Archive for the ‘Global Economy’ Category

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Asia is in crisis mode. Europe, or so it appears, is in recovery mode. In Asia we are set to see a re-run of 1997, or so they say, when Asia suffered one very nasty crash. In Europe years of pain are set to pay dividends, or once again so they say. Yet, look beneath the surface and things look different. Asia today is nothing like Asia in 1997. Parts of Europe on the other hand do.

Déjà vu. We all get it from time to time, but presumably it is an illusion. It has been theorised that we may get that feeling of that having done or said something before, because our subconscious can perceive something before our conscious. Déjà vu when applied to Asia may be an illusion too.

At the moment many are trying to draw a lesson from the 1990s. In 1994, the US Federal Reserve began a cycle of tightening monetary policy. As US interest rates increased, money flowed from the so-called tiger economies of South East Asia into the US. The 1997 Asian crisis resulted. The IMF stepped in. Some countries, that had previously seemed to be on an unstoppable road to riches, suffered a very nasty recession/depression.

Many fear a repeat of this today. The Fed is set to tighten. The biggest victim to date has been India. Brazil, Turkey and Indonesia have also seen sharp currency losses. Indonesia’s central bank has responded by increasing rates four times in just a few months. Don’t forget, however, that despite the severity of the 1997 crisis, within a short time frame output across South East Asia had passed the pre-1997 peak. It will be like that again. Indeed Indonesia, perhaps along with the Philippines, is one of the most interesting territories in the world right now – from an investor’s point of view that is. This time around savings rates are higher in South East Asia, while external debt – especially in the case of Indonesia, the Philippines and India – is relatively modest.

Contrast this with what is happening in the euro area, where many countries in the region are facing the tyranny of a fixed exchange rate, which is causing the recession/depression to drag on and on.

But the latest Purchasing Managers’ (PMIs) Indices relating to Europe look promising. The PMI for Spain hit a 29 month high, for Italy it was at a 27 month high. Ireland’s PMI was at a 9 month high. For Greece the story is sort of better still; the PMI is now at a 44 month high.

However, the Greek PMI still points to recession. In Spain, Italy and Ireland the growth looks only modest. Just remember that these countries have massive levels of unemployment – especially in Spain and Greece. For them to cut government debt to the levels required, they have to impose austerity for years and years.

And just consider what might happen, if the markets expect an even higher return on the money they lent to troubled Europe as rates rise in the US.

The markets are panicking over Asia. They should perhaps be looking towards Europe.

© Investment & Business News 2013

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It happened in 1997, and some think it is happening again. Back in 1994 the US Federal Reserve upped interest rates, and so begun a cycle of tightening monetary policy. Money flowed from East to West, and in 1997 crisis was the watch word. The so called tiger economies of South East Asia in particular saw their economies look distinctly like a certain fruit – a pear. It was an important episode. Some say that the Asian crisis of 1997 sparked off a chain of events that led to the 2008 finance crisis. And now it seems to be happening all over again. Or is it?

Many economists say that the tragedy of the Asian crisis was that it was not the fault of the countries that were the victims. Cheap interest rates in the US meant money flowed from the US and Europe into South East Asia. Not all governments in the region wanted it. But – or so Nobel Laureate Joseph Stiglitz, who was chief economist at the World Bank at the time alleges – the IMF urged governments to welcome the influx of money. It is just that when money flows fast, not all of it is used wisely. Bubbles are born. Then in 1994 things began to change. Slowly the Fed increased rates. By 1997, the interest rates in the US were attractive to investors, and money flowed back. Bad Asian businesses were exposed. Good businesses were caught out too. The IMF came riding in to the rescue, but not all agreed with how it reacted. Critics say the IMF was more concerned about finding ways to ensure the West got its money back than helping the countries of South East Asia cope with the crisis.

And in so doing seeds were sown. Many countries in South East said never again, and vowed to ensure they were never again reliant on overseas capital. China watched events with alarm, and its policy of keeping a cheap yuan, and pushing for growth off a trade surplus was born. Many economists say this policy helped to contribute to global imbalances, which may have been an underlying cause of the 2008 crisis.

But by trying so hard to save the West, the IMF and –what Stligtz calls the Washington Consensus – western banks got off lightly, It happened again in 1998 with the Russian crisis and the collapse of LTCM, for which Fed Chairman Alan Greenspan managed to orchestrate a rescue which avoided a western banking crisis. But the rescue meant moral hazard because western banks did not learn their lesson. They repeated their errors until they became too big for even the Fed to sort them out in 2008.

Now let’s come up to date. We appear to be entering a new period of rising interest rates. The Fed and Bank of England have tried to persuade us that rates will not rise for some time, but the markets are not buying it. Every piece of good news, every

piece of okay news on jobs in the UK and the US, makes the markets more certain that rates will be rising sooner rather than later. On the back of this, yields on US government bonds have hit two year highs. It is not so much that money is flowing from Asia back into the US, but that the markets fear this will happen. And the fear is having an effect. The Indian Rupee fell to all-time low against the dollar yesterday (19 August). But emerging market currencies saw sharp falls across the board.

So far this year has been disastrous for the South African Rand, the Brazilian Real, and now the Indian Rupee. Last week data revealed that Russia is in recession. Yesterday data emerged indicating that Thailand is in recession. The Indonesian stock market saw sharp falls as markets took fright over the size of its current account deficit. Indonesian government debt is rising too. Yet there are reasons to think that some of these countries are being wrongly punished by the markets, and the ultimate loser will be the markets themselves.

This time around many of the larger countries of South East Asia are far less reliant on overseas money. Savings ratios are high.

In Indonesia the ratio of credit to GDP is 30 per cent, against an average of nearer 100 per cent for the region. More interestingly, in Indonesia a smaller proportion of credit has funded projects in the property sector, relative to Hong Kong and Vietnam, for example. As a result there is little hint of a property bubble in the making. Instead, much of the credit has funded infrastructure and manufacturing. In 1997 around 50 per cent of Indonesia’s credit was funded by foreign currencies. Today that level is nearer 15 per cent.

Indonesian domestic credit to the private sector is just 33 per cent, compared to 203 per cent in the US. The ratio is just 33 per cent in the Philippines too. It is even lower in Mexico, which may, by the way, benefit from re-shoring as manufacturers move closer to the US market.

As far as emerging markets are concerned, the markets are in panic mode. In such times they are lousy at picking the wheat from the chaff. When they become more rational, certain emerging market countries will see equities boom.

© Investment & Business News 2013

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The Indian government has just made a rather interesting new appointment. It concerns the man who is to head the country’s central bank. The man is… well, he is rather clever and well regarded across the world. But what makes this one so very interesting, is that talk is that Barack Obama’s choice for the next boss of the Fed is rather controversial. And what is really really interesting is that amongst the critics of Obama’s choice is the man who is set to take over at India’s central bank.

Okay let’s name some names. The man who is to take over at India’s central banks is Raghuram Rajan – former chief economist of the IMF and the author of ‘Fault Lines’. In his book, Mr Rajan postulated the theory that surging house prices were used by western governments as a way to kind of compensate for the fact that real wages were rising only very slowly. So, during the boom years, the gap between the super-rich and everyone else grew, profits to GDP rose while wages to GDP fell, and median workers in many countries found that over a period of many years – years of boom that is – their real disposable income didn’t grow at all. These were not good developments. We should have had recession when demand was suffocated from the economy. Instead, the money that companies were not spending sloshed around the system, eventually leading to lower interest rates, more credit, more mortgages, higher house prices, more household debt, and a consumer boom based on leverage.

Mr Rajan was one of the most prescient of the world’s economists and his theories to explain what was charging the boom and then the crash are probably spot on.

Now to change the mood a little: consider the Fed. The Fed’s deputy chair is Janet Yellen, and she is the person many want to see take over from Ben Bernanke next year. Talk is that Barack Obama wants Larry Summers to have the job. Now Summers was US treasury secretary under Bill Clinton – a massive critic of QE – and was the man whom many hold responsible for loosening the stranglehold of the Glass–Steagall Act, which separated investment and retail banking. Summers is not liked by Republicans and quite a lot of Democrats have their doubts about him, but he is a heavy weight in the world of international finance and politics – there is no doubt about that.

Many of the world’s top economists are critics of Summers, including the likes of Paul Krugman and Joseph Stiglitz, and Raghuram Rajan of course. Let’s say it happens and next year Summers and Rajan are both central bankers. For once when India’s central bank meets up with the Fed, many will see it as a meeting of equals – that will come as quite a shock for a US that is used to having things its way.

As for India, the appointment of Rajan may yet prove to be a key moment as the country attempts to re-establish itself as one of the world fastest growing economies.

© Investment & Business News 2013

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31 July 2013, and 1 August 2013: mark these dates in your diary. On these days economic news was revealed that meant one of two things; either the economy was well and truly on the mend, or we are seeing one very big blip. If it is the former, celebrate; if it is the latter enjoy it while it lasts.

They hadn’t expected much. Purchasing Managers’ Indices (PMIs) suggested the US economy had a rotten Q2. Sure, said the optimists, Q3 would be better, but the second quarter of this year was one we would rather forget. Then on 31July 2013 the hard data was released and it told a very different tale.

The US economy expanded at an annualised rate of 1.7 per cent in Q2, and by 1.4 per cent year on year. That was much better than expected, much better than the PMIs suggested.

Both business investment and residential investment helped – in the US when house prices go up so does construction, unlike in the UK where the correlation seems only very vague.

So that was the US. The news was good in the Eurozone too. The latest PMI from Markit on manufacturing in the region was out yesterday and it rose, hitting a two year high, with a reading of 50.3. To put that in perspective, any score over 50 is meant to correspond to growth. A reading of 50.3 is nothing special, but by recent standards it is positively wonderful.

Broken down by country things look like this:

Ireland,   51.0,    5-month high
Netherlands   50.8   24-month high
Germany   50.7   18-month high
Italy   50.4   26-month high
Spain   49.8   2-month low
France   49.7   17-month high
Austria   49.1   8-month high
Greece   47.0   43-month high

And finally we turn to the UK. The latest PMI for UK manufacturing rose to 54.6, a 26 month high. And get this. According to Markit which compiles the data along with CIPS: “New export business rose at the fastest pace for two years, reflecting increased sales to Australia, China, the euro area, Kenya, Mexico, the Middle East, Nigeria, Russia and the US.”

Apologies for raining on such a pleasant parade, but the story was not good everywhere. In Russia and Turkey the PMIs fell sharply and look worrisome, in China the picture is mixed, with the official PMI pointing to a modest pick-up and the unofficial PMI from HSBC/Markit, which puts more weight on smaller companies, deteriorating.

Still with the PMIs, the news on Poland and the Czech Republic was much better. Watch these two countries closely, especially Poland. If there is truth in all this talk about reshoring, Poland, with its proximity to the developed part of Europe, may be a big beneficiary.

One worry is that other data out yesterday showed that Sweden contracted in Q2. The out and out bears – those who are cynical for a living – question the PMIs. They say they did not predict the slow-down in Sweden; they did not predict the pick-up in the US, and they are giving a misleading picture on Europe. The big fear relates to central bankers tightening policy as a result of this data. The Fed may accelerate its plans to ease back on QE.

As for the European Central Bank, it is cautious and conservative to a T. There is a permanent danger it will lose its nerve, and tighten again, sending the Eurozone back into recession.

© Investment & Business News 2013

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“Software (Google and Amazon), hardware and design (Apple), social networking (Facebook and Twitter), biotech, pharmaceuticals, robotics, nanotechnology, entertainment and retail (Wal-Mart)” – these are the bedrocks of modern capitalism. And without high rewards for the innovators – the people who broke the mould and gave us great new innovations – the rest of us would still be living in the Stone Age, or at least we would be poorer than we are, or so says Daron Acemoglu from MIT.

The US could become a lot more equal and a fairer place, but the rest of us, with our more liberal views would be the losers. Is that right? Can the more cuddly and idealist parts of this world only survive thanks to the more cut-throat and harsher realities of the US system?

“The United States does not have the type of welfare state that many European countries, including Denmark, Finland, Norway and Sweden, have developed, and despite recent health-care reforms, many Americans do not enjoy the type of high-quality health care that their counterparts in these other countries do. They also receive much shorter vacations and more limited maternity leave, and do not have access to a variety of other public services that are more broadly provided in many continental European countries.

Perhaps more importantly, poverty and inequality are much higher in the United States and have been increasing over the last three decades, while they have been broadly stable in Denmark, Finland, Norway and Sweden,” or so says Daron Acemoglu from MIT; James A Robinson from Harvard, and Thierry Verdier from the Paris School of Economics in a paper published last year. See: Can’t We All Be More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World 

But, continues the paper: “American society that makes possible the more cuddly Scandinavian societies based on a comprehensive social safety net, the welfare state and more limited inequality. The basic idea we propose is simple and is developed in the context of a canonical model of endogenous technological change at the world level.

The main building block of our model is technological interdependence across countries: technological innovations, particularly by the most technologically advanced countries, contribute to the world technology frontier, and other countries can build on the world technology frontier. We combine this with the idea that technological innovations require incentives for workers and entrepreneurs.”

Okay, so that is what the paper says. To put it more succinctly, the US does appear to be more innovative than, say, Scandinavia, with more patents per head for example. So maybe we should all be grateful that the US system is so ruthless.

But here is an alternative, point of view. In his book ‘Sex, Science and Profits’, Terence Kealey quoted Robert Stephenson who said: “The locomotive is not the invention of one man but of a nation of engineers,” and the industrialist A J Mundella, who said: “Every invention we have made and patented (and some have created almost a revolution in the trade) has been the invention of overlookers, or ordinary working men, or skilled mechanics, in every instance.” In short, it was not the case that that the great innovations have been down to highly remunerated entrepreneurs; rather they have often been down to ordinary folks on the payroll, who received little more than a pat on the back for their troubles.

There is one other downside to a system in which there is a massive gap between, say, the top 5 per cent and everyone else. Because doctors often fall into the top 5 per cent in terms of ability and certain exam results, it means that society as a whole struggles to be able to pay for its doctors. If doctors earned less, the NHS would be easier to fund. But if they did, maybe there would be fewer doctors to go around.

Maybe the authors of this report have causation the wrong way round. Sure the US may be more innovative than Scandinavia and less equal, but does that mean one caused the other.

Maybe the US is innovative because it has different attitudes to failure, and its system gives greater scope for experimenting.

For every entrepreneur who makes it big, there are many who fail abjectly, and maybe they fail because they were just unlucky. The difference between those who make it and those who don’t may be as much down to luck as pure ability or hard work.

In any case, there is lots of research to show that money is not the main driver of either entrepreneurs or indeed inventors.

And yet there is something irrational about us all. Why is that more people enter the lottery when the prizes are bigger, even though the chances of winning are not affected? Do you really care if you win £5 million or £30 million on the lottery? Would it really make much difference to your happiness? Yet more of us take part when the prize money is for the bigger amount.

It may be irrational; it may unfair; it may not really add up, and it may not apply to us all of us, but the thing that drives many entrepreneurs to take massive risks, and work through the night, night after night is the promise of great riches. Maybe Messrs Acemoglu, Robinson and Verdier have a point.

© Investment & Business News 2013

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House prices might be rising in the UK, but that is not what’s happening across most of Europe.

According to new data from the EU Commission, house prices across the Eurozone fell 2.2 per cent year on year in the first quarter of this year. Across the EU they fell 1.4 per cent.

Among the Member States for which data are available, the highest annual increases in house prices in the first quarter of 2013 were recorded in Estonia (+7.7 per cent), Latvia (+7.2 per cent), Luxembourg (+4.3 per cent), and Sweden (+4.1 per cent), and the largest falls were seen in Spain (-12.8 per cent), Hungary (-9.3 per cent), Portugal (-7.3 per cent), and the Netherlands (-7.2 per cent).

In France they were down 1.4 per cent. They fell 5.7 per cent in Italy, 3.0 per cent in Ireland, and 0.4 per cent in Cyprus.

The latest data for Germany is not yet available, but in Q2 2012 they rose 2.3 per cent, year on year.

According to recent OECD data, when comparing average house prices to rent, they are 71 per cent above the historic average in Norway, 64 per cent more than average in Canada, 63 per cent more in Belgium, 61 per cent in New Zealand, 38 per cent in Finland, 37 per cent in Australia, 35 per cent in France, 32 per cent in Sweden, and 31 per cent in the UK.

Prices to rent are below the historic average in the US, Japan, Germany, Italy, Czech Republic, Greece, Ireland, Iceland, Portugal, Slovak Republic, Slovenia and Switzerland. In the case of Japan, Germany, Greece, Ireland, Portugal and Slovenia they are less than 80 per cent of the average relative to rents.

© Investment & Business News 2013

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The economist Robert Gordon opened a can of worms a year or so ago when he suggested that technology is having a limited impact upon the economy; that the computer revolution is not increasing wealth like the industrial revolution or the move towards mass production did in the early 20th century. In short the good days are behind us. But is that really right?

Other see it in terms of low hanging fruit. They say we have picked the fruit that can create economic growth the easy way. The growth period supported by carbon fuels may be approaching its end – or maybe the end will be delayed if the hype about shale gas is to be believed – and this era of growth is coming to an end. But is that really right?

Capital Economics pointed out that it took 60 years before the steam engine invented by James Watt in 1769 materially boosted productivity. If history teaches us one thing, it is that there is a time lag between innovation and growth.

Sometimes we even get economic depressions in-between, as happened between the innovation we call mass production and the post World War 2 economic boom.

So to say that the computer has not created growth and neither will it, does seem to be a bit hasty.

The thing about technology that economists often forget is Moore’s Law. Computers are getting more powerful all the time and, as this happens, their potential to influence growth rises. Sometimes technology can steadily increase in power, but we barely notice it until it passes a kind of breakthrough point. When that happens we start to notice it more and more.

Apple is a good example. Steve Jobs had a dream of combining design with technology. But this was only really viable once technology had passed a certain level; a level it may have passed in the early years of the 21st century. And then the company went from flirting with bankruptcy to the biggest in the world within just a few years.

Certain burgeoning technologies may suit the UK rather well.

Take biotech. The industry is on the verge of some seriously major breakthroughs. And in this industry, the UK is the world leader.

Or take 3D printing. Critics make the same mistakes economists often make when they forget about Moore’s Law. This is a burgeoning technology, which is set to become steadily more powerful and relevant. The 3D printer costing £699 and for sale in Maplin may help users to replace missing chess pieces or new cases for their phones, but future 3D printers will do an awful lot more. NASA is funding one project to make a printer than can create a pizza from powders. It may be only a matter of time before one can say to a printer: “Tea, Earl Grey, hot.”

But 3D printing may transform industry in a way that is just as radical as when mass production took off, but this time it may work in reverse. Manufacturing may return to local craftsmen; even to the High Street as it becomes possible to have bespoke clothes, furniture, even cars made without necessarily paying more money.
Debt matters, but it matters less if your income is growing. It matters even less if the percentage interest on debt is less than the percentage growth in income.

Many critics say we face a debt crisis, that the economy is about to implode. But they forget about technology. And their error may be dangerous. If we try to cut debt at a time of innovation, the result may be falling demand at a time of rising productivity.

The debt hawks may mean well, but their belief that we must suffer pain before we can see recovery may be both wrong and dangerous. If we try to cut debt, with a resulting fall in demand at a time of rising productivity, the result may be an economic depression of great severity. The arch bears may be right in prophesying doom, but they may be right for entirely the wrong reasons.

© Investment & Business News 2013