Archive for the ‘United States’ Category

The world had de-coupled, we were told. Time was, that when the US consumer sneezed, the rest of the world got a cold.

Then in 2008, the US consumer was sent to bed, with a thermometer in his/her mouth, and the rest of the world was in agony.

Then something odd happened. After a few months, in which everyone suffered, the emerging world did okay. China did more than okay, it boomed.  The BRICs, or if you want to include South Africa in that illustrious group, the BRICS, took the baton of growth from the US.

Sure there was talk of currency wars, sure the UK limped along like a cripple on broken crutches, but the global economy did well. It had de-coupled we were told.

Or did it? There are time lags in these things.

Now things seem to have gone into reverse. Sure China is still growing, but it is struggling to change from export to consumer led growth. India is picking up, Brazil looks dire, Russia looks worse, and if you want to make the small ‘s’ at the end of BRICS into a big “S” South Africa  is struggling.

There are signs Japan may be recovering, more of that in another article, the Eurozone is well and truly stuck in a very low gear, or even reverse, but the UK and US are the new stars.

The UK economy slowed a bit in Q3, with quarterly growth down to 0.7 per cent, from 0.9 per cent the quarter before. But then the UK’s main trading partner is the Eurozone. At least investment is rising at a very brisk pace, and that gives good reason for cheer.

But there is even more reason to cheer the US.

The year got off to an awful start, with a cold winter and unfortunate timing of the inventory cycle hitting  the economy hard. Was the Q1 contraction a one-off?   Or was it a sign of something more serious?

Well the data on the US economy has been unremittingly good, ever since.  Take for example the latest US consumer Confidence Index from the Conference Board. It hit a new seven year high in October. If you like your numbers, then you may be interested to know the index hit 94.5. The last time it was so high was in October 2007.

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Yet, the global economy still struggles. If it has de-coupled, then right now this is negative thing.

But there is one other issue here.

As the US recovers, the Fed makes noises about upping rates. This is spooking markets, and hitting emerging economies hard.

It is not that the US economy is no longer the lynchpin of the global economy. It still is. It is just that the actions of the Fed seem to count for more than the well-being of the US consumer.

But can the US consumer yet save the day? Only time will tell, but it is surely the case that if US Consumer Confidence continues to grow, then the rest of the world will grow with it – eventually.

p.s. I have been away for a while to complete my new book, called ‘iDisrupted‘ which is available to purchase via Amazon. If you are interested in my thoughts about how the incredible changes in technology are likely to change our world forever then you are invited to buy the book and let me know whether you agree or disagree with my predictions. Further details about the book can be found on www.idisrupted.com

Michael Baxter, The Money Spy

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Perspective makes all the difference. On this side of the pond, BP – along with its two US partners –made a dreadful error. In the case of BP the causes of the errors were complex. Its boss at the time was trying to change the culture, and make the company more safety aware. BP works with cutting edge technology, drilling for oil in the deep places of this planet. It possesses skills at searching for and releasing oil lying beneath the oceans which are second to none, but inevitably, when you push technology to its limit, you occasionally get it wrong. With the Macondo oil platform, the consequences of getting it wrong were calamitous. BP was unlucky, it could have been a rival, a US firm, for example, but alas BP was the one hit by a bolt of misfortune.

From the perspective on the other side of the Atlantic, the view is quite different. Run by a complacent Brit, “who wanted to get his life back”, BP put profits before all else. It ignored warnings. It allowed a culture to develop in which employees at the firm told their bosses what they thought they wanted to hear. BP was a company that represented all that was bad about corporate culture. Consider this anecdote to illustrate the point. Its partner, Halliburton told BP that it needed 21 metal centralising collars to stabilise cement laid down before drilling. So what did BP, with its attention forever on cost cutting, do? It laid down just six such collars.

There is no doubt that there are companies, individuals and indeed lawyers, in the region of the US affected by the Gulf of Mexico oil spill that have tried their luck. Ads have circulated urging people to lodge claims. Stories abound of firms gaining compensation from BP for the most spurious of reasons. Perhaps their turnover fell in the year of the oil spill, but for reasons quite unrelated to BP. Perhaps their turnover fell because their finance director booked invoices that would normally have been sent in the year of the oil spill into the following year. Perhaps their turnover fell because firms changed their accountancy practice for just that one year.

Is it fair? It depends on the narrative to which you are subjected. If you believe that BP was guilty of huge arrogance, with compete disregard to human life in the build-up to the oil spill, then you might say the company hasn’t changed; that it is shamelessly trying to put the blame on innocent US victims.

If you believe BP was unlucky, and is no more guilty than its two main US partners in the oil project – Halliburton and Transocean – if you believe that its former boss Tony Hayward was singled out by the US because they just didn’t get the British tendency for understatement, then you might feel that the giant oil company has been treated shamelessly by the US system of so-called justice.

The ‘FT’ has run a number of anonymous articles fighting BP’s corner. One article headlined America’s shameful shakedown of BP and said that the “gulf settlement should be fair, not an exercise in extortion.”

Robert Kennedy Jr told the other side of the story. In a recent interview with the ‘Telegraph’ he responded to the argument that BP was being bullied by the US legal system. He said: “They are being picked on as an oil company that wrecked our Gulf and lied about it… I don’t care if it’s a British company or Exxon. I would rather sue Exxon than BP, because I think Exxon is a worse company. But Exxon didn’t do the Gulf spill.” He said damages should be sufficiently punitive that “it gives an incentive to their industry to spend as much money on protecting the safety of the public and the environment as they do on their tax lawyers, who are trying to reduce their tax liabilities.” Now take legal fees. BP forked out no less than $1.5 billion in payments to law firms acting for apparent victims of the oil spill in May and June alone. BP called these charges “perverse and outrageous.”

What it has managed to do is get the US legal system to investigate and former judge and – more to the point – former director of the FBI Louis Freeh is on the case. The Feds, as it were, are trying to see whether BP has a right to cry foul.

Yet federal judge Carl Barbier doesn’t seem impressed with BP’s arguments. The oil company has been accusing the US claims administrator Patrick Juneau and his office of acting unfairly. But Judge Barbier accused BP Boss Bob Dudley of “going beyond the line”, and of making “unfair, inappropriate, personal attacks” on Mr Juneau.

It does seem to depend on the narrative to which you were subjected in the first place.

Supposing, however, the narrative is retrospectively changed. It turns out that had BP followed Halliburton’s advice and employed 21 metal centralising collars, instead of six, it would have made no difference. Soon after the oil spill, Halliburton ran two simulations of what would have happened in the event that BP had heeded its advice, and the simulations showed that the end result would have pretty much been the same. So what did Halliburton do? It asked the people who ran the simulations to destroy them.

Halliburton has been fined $200,000 for its wrong doing, while BP has forked out around $40 billion. Some say there is a disconnection there.

But then that is the snag with narratives. When pieces of the narrative are changed at a later date, the overall initial impression is unaltered. The narrative changes us, and retrospective changes to the narrative don’t reverse the original effect it had on us. If we were to find out years after we first heard the story that that actually Cinderella was a manipulative little so and so, we would probably still think she had an evil step mother and sisters. Not that BP is Cinderella, but there is someone who is as white as the hero from the best child’s story: Dick Cheney, former US Vice President, no less.

Of course Halliburton is essentially honourable; its former boss went on to become US Vice President.

But if your narrative of US history when Cheney was Vice President is a tad cynical, and you view him as something of a war monger, who made Attila the Hun seem like a socialist, then no doubt you will see this as yet more evidence that BP has been screwed by the US legal system, while Halliburton with its links to the very top of the US government, has got away with the tiniest of fines.

© Investment & Business News 2013

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“I think I should warn you,” said Ben Bernanke, “if you think I am making myself clear, then that means you have probably misunderstood me.” Witty, and a tad daft. It is just that actually those words were not spoken by Mr Bernanke at all; rather they were spoken by his predecessor as the Fed chairman Alan Greenspan.

In fact, when Ben took over at the Fed he went to great lengths to say he was not one for cryptic remarks. He would say it as he saw it. He promised to be something of a blunt speaker. (Ay up lad, I say wat I mean tha noes). Last week, however, he seemed to do an impressive impersonation of Mr Greenspan. His lips and eyes, or his statement and his inference, seemed all seemed out of sync.

Don’t get confused,” said the Fed Chairman, “The overall message [from the Fed’s rate setting committee] is accommodation.”

His words had been eagerly awaited. Last month Ben suggested the Fed may be tightening monetary policy soon. This time he said they will be doing no such thing. Rather that we may see a “gradual and possible change in the mix of [monetary] instruments.”

So what does that mean? A change in mix suggests the details are different but the overall thrust the same.

So that’s the headline.

What about the substance?

The latest minutes from the Fed said that many members of the FOMC – that’s the Federal Open Market Committee – “indicated that further improvement in the outlook for the labour market would be required before it would be appropriate to slow the pace of asset purchases.” Again this needs translating. “Many” is supposed to be code for slightly over half. Subsequent to the meeting of the FOMC to which these minutes relate, job data on the US has seen another big improvement. That rather suggests that more than half of the men and women who determine monetary policy are on the cusp of agreeing to “slow the pace of asset purchases.”

So Ben says one thing, and the minutes say something else.

The minutes also said that ‘some members’ wanted to see evidence that GDP growth was picking up before they agreed to tighten policy. So let’s decode that. In this case, “some” means fewer than half. The data on GDP is not expected to be so good in Q2. In other words, fewer than half are not ready to tighten policy.

Would you believe it? The markets loved all this. Somehow they concluded that the Fed is not going to tighten monetary policy as quickly as they had feared, so they went out and bought, pushing the Dow and S&P 500 to new all-time highs.

Capital Economics took a look at the Fed’s words and concluded that they suggest QE will be reduced somewhat in September, will cease altogether in 2014 and rates will rise in 2015. This is actually pretty much the same as what it was saying before the Fed released its minutes.

In other words, all that has really changed is that the Fed is saying much the same thing as it was a few weeks ago; it is just using more ambiguous words to say it.

And that was enough to get the markets all bullish again.

© Investment & Business News 2013

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The US economy has not been good at exporting for some time. Recent data shows that its imports of goods and services still lag way behind exports. Yet there is one thing the US is good at exporting and that is economic news. And of late it has been exporting good economic news. So what is it; why; is it for real, and does that give us reason for hope?

Sometimes recoveries seem to be built on hot air. Sometimes they are down to confidence, and confidence creates growth, and growth creates confidence. During the boom years of the noughties, economic boom was built on debt. Households borrowed because house prices were up, and they rose partly because interest rates were so low, and partly because credit was so easy to come by, but there was something wrong.

The boom was built on foundations as shaky as a shaky house built of shaky match sticks, sitting on top of shaky hill made from quick sand. This time the recovery seem to sit on foundations that are a lot more robust. Yet still the doubters say it is all a lie.

So why the reason for cheer?

First and foremost, US households have cut debt. US household debt has fallen from $12.7 trillion in 2008, to $11.2 trillion at the end of last year. In fact, according to IMF data, US household debt to income has fallen from a ratio of 1.3 in the mid-noughties to around 1.05. In fact, the ratio is now higher in the Eurozone. At the same time, the value of US household assets have risen. According to Capital Economics: “Every $1.00 of debt is now backed by $6.30 of assets, whereas before the recession it was backed by $4.80 of assets.” Capital Economics, for so long a bear on the US economy, recently said that the US consumer is now well placed to drive “a faster period of economic growth.”

Secondly, US banks are in better shape. Q1 saw record profits for US banks, while their deposit-to-liabilities ratio recently hit a 20-year high of 84.6 per cent. See: US banks see biggest profits ever: is the US back? 

Thirdly, the US fiscal deficit this year is expected to be $642 billion, or so estimates the Congressional Budget Office. To put that in context, last year the deficit was $1.1 trillion. It will, in fact, be the first time since 2008 that the US deficit is less than $1 trillion. And, by the way, not so long ago the Congressional Budget Office was projecting a deficit of almost $200 billion more than that.

As for those who say the US sits on a financial and demographic time bomb, and that surging health care costs alone are sure to bankrupt the world’s largest economy there are some reasons to be cynical about such cynicism. See: The scaremongers are wrong: the US is not even vaguely close to going bust  and US medicare time bomb begins to look more like a pretty time piece 

US consumer confidence recently hit a five and half year high. US house prices are rising, and, unlike in the UK, they are rising from a point where the average price to income is below the historical average of 1.2 million, with June seeing a rise of 195,000.

Given all this evidence, why are many so cynical?

Some cynicism seems to be built on genuine concerns, while others seem to be cynical for its own sake.

One challenge is that this year US government spending will be falling while taxes are rising. This may be good for cutting government debt, but it may yet prove disastrous for the economy, and indeed the IMF has slated the US government for relaxing its fiscal stimulus too soon. But then that is what you get when you have a political system made up of two parties that seem to be hell bent on putting self-interest over national interests.

Partly as a result of the US fiscal stimulus’ going into reverse, recent  Purchasing Managers’ Indices (PMIs) have been disappointing, with the latest PMI tracking US non-manufacturing falling to a three year low. The latest PMIs suggest the US will grow at around 1 per cent in Q2 on an annualised basis. By recent standards, that is poor. But then these are problems with the short term.

Another challenge relates to the very difficult balancing act that the Fed has to manage. It is now talking about cutting back on its quantitative easing or QE programme quite soon – September being the date expected by the markets. The Fed has been buying $85 billion worth of bonds every month. To begin with the Fed will not stop QE, but merely slow down. The feeling is that it won’t stop altogether until next year, and rates won’t rise until 2015.

Not all see why. For one thing US inflation is modest, and appears to pose no threat at all. Fears that were commonplace a year or so ago, that QE would lead to runaway inflation currently look somewhat silly. So they ask: why cut rates so soon?

A more serious concern relates to ways in which the actual data may be misleading. So sure, US employment may be up, US unemployment may be falling, but US employment to the US population is not much less today than during the height of the recession. In part this is down to more people retiring, but it appears this is also partly down to some people pretty much giving up, and falling off the unemployment stats.

Then there are some who voice concern over student loans in the US. The big critic here is Nobel Laureate Joseph Stiglitz. See: Student Debt and the Crushing of the American Dream

This all leaves two big pluses.

The first plus is shale gas. This has led to falling energy costs, handing US households more disposable income after paying for energy. The second is signs of a kind of renaissance in manufacturing. This shows up in many ways. Both Apple and Google, for example, have recently announced that certain products will be made in the USA.

As US productivity rises, unit labour costs fall, and unit labour costs in China rise, the gap with China improves in favour of the US. More exciting is the potential of 3D printing, which may yet create a new kind of local craftsman, as is suddenly becomes viable for consumers to have bespoke products designed especially for them, or for just a small number of people.

A sustained US recovery is not guaranteed, but the odds are about as favourable as they have been for a very long time.

© Investment & Business News 2013

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There once was a king in Sicily called Dionysus. He had a courtier called Damocles who, in his efforts to flatter his King, told his liege how fortunate he was. To teach the obsequious inferior a lesson, Dionysus offered to swap places. There was a catch, however; above Damocles, sitting on his newly acquired throne, there hovered a sharp sword dangling by a horse’s hair, and arranged that way by Dionysus. The fear that the sword might finally fall, severing poor old Damocles’ arteries, proved too much for the imposter on the throne, who eventually begged his lord to swap back.

That’s the trouble with getting gold and riches; sometimes such ownership comes with a burden that is too high to bear. And that brings us to the subject of the UK housing market, the Bank of England, and a kind of monetary equivalent of a sword, dangling by the fiscal equivalent of a horse’s hair over the UK housing market’s equivalent of its genitalia.

You may have noticed that interest rates are quite low at the moment; lower in fact than a very low lower ground floor, which is good news for those with debts.

Suppose though that rates rise. For those who can easily pay their way that may not matter, but for those who can only just cover the interest on their mortgages out of current income, this may matter rather a lot.

“So what?” You might say.”It is time people started to learn how to manage their own finances. If you can only just afford a mortgage when rates at are at a record low, then you shouldn’t be getting yourself a mortgage at all.” It is just that in the UK, groupthink says ‘house prices always go up’, the wisdom of our elders says ‘always get the biggest possible mortgage you can possibly afford’, and George Osborne, with a wink to the wise, and a scheme he calls Help to Buy, has said: “Look, that horse’s hair that holds up house prices will never break.”

The mix of panic over the prospect of missing out on rising house prices, fear over never being able to jump on the housing ladder, and greed over the prospect of making a fortune via the magic of leverage and the guarantee that house prices always returns a profit, makes a heavy cocktail and one that is hard to resist.

The snag is that it turns out that around 18 per cent of secured loans are to households with less than £200 a month to spare after housing costs and other items of essential expenditure.

“If interest rates rise 1 per cent,” said the Bank of England in its latest Financial Stability Report, “households accounting for 9 per cent of mortgage debt would need to take some kind of action — such as cut essential spending, earn more income (for example, by working longer hours), or change mortgage — in order to afford their debt payments if interest rates rise.”

“If interest rates rise by 2 per cent,” suggested the bank, ditto, except that that it will be households accounting for 20 per cent of mortgage debt who will be so cursed.

Again, you might say: “So what? Get another job, worker longer hours, get on your bike.” But when there is unemployment, it is not so easy. Besides if we suddenly see a rush of people, accounting for 20 per cent of mortgage debt, suddenly asking for overtime, there probably won’t be enough to go around.

And that, as they say, is why a certain sword, not unlike the one Dionysus had arranged, dangles by a horse’s hair over the UK housing market.

But this story has another edge to it. “A study by the FSA,” said the Bank of England, “found that 5 to 8 per cent of UK mortgages by value were subject to forbearance in 2012, which was broadly unchanged from 2011.”

In the UK, chastened banks, many of whom are partially owned (via the government) by the taxpayer, don’t like the idea of repossessing properties. Then there is the issue of low interest rates. When they are that low, if a mortgagee gets behind with payments, why not give them more time, or so the bank might reason.

In the US it is not like that. In the US banks are more ruthless in their approach to repossessing property, but there is a good reason for that. In the UK, if a mortgage holder’s home is repossessed and it is worth less than the mortgage, it is up to the mortgagee to pay the difference. In the US, it is the bank’s responsibility.

So, US banks are more ruthless, but the consequences of negative equity are not quite as dire for US households.

So, will it happen? Will this latter day sword fall? Will the horse’s hair split? Mervyn King reckons UK interest rates won’t rise for some time. But just remember that the US economy and that of the UK are at different stages in their respective economic cycles. If the Fed, let’s call it Dionysus, increases rates, and the Bank of England (Damocles) doesn’t, there is a risk that sterling may crash. To avoid this, Damocles may have no choice to but to up rates to, as it were, cut the very horse’s hair he depends upon.

© Investment & Business News 2013

If you like your news with a twist of misery and a slice of disaster thrown in, then apologies, you will be disappointed with the latest economic data coming out of the US. On the other hand, if you like to be cheered up, read on.

The latest batch of good news out of the US came in a set of three.

Firstly US consumer confidence, according to the closely watched Conference Board Index, hit a near five and a half year high in June, with the index hitting 81.4. The last time it was higher was January 2008.

Okay, admittedly the data used to draw up the index only goes up to Mid-June, and stock markets crashed after that. But then again, bear in mind that US consumer confidence is one of the drivers of the US stock market. Some might say that US consumer confidence is riding high because the Dow and S&P 500 recently hit new all-time highs, but you could respond by saying yes, but part of the reason for stock market strength has been buoyant US consumer confidence.

But don’t forget that there are reasons beyond surging stocks for US consumers to feel chuffed with themselves at present. For one thing, as pointed out here several times of late, US household debt to income has fallen sharply since 2007.

Then there is US house prices. They have been looking up lately too, and that is also good for US consumer confidence. Bear in mind, too, that US house prices to rent and income are now below the historical average, so there is a good fundamental reason for prices to rise.

And that brings us to good news item number two. According to the latest Case Shiller US house prices index, April saw prices rise by 12.1 per cent year on year, and by 2.5 per cent over March. In fact, the month on month rise was the highest ever reported in the 12 year history of the index

And if that isn’t enough reason for cheer, yesterday also saw data on US durable orders for May, and that too was up.

Actually, it was literally up, with sales of aircraft soaring 51 per cent – Boeing sold 252 planes in the month, compared to 51 in April.

Even stripping out transport goods, core durables’ orders increased by 0.7 per cent month on month.

Apologies again. It is fun to be cynical, and talk about the Fed squashing the world by ending QE.

And indeed, if rates are set to rise, this will be a problem for some countries.

But relative to what we have become used to, the news out of the US really has been encouraging of late, and, just for now, cast cynicism aside and enjoy the moment.

© Investment & Business News 2013

As you know the US is effectively bust. There is a long list of perennial bears on the US economy who claim that commitments to future medical care costs mean the US is living off borrowed time.

They produce their calculations of woe like this. They look at how medical care costs have risen in past years (and they have shot up), and assume they will carry on rising at this rate. They then take an estimate for total expenditure over the next half a century or so, or indeed even longer, and then apply a rate of interest to calculate a net current value.

Using a formula based on those principles, last autumn Chris Cox and Bill Archer penned a piece for the ‘Wall Street Journal’ saying: “The actual liabilities of the federal government – including Social Security, medicare, and federal employees’ future retirement benefits – already exceed $86.8 trillion, or 550 per cent of US GDP.”

Dambisa Moyo wrote in her book ‘Why the West has lost: “If nothing else changes it from its current path, it is almost certain that America will move from a fully fledged capitalist society of entrepreneurs to a socialist nation within a few decades…The trouble is, it won’t be just any socialist welfare state … the US is on the path to creating the venal form of welfare state (poorly developed and designed) – one born of desperation from many years of flawed economic policies and a society that rapaciously feeds on itself.”

But supposing something else does change. Supposing the retirement age in the US rises by a couple of years, or supposing a modest consumption tax is introduced in the US, like VAT but much lower.

Then the time bomb won’t so much explode as go pftt, like a damp box of fireworks on a very rainy bonfire night.

Then there are medical costs. Medical costs in the US are expensive and, apparently the whole sector is meant to be pretty inefficient.

The projections of woe assume that medical costs will carry on rising at a rate well in excess of inflation.

It’s all a little odd, because the inflation rate for US medical care costs in May was 2.2 per cent year on year, which was a fifty year low.

Pftt. Did you hear that? It was all those predictions of doom going up in smoke.

© Investment & Business News 2013