% growth in the first-quarter of 2016.
After the farm economy enjoyed an almost perfect six years, values of farmland are down from all-time highs, while the agricultural debt relative to income swelled to the highest in 30 -years.Global prices of corn and soybean are below the cost of production. Last year farm income was the lowest since 2002.This year's agricultural—traded surplus in the U.S. will be the smallest in ten years. The $1,2 trillion student loan debt presents another problem for the government.
For the first time in 5 years Congress passed the most productive measure to fund the government through September, and to extend tax breaks for business and low income families. The $1.15 trillion bill approved a multiyear package, ended a Medicare cliff, agreed to make permanent tax credits and lifted a ban on oil exports. It bulged the next year's budget deficit to a three-year high, which the
conservatives did not appreciate. Thus far Puerto Rico defaulted on about $174 million debt with more to follow. As it is planning to pay some investors at the expense of others, the problems are likely to lead to conflicts which will spread over a prolonged time. Even so, the Conference Board Consumer Confidence Index rose materially to 96.5 in December from 92.5 in November. Consumers' appraisal of current conditions was mixed, as it is for business conditions over the next six months, but it is more positive about the labor market.
Employers added 292,000 workers in December helped by mild winter, while payrolls were revised upwards by 50,000 for October and November, holding the jobless rate at 5%. After a gain of 3.1 million in 2014, employment rose by 2.65 million for all of 2015. The average hourly earnings were increased 2.5% from a year earlier, with average workweek unchanged at 34.5 hours, and the participation rate barely increased to 62.6% from 62.5%, Part-time workers held at over 6 million with underemployment rate at 9.9%.
In the course of 2015 the FOMC appeared to exhibit a policy consensus, however there were some marked dissentions. The configuration of FOMC voting is going to change for 2016 as the rotation of voting seats have changed and will bring officials who were in favor of the Fed starting to raise rates well ahead of December 16, including Bullard, George and Mester. The vote in December indicated a projection for the rate to reach 1.375%, with four 0.25% increases by the end of 2016. This projection may undergo a change due to the latest events in the financial markets. The next policy meeting is scheduled for January 26/27.
MID-SHIP Report January 15, 2016
The geopolitical problems did not get better over the past few weeks, in fact they got more complicated and created a greater degree of uncertainty, leading to higher financial risks. The BRIC economies continued limping poorly, while Greece appears on the verge of another bankruptcy. The U.K faces a referendum whether to stay within the E.U. Since reaching the milestone of becoming a world elite currency, the Yuan started slowly but steadily falling, as China's companies and individuals moved huge amounts of money out of the country. China's manufacturing sector contracted for the 10th consecutive month. The promised reforms of the economy are left neglected. Emerging countries' currencies tumbled against the U.S. dollar.
However, according to the IMF and the World Bank the effects of currency movements have been reduced over time by 30%, and no longer boost exports as they once did. Hence the divergence between the Fed and the ECB will have less impact than expected. The latest Saudi conflict with Iran pushed oil prices down further. The purported H-bomb test by North Korea and the turmoil in China led to the fall of world stock markets, triggered by three setbacks of several percent each at the Shanghai exchange, pushing DJIA down 1,079 points to 16,346, and causing the worst -ever five-day start of the year ever. Crude oil settled at a 12-year low, and copper fell below $2, for the first time since 2009. Few economists anticipate crude oil to go down to below $30 which could cause some energy companies to go bankrupt.
According to Bloomberg, investors went on the biggest 3-day spree in gold-backed exchange traded funds; ETFs climbed 19.8 metric ton to 1,477.7 tons, the largest increase since January 2015. Bullion jumped 4.1%, for the best performance since August while global equity was in a bad slump. Goldman Sachs suggests that stock market may get worse, and if it does it will create opportunities to invest.
In the U.S. the GDP rose at a 2% annual rate in the third quarter, driven by a 3% rise in consumer spending. The strong dollar and low commodities prices weighed heavier on exports and business spending, following the GDP 3.9% growth rate in the second quarter. Sales at physical stores fell 6.7% over the weekend preceding Christmas, while traffic declined 1.4%. In contrast, e-commerce sales rose 11.8% from November 26 through December 20 compared with a year ago. Some researchers expected e-commerce to account for 14% of retail sales in November and December. Some estimated total sales up 3.1% for the season.
In housing, existing-home sales sank 10,5% in November to an annualized rate of 4.76 million, well below the estimated 5.32 million. The NAR blamed the fall on delays caused by new federal rules of the Consumer Financial Protection Bureau, required by the 2010 Dodd-Frank financial law. The median home price rose in November to $220,300, making it 6.3% higher than a year ago.
U.S. car and light truck sales rose 5.7% reaching 17.5 million and broke a 15 year—old record. However, ISM's index of manufacturing fell to 48.2 in December, for a few consecutive months of contraction to the lowest level since 2009, from 48.6 in November, highlighting the global situation's effect on U.S. factories' business. Manufacturing accounts for 12% of U.S economic output. The Atlanta Fed Bank's estimate for fourth-quarter GDP fell to 0.7% from 2.3%. J.P. Morgan predicts 2,25% growth in the first-quarter of 2016.
After the farm economy enjoyed an almost perfect six years, values of farmland are down from all-time highs, while the agricultural debt relative to income swelled to the highest in 30 -years.Global prices of corn and soybean are below the cost of production. Last year farm income was the lowest since 2002.This year's agricultural—traded surplus in the U.S. will be the smallest in ten years. The $1,2 trillion student loan debt presents another problem for the government.
For the first time in 5 years Congress passed the most productive measure to fund the government through September, and to extend tax breaks for business and low income families. The $1.15 trillion bill approved a multiyear package, ended a Medicare cliff, agreed to make permanent tax credits and lifted a ban on oil exports. It bulged the next year's budget deficit to a three-year high, which the
conservatives did not appreciate. Thus far Puerto Rico defaulted on about $174 million debt with more to follow. As it is planning to pay some investors at the expense of others, the problems are likely to lead to conflicts which will spread over a prolonged time. Even so, the Conference Board Consumer Confidence Index rose materially to 96.5 in December from 92.5 in November. Consumers' appraisal of current conditions was mixed, as it is for business conditions over the next six months, but it is more positive about the labor market.
Employers added 292,000 workers in December helped by mild winter, while payrolls were revised upwards by 50,000 for October and November, holding the jobless rate at 5%. After a gain of 3.1 million in 2014, employment rose by 2.65 million for all of 2015. The average hourly earnings were increased 2.5% from a year earlier, with average workweek unchanged at 34.5 hours, and the participation rate barely increased to 62.6% from 62.5%, Part-time workers held at over 6 million with underemployment rate at 9.9%.
In the course of 2015 the FOMC appeared to exhibit a policy consensus, however there were some marked dissentions. The configuration of FOMC voting is going to change for 2016 as the rotation of voting seats have changed and will bring officials who were in favor of the Fed starting to raise rates well ahead of December 16, including Bullard, George and Mester. The vote in December indicated a projection for the rate to reach 1.375%, with four 0.25% increases by the end of 2016. This projection may undergo a change due to the latest events in the financial markets. The next policy meeting is scheduled for January 26/27.
MID-SHIP Report January 15, 2016