Don Vialoux: Miners Recently Outperforming Bullion (August 9, 2012)

Thursday, August 9th, 2012

by Don Vialoux, EquityClock.com

Upcoming US Events for Today:

1. Weekly Jobless Claims will be released at 8:30am. The market expects Initial Claims to show 375K versus 365K previous. Continuing Claims are expected to reveal 3290K versus 3272K previous.
2. Trade Balance for June will be released at 8:30am. The market expects -$47.5B versus -$48.7B previous.
3. Wholesale Inventories for June will be released at 10:00am. The market expects an increase of 0.3%, consistent with the increase reported previous.

Upcoming International Events for Today:

1. The ECB Publishes the August Monthly Report at 4:00am EST.
2. Great Britain Merchandise Trade for June will be released at 4:30am EST. The market expects –9.0B versus –8.4B previous.
3. Canadian Housing Starts for July will be released at 8:15am EST. The market expects 210K versus 222.7K previous
4. Canadian Trade Balance for June will be released at 8:30am EST. The market expects -$0.9B versus -$0.79B previous.

LIVE SEASONALITY GANTT CHART

The Markets

Equity markets traded flat on Wednesday with little to move the tape one way or the other. Volume was once again light as conviction appeared lacking. The two consumer sectors bookended the days activity with Consumer Staples showing the best sector performance with a gain of seven-tenths of a percent, while Consumer Discretionary showed the worst performance, succumbing to a loss of half a percent.

Investors continue to remain hopeful for further monetary stimulus from any one of the major central banks, a fact which is clearly showing up in inflation expectations. The ratio of the Treasury Inflation Protected ETF (TIP) over the 7-10 Year Treasury ETF (IEF) continues to trend higher following an almost five month decline. Even the 5 Year Breakeven Rate has pushed higher since ECB President Mario Draghi hinted of further central bank intervention. Increased inflation expectations are bullish for stocks and commodities, both of which are at multi-month highs.

Inflation is particularly conducive to strength in the price of Gold, which has shown moderate improvement over recent weeks. Seasonal investors are well aware that we are within the period of seasonal strength for the yellow metal, but thus far the price action of bullion has been rather subdued, at least compared to years past. The metal is hinting of a breakout above a descending triangle pattern, a pattern that has bearish implications should the price of Gold fall below $1525. Further evidence is required to confirm the breakout. Hesitation from investors to believe in the stimulus hype is suspected to be culprit for the shallow returns.

The framework for a strong move higher in Gold has become established. In addition to increased inflation expectations, the US Dollar index has also come under pressure over the course of the past month and a minor head-and-shoulders top can be spotted on the charts. The target of this topping pattern points down to 81, also the point at which the price action would intersect with the rising intermediate trendline. The long-term trend for the US Dollar continues to look positive as the upside target derived from a head-and-shoulder bottoming pattern is fulfilled. The US Dollar Index seasonally declines, on average, between now and September, supporting commodity prices, such as Gold.

Another positive for the Gold trade is the fact that the miners have recently shown outperformance compared to bullion, a typical precursor to a positive move in the commodity. The relative performance chart for Gold Miners versus Gold bullion has shown a declining trend for over a year and a half, just recently charting the lowest level since the 2008 low. However, a double bottom has become apparent on the chart, hinting of positive things to come as investors become content with equity valuations at current gold prices. A positive trend still needs to be established, which may not be able to be confirmed until the ratio breaks above the 200-day moving average (0.29 on the chart below). The seasonal trade in gold currently looks appealing given the positive backdrop, but keep in mind that the trade could easily break if stimulus expectations are not confirmed.

Sentiment on Wednesday, as gauged by the put-call ratio, ended bullish at 0.80. The ratio continues to hold within a declining range as bullish expectations flourish.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $12.40 (up 0.40%)
• Closing NAV/Unit: $12.36 (down 0.02%)

Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.

Tags: 10 Year Treasury, 9b, Bullion, Central Bank Intervention, Central Banks, Consumer Sectors, Consumer Staples, Don Vialoux, Ecb President, ETF, ETFs, Half A Percent, Inflation Expectations, Initial Claims, Merchandise Trade, Seasonality, Sector Performance, Seven Tenths, Stocks And Commodities, Trade Balance, Weekly Jobless Claims, Wholesale Inventories
Posted in Markets | Comments Off

Canada Market Cheat Sheet (February 14, 2011)

Saturday, February 12th, 2011

TSX and Subgroups – Week Ending February 11, 2011

TSX and Subgroups – YTD to February 11, 2011

TSX and Subgroups – 1 Year Ending February 11, 2011

Strengths

• Canada Has Trade Surplus; Exports Jump Most Since ’82. Canada unexpectedly posted its first trade surplus in 10 months in December as energy and metals powered the biggest jump in exports in almost three decades.
• Canada returns to trade surplus in December. OTTAWA (Reuters) – Soaring exports of crude oil and other energy products unexpectedly tipped Canada’s trade balance into surplus in December after nine months of deficits, fueling hopes the much-coveted export recovery is gaining traction.[Reuters]
• Improved leasing market boosts Brookfield. Brookfield Office Properties (BPO-T17.28-0.18-1.03%) says the companies who fill its office towers in key markets such as New York and Washington are acting more decisively when it comes to leasing office space, as it reported fourth-quarter results that were just above analysts’ expectations. The company, which has offices in most large Canadian and U.S. cities, said funds from operations in the quarter were 40 cents a share, the same as last year. Analysts had expected 39 cents. Brookfield cited an improving leasing market for the gains. [Globe and Mail]
• SNC-Lavalin Will Buy Rest of AltaLink From Macquarie for C$213 Million. SNC-Lavalin Group Inc. said it will buy the part of AltaLink LP that it doesn’t own from Macquarie Essential Assets Partnership for C$213 million. SNC-Lavalin now holds an indirect 76.92 percent ownership interest in the Calgary-based transmission company. [Bloomberg]
• Canaccord boosts dividend as profit more than doubles. Canaccord Financial Inc. (CF-T15.92-0.08-0.50%) is raising its dividend after profit more than doubled in the third quarter on an improvement in the economy. The financial services firm said Thursday that it would pay a 7.5-cent-per-share dividend on March 15, an increase from the previous payout of 5 cents a share.[Bloomberg]

Weaknesses

• Fed’s illusion of prosperity bound to vanish. U.S. Federal Reserve Board chairman Ben Bernanke recently congratulated himself on CNBC for helping boost the Russell 2000 stock index by 30 per cent. The San Francisco Federal Reserve Bank just published a report that claims the second round of quantitative easing – so-called QE2 – is a success because the U.S. inflation rate is a percentage point higher than it would have been absent the Fed intervention. [Globe and Mail]
• Home prices could dive if rates rise, analyst says. Higher interest rates could “easily” cause Canadian home prices to collapse, Capital Economics warned in a bleak report that suggests the housing market is likely to suffer the same sort of crash that has plagued countries such as the United States. [Globe and Mail]
• Housing market will be stable next two years: RBC. A stronger economy will offset the effects of higher mortgage rates and keep Canadian house prices stable over the next two years, according to the Royal Bank of Canada. In a market update that has the bank forecasting price gains of 0.5 per cent in 2011 and 1.3 per cent in 2012, economist Robert Hogue said that after two years of “gyrating wildly,” the Canadian housing market is likely to be a much less interesting place for the next several years. [Globe and Mail]

Opportunities

• Drilling technology sparks new oil boom. Gary Williams recalls the last time the oil industry showed up in his tiny town of Waskada, Man. Crews punched holes in the prairie ground, then disappeared as suddenly as they arrived when those holes came up empty. But that was 30 years ago. This time, it’s different. Armed with new drilling technology and eager to reap the rewards of oil’s high prices, companies are tapping complex geological formations, and the crude is flowing, adding Manitoba to Canada’s list of significant oil-producing provinces.
• PetroChina pays $5.4 billion for Canadian gas assets. PetroChina is purchasing half of a prolific shale gas project from Canada’s Encana Corp for C$5.4 billion ($5.4 billion), marking the largest Chinese investment yet in a foreign natural gas asset.
• Global stock exchange consolidation may just be starting. As the heads of the TMX Group Inc. (X-T42.150.020.05%)and London Stock Exchange Group Inc. sat together in Toronto to unveil their $7-billion merger plan, Deutsche Boerse AG and NYSE Euronext Inc. (NYX-N38.310.511.35%)confirmed that they too are in talks to create a vast new exchange company that would combine the New York Stock Exchange with Germany’s main market. The Deutsche Boerse-NYSE plan would create what would be the world’s biggest market operator by revenue. The deals mark the resumption of a wave of mergers that in the past decade has seen exchanges unveil more than 600 purchases worth $94-billion (U.S.), according to Thomson Reuters. More than half that activity has been via cross-border deals as the industry has gone from one where each country had one or two major exchanges to one where transnational conglomerates dominate. [Globe and Mail]
• China pays $5.4-billion for B.C. gas play. PetroChina International Investment Co. Ltd. (PTR-N133.760.150.11%) has agreed to pay $5.4-billion in a natural gas investment with Encana Corp. (ECA-T31.03-0.99-3.09%) that promises to be the largest Chinese investment in Canadian energy assets. The deal underscores the voracious appetite Asian firms have for North America’s vast deposits of oil and gas – and speaks to the growing attraction of Canadian energy assets to overseas companies, which are increasingly looking at ways to buy western reserves that can some day be delivered to consumers in China and South Korea.[Globe and Mail]
• Canadian developers go shopping in Brazil. Real estate companies are sinking billions into the South American country’s property market, saying it is ripe for consolidation. When the more than one million residents of Campinas, Brazil go shopping, they wander open-air markets and visit a smattering of outdoor strip malls. Despite a swelling middle class, the bustling industrial region about an hour outside of capital Sao Paulo has very little indoor retail space. The lack of a proper shopping mall is the kind of thing that Pierre Lalonde dreams about when trying to decide where to invest Ivanhoe Cambridge’s money. [Globe and Mail]

Threats

• Canadian Currency Strengthens as Trade Surplus Buoys Interest-Rate Outlook.The Canadian dollar rose against most of its major counterparts as an unexpected trade surplus in December encouraged speculation the Bank of Canada will raise borrowing costs sooner than other central banks.
• Canada to say next week if review of LSE bid needed. Canada hopes to announce next week whether it will review the London Stock Exchange’s bid to merge with Canadian exchange operator TMX Group, Industry Minister Tony Clement said on Thursday.[Reuters]
• Mortgage rates on the upswing. Canadian banks are once again ratcheting up mortgage rates, as government bond yields rise because of worries about inflation and growing confidence in the global economic recovery. Toronto-Dominion Bank and Canadian Imperial Bank of Commerce were the first two banks out of the gate with mortgage hikes Monday. Both banks raised the rate on their standard five-year fixed mortgages to 5.44 per cent, an increase of one-quarter of a percentage point, or 25 basis points. Economists predict the other major banks will soon follow suit, perhaps as early as Tuesday. The yield on five-year Canadian government bond yields has gone up sharply of late, jumping 24 basis points last week alone, and mortgage prices closely track these bonds. [Globe and Mail]
• Pharmacies face upheaval with private-label drug ruling. An obscure line of generic prescription drugs launched by Shoppers Drug Mart Corp. (SC-T39.380.842.18%) has the potential to help ease its regulatory-reform pain but at the same time shake up the pharmacy sector. The company began to roll out its private-label line last year in most provinces to counter new laws meant to reduce the cost of government drug plans. Ontario, for one, had prohibited generic drug companies from paying rebates to drugstores – rebates that had been worth an estimated $750-million a year to the pharmacies. On Thursday, Shoppers released its year-end results, showing profits had been dragged down by the regulatory changes. [Globe and Mail]
• Strong loonie shifting Canadian production offshore: EDC. Canadian firms are increasingly shifting their production offshore in response to the pressures of globalization and the strong loonie, Export Development Canada says. A new study from the Crown corporation shows sales from foreign affiliates of Canadian firms grew by more than twice the rate of exports from firms inside Canada between the years 2000 and 2008.[Bloomberg]

Tags: Altalink, Bank Of Canada, Banks Canada, Ben Bernanke, Brazil, C 213, Canaccord, Canadian Currency, Canadian Market, Central Banks, China, Currency, energy, Energy Products, Export Recovery, Federal Reserve Board, Federal Reserve Board Chairman, Funds From Operations, Globe And Mail, Globe Investor, Interest Rate Outlook, Leasing Market, Leasing Office Space, Macquarie, Office Towers, oil, Ownership Interest, Profit More Than Doubles, Rbc, Reuters, Share Dividend, Snc Lavalin, Subgroups, Theglobeandmail, Three Decades, Trade Balance, Trade Surplus, Transmission Company, Week Ending February
Posted in Brazil, Canadian Market, Energy & Natural Resources, Markets, Oil and Gas, Outlook | Comments Off

Japanese Q3 2010 GDP Growth Hit Out of the Ballpark but Set to Fall Flat Next Quarter

Tuesday, November 16th, 2010

The Japanese economy grew 3.9% at a seasonally-adjusted annualized rate in Q3 2010 and over 2X the pace in Q2 2010 (data here). According to Bloomberg, the headwinds to Q4 growth are household consumption and the yen:

Consumption, accounting for about 60 percent of GDP, led the gain as households stepped up purchases of fuel-efficient cars ahead of the expiration of a subsidy program and as smokers stocked up before an Oct. 1 tobacco-tax rise. The yen’s climb to a 15-year high will probably dampen growth this quarter as companies from Sharp Corp. to Nikon Corp. cut profit forecasts.

To be sure, the surge in real GDP growth is unlikely to be sustainable, but it’s not because of the yen’s strength, per se. True, consumption growth is more likely to print on the lefthand, rather than the righthand, side of the 0-Axis. However, the yen on a trade-weighted basis and in real terms hovers at its historical average, hence the currency poses less of a risk to growth.

The chart illustrates the contributions to non-annualized quarterly growth (not annualized, GDP grew near 1% in Q3) from each of the GDP components: private consumption (C), investment (I), inventory build (Inv), government consumption (G), and net exports (NX).

The Q3 pace of growth is almost certainly not sustainable and has a decent chance of turning negative in Q4 2010 for the following reasons (see charts below text for illustration):

* The biggest contribution to Q3 growth came from consumer spending, +0.66%. Investment contributed positively, 0.11%, but has been trending downward. Key data points are inauspicious for consumer spending: the unemployment rate is hovering stickily around 5% and October auto sales saw a 27% annual decline, as green auto subsidies expired.

* Although the JPY/USD has appreciated 14% since the middle of 2010, the real effective exchange rate, the economic driver of a country’s trade balance, has been stable over the same period (see final chart below) and in line with its longer-term average. So, while I don’t expect net exports to turn negative per se, any additional impetus to growth is unlikely to come from trade.

* Therefore, the key to growth is final domestic demand, and more specifically consumer spending. That’s a stretch.

Source: Rebecca Wilder, News N Economics, November 15, 2010.

Tags: Consumption Growth, Decent Chance, Economic Driver, Effective Exchange Rate, Fuel Efficient Cars, GDP Growth, Government Consumption, Headwinds, Household Consumption, Japanese Economy, Key Data, Lefthand, Private Consumption, Profit Forecasts, Real Gdp, Sharp Corp, Subsidy Program, Tobacco Tax, Trade Balance, Unemployment Rate
Posted in Markets | Comments Off

Turkey: A Country on the Rise

Friday, October 22nd, 2010

Turkey has been a bright spot for emerging markets this year, nearly tripling the performance of other Emerging European countries. Tim Steinle, co-manager of the Eastern European Fund (EUROX), has just returned from a research trip to Turkey and reports the Turkish story is gaining momentum.

Industrial Production (IP) grew 11 percent during September compared with the same time period a year ago, reflecting the economy is getting stronger. Global investors are starting to take notice. Roughly $40 billion has flowed into emerging markets so far this year and just over 5 percent of those inflows ($2.3 billion) have landed in Turkey.

Some Central Emerging Europe-Middle East-Africa funds already allocate half of their assets in Turkey and recently some “go-anywhere” global funds have upped their allocations.

Some fear the strong recovery could trigger whiplash inflation but the Turkish central bank prefers to sterilize liquidity instead of raising interest rates in order to keep Turkey’s currency, the lira, from appreciating against its peers. One former central bank governor says that he hopes Turkey can follow in the fiscal footsteps of Brazil, which has been able to keep its own currency valuation under control despite rapid growth in the country’s economy.

The future looks bright for Turkey but there are some potential hurdles the country must overcome. Rising consumption, especially for energy, puts a strain on Turkey’s current account (i.e., the country’s balance sheet) and tilts the country’s trade balance toward imports.

However, Turkey envisions itself as the region’s energy transportation hub. Roughly 1.5 percent of the world’s oil goes through Turkish pipelines and several projects already under construction should ease the country’s energy dependence on foreign sources. In addition, tariffs on the oil and natural gas passing through the pipeline should offset some of the import costs.

Another hurdle is that Turkish Islamists and secularists hold extreme and opposing views, and the rift is deepened by the class divide of poor versus the elite. Will the wider masses take advantage of the new opportunities to better their lives or will the country swing toward theocracy like Saudi Arabia or Iran?

The entrepreneurial predisposition and the failed social experiment of the latter ought to keep that from happening.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.  By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.

Tags: Brazil, Central Bank Governor, Currency Valuation, Current Account, East Africa, Emerging Europe, Emerging Markets, Energy Dependence, Energy Transportation, Eurox, Foreign Sources, Gaining Momentum, Global Funds, Global Investors, Islamists, Natural Gas, oil, Research Trip, Rsquo, Same Time Period, Steinle, Trade Balance, Transportation Hub, Whiplash
Posted in Brazil, Emerging Markets, Energy & Natural Resources, Oil and Gas | Comments Off

Stocks Remain in Trading Range, but Outlook is Positive (Bob Doll)

Monday, September 13th, 2010

Last week saw some continuation of the recent trend of modestly positive economic news, including a drop in jobless claims, a narrowing of the trade balance and an increase in wholesale inventories, all of which lent support to the idea that the economic recovery remains intact. Against this background, stocks posted modest gains, with the Dow Jones Industrial Average inching up 0.1% to end the week at 10,463, the S&P 500 Index advancing 0.5% to 1,109 and the Nasdaq Composite increasing 0.4% to 2,243.

Last week’s positive economic news helps reinforce our view that a slow economic growth environment is more likely to occur than is a double-dip recession. By our analysis, economic data has turned more positive in recent weeks when compared to the mid-June to mid-August time frame. There are, of course, some significant downside risks that could continue to weigh on economic growth, including ongoing consumer deleveraging, a still-troubled global financial system and a weak housing market. The labor market also remains depressed, but we have seen some signs of improvement. Temporary hiring levels have been somewhat higher recently, the number of hours worked has been improving and wages have increased. Taken together, these factors should translate into stronger jobs growth. On balance, we expect the economy to muddle through over the next several quarters, and in our estimation, US gross domestic product growth should come in at around 2% for the near future.

Now that we are past Labor Day, the mid-term elections season appears to be heating up. Last week, President Obama announced a series of economic initiatives that have some obvious political ramifications. The president proposed increased infrastructure spending, an extension of research and development tax credits and changes to the tax code that would make it easier for companies to purchase capital equipment. Whether any of these initiatives could become law in the current environment remains to be seen. There are a number of details that would still need to be worked out, not the least of which is how any new spending or tax reductions would be paid for. It is possible that the president would push for taxing foreign-sourced income on US multinational corporations, although Republicans are not likely to support such an initiative.

One area of political debate on which many are focused is the fate of the Bush tax cuts, which are set to expire at the end of this year. The Obama Administration may be supportive of a hybrid approach in which some tax cuts are extended, but not those that benefit upper income tax brackets. However, it appears unlikely that the Senate would go along with such a proposal. With the political backdrop becoming increasingly contentious, it is hard to imagine any tax-related legislation being passed until after the mid-term elections.

By making some new economic proposals, it appears the president is attempting to shift the debate from the elections being a referendum on the current party in power to one that is more about choices between competing ideas. Current polls suggest that the outlook is growing increasingly dire for the Democrats, but the elections are still almost two months away.

Tags: Bob Doll, Double Dip Recession, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Downside Risks, Economic Data, Economic Initiatives, Economic News, Economic Recovery, Global Financial System, Gross Domestic Product, Growth Environment, Jobless Claims, Nasdaq Composite, Obama, Political Ramifications, Slow Economic Growth, Trade Balance, Wholesale Inventories
Posted in Infrastructure, Markets, Outlook | Comments Off

The Economy and Bond Market Diary (September 13, 2010)

Saturday, September 11th, 2010

The Economy and Bond Market Diary (September 13, 2010)

Treasury bond yields moved higher this week as recent economic data has been viewed more favorably as negative economic sentiment may have become overdone. The chart below shows the yield on the 10-year Treasury which is up about 30 basis points just this month.

Strengths

• Initial jobless claims fell to 451,000 which is considerably better than what has been reported in recent weeks.
• The trade balance improved in July as exports climbed while imports dropped. This is incrementally positive for third quarter GDP.
• The Labor Department reported that job openings rose 6.2 percent in June and hit the highest level since April.

Weaknesses

• The Fed’s Beige Book reported “widespread signs of deceleration” as the Fed prepares for its Federal Open Market Committee meeting on September 21.
• Home inventories rose for the 8th straight month in August as the housing market continues to struggle.
• Consumer credit fell for the 6th straight month as consumers pare down debt. While this is what needs to take place in the long run, the short term impact is sluggish growth.

Opportunities

• Inflation is unlikely to be a problem for some time and this gives central bankers and other policy makers around the world room for expansive policies.

Threats

• European financial concerns have intensified recently as the long-term solutions still appear elusive for many economies.

Tags: Basis Points, Beige Book, Bond Market, Deceleration, Economic Data, Economic Sentiment, Federal Open Market Committee, Financial Concerns, Growth Opportunities, Housing Market, Initial Jobless Claims, Labor Department, Long Term Solutions, Market Diary, Open Market Committee, Quarter Gdp, Sluggish Growth, Term Impact, Trade Balance, Treasury Bond Yields
Posted in Markets | Comments Off

Why Another Fiscal Stimulus Won’t Do (PIMCO)

Friday, August 27th, 2010

· What is critical to keep in mind is that this situation is part of a broad, multiyear process driven by national and global realignments. It’s a secular phenomenon that needs to be better understood and navigated — by recognizing its structural dimensions and by urgently broadening the excessively cyclical policy mindsets that abound.

·  Specific policy measures would include pro-growth tax reform, housing finance reform, increased infrastructure investments, greater support for education and research, job retraining programs, removal of outdated interstate competition barriers and stronger social safety nets.

·  This worrisome trio of increasingly ineffective national and global policy stances, intense political polarization and growing social pressures speaks to the risk that the economy’s recent soft patch will evolve into something even more troublesome and sinister.

This article was originally published on washingtonpost.com on August 27, 2010.

The great hope a few months ago was for a “recovery summer,” with the economy responding favorably to various policy initiatives. Yet the recovery has lost momentum, and while the end of the year will not be as gut-wrenching as the final 3 1/2 months of 2008, when the global economy suffered a cardiac arrest, it will be as consequential in affecting the welfare of millions of people.

Throughout the summer, data signals have become more alarming. Despite all the rhetoric about job creation, unemployment remains stubbornly high and the problem is becoming structural in nature (and, therefore, harder to solve). Consumer credit continues to contract while small companies find it difficult to access new bank lines of credit. Housing activity is falling, and home values are poised for further declines as foreclosures increase. The trade balance has taken an ominous turn, with exports stagnating and imports surging. More Americans are falling through the large holes in the country’s safety net.

The equity markets are again under pressure while yields on Treasury bonds have collapsed, reflecting that market’s growing concerns about the weak economic outlook. With such fragility, households and companies have become even more cautious, undermining the “animal spirits” needed for economic expansion.

Meanwhile, the United States has received little help from the rest of the world. Yes, German growth is up, but a significant part reflects its well-functioning export machine. The beneficial spillover effects have been immaterial. And despite the political narrative to the contrary, market concerns with debt solvency in some eurozone countries (Greece, Ireland, Portugal and Spain) remain high.

Even a steadily growing China is proving to be of limited help. While Beijing is implementing additional structural changes to reorient its economy toward domestic consumption, the pace remains measured; what is understandable from a Chinese national perspective does little to help sustainably rebalance the global economy.

In sum, the current policy approaches here and abroad are unlikely to deliver a durable and robust U.S. recovery and, critically, create sufficient growth in jobs. Yet the main debate in Washington is whether to do more of the same — namely, another fiscal stimulus and another round of quantitative easing by the Federal Reserve. This clearly conflicts with evidence that a broader and more holistic response is needed.

These realities will fuel debate among economists, who already hold unusually divergent views, and reignite the discomforting notion that economic unthinkables and improbables — such as a double-dip recession and a deflation trap — are more of a possibility.

What is critical to keep in mind is that this situation is part of a broad, multiyear process driven by national and global realignments. It’s a secular phenomenon that needs to be better understood and navigated — by recognizing its structural dimensions and by urgently broadening the excessively cyclical policy mindsets that abound. Unfortunately, the approach in too many industrial countries has been to kick the can down the road, seemingly hoping for a series of immaculate economic recoveries.

Policymakers must break this active inertia by implementing a structural vision to accompany their current cyclical focus. Measures are needed to address key issues, which include the change in drivers of growth and employment creation; the high risk of skill erosion and lost labor productivity; financial deleveraging in the private sector; debt overhangs; the uncertain regulatory environment; and the unacceptably high risks facing the most vulnerable segments of society.

Specific measures would include pro-growth tax reform, housing finance reform, increased infrastructure investments, greater support for education and research, job retraining programs, removal of outdated interstate competition barriers and stronger social safety nets.

That, of course, is what is desirable; how about what is likely?

With the recovery’s visible loss in momentum, more people are coming to appreciate the importance of structural issues. Indeed, some elements of the package are visible. Yet, to my dismay, the prospects for a sufficiently bold policy reaction are doubtful. Post-financial crisis, it is no longer just about the “unusually uncertain” economic outlook and related challenges for a policy approach that remains too reactive and ad hoc. The politics of structural change are now a material impediment.

An already polarized political environment is becoming even more fractured by real and far less substantive issues. There is virtually no political center that can anchor consensus and enable sustained implementation of policy. Meanwhile, as anti-Washington sentiments rise, interest in a national agenda is increasingly giving way to the election cycle. Internationally, the impressive degree of cross-border coordination seen during the global financial crisis has been reduced to inconsistent — and at times contradictory — national responses.

This worrisome trio of increasingly ineffective national and global policy stances, intense political polarization and growing social pressures speaks to the risk that the economy’s recent soft patch will evolve into something even more troublesome and sinister.

I hope that sober policy responses will accompany the coming cooler temperatures. Given the proximity of the November elections, however, I worry they may not.

This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. This material was reprinted with permission of the Washington Post.

Date of original publication August 27, 2010.

Copyright (c) PIMCO

Tags: Cardiac Arrest, China, Final 3, Finance Reform, Fiscal Stimulus, Global Economy, Global Policy, Home Values, Infrastructure Investments, Interstate Competition, Job Creation, Job Retraining, Mindsets, Policy Initiatives, Policy Measures, Political Polarization, Research Job, Safety Net, Social Pressures, Social Safety, Trade Balance
Posted in Infrastructure, Markets, Outlook | Comments Off

Global Rebalancing – Well Under Way!

Wednesday, August 11th, 2010

The article below is a guest contribution by Bernard Tan (courtesy Fullermoney).

The general consensus is that the US is suffering from chronic trade deficits and is frittering away its future wealth importing (and consuming) the production from the rest of the world.

Not many people realise that the US is in fact one of the biggest exporters in the world. In 2009, its exports totalled US$1.05 trillion. Only 2 countries exported more – China (US$1.20 trillion) and Germany (US$1.12 trillion).

The reputation for being “just a voracious consumer that produces nothing” comes from the size of its imports, which in 2009 totalled US$1.56 trillion!

But the trade balance is already shifting. The chart below shows the monthly trade balance of the US (exports less imports).

Note that the trade deficit actually peaked in late 2005/early 2006, well before the financial crisis and recession. This suggests that some structural adjustment in the US’s role in the world economy had already begun more than 4 years ago.

It is obvious that US exports have moved from generally single-digit YoY growth rates prior to 2004 to double-digit YoY growth. By mid-2008, before the global recession began, the trailing 12-month average of export growth had reached almost 17%.

Of course, the pattern has been interrupted by the recession/financial crisis. The data is only available up to May 2010 but I believe that the trend will resume in short order.

Another interesting phenomena is the volatility of exports. With each crisis/recession, the fluctuation in export growth rates become greater. Compare 1998/99 Asian financial crisis with the 2000/2001 dotcom collapse with the 2008/2009 global financial crisis.

The increasing sensitivity and volatility of US exports to global economic circumstances is exactly the type of behaviour traditionally exhibited by the Asian export powerhouses.

The US could be gradually (and stealthily) regaining its export powerhouse status!

In the final chart on the next page, I have plotted the ratio of US export growth to US GDP growth.

This chart proves beyond doubt that US export contribution to GDP growth has been rising sharply since 2006.

Everybody who reads economic or business pages is well aware of the need for rebalancing in the world economy – so that the US consumes less, produces more while Asia consumes more, produces less.

What I believe most people fail to realise is that this process has already begun and is well under way.

Perhaps in the not too distant future, Foxconn will build its factories in the US. I only hope that we won’t then see young workers in South Carolina jumping off the roofs of those Foxconn factories!

Tags: Asian Financial Crisis, Collapse, Consensus, Economic Circumstances, Fluctuation, Future Wealth, Global Financial Crisis, Global Recession, Phenomena, Powerhouse, Powerhouses, Rebalancing, Rest Of The World, Structural Adjustment, Trade Balance, Trade Deficit, Trade Deficits, Trillion, Volatility, World Economy
Posted in China, Markets | Comments Off

Chart of the Week: China Exports

Tuesday, May 18th, 2010

This article is a guest contribution by Frank Holmes, U.S. Global Investors.

The government in Beijing has been aggressive in using money policy to damp down property speculation as a way to steer China’s hot economy away from a meltdown.

Avoiding dangerous bubbles makes long-term sense, but there have been short-term costs:  the benchmark Shanghai Composite Index is down more than 20 percent year-to-date. It fell 5 percent on Monday alone.

The chart to the right shows the growth rate over the past eight years for China’s imports and exports (lines), along with the nation’s trade balance (vertical bars). After a huge contraction in 2008-09 during the global recession, both imports and exports have bounced back strongly.

In April, imports (which include raw materials for manufacturing) were up 51 percent year over year and exports were up 30 percent.

Four straight months of strong year-over-year recovery in China’s exports was likely a key factor considered by the government when it imposed anti-property speculation policies last month.

But the sovereign debt crisis in the eurozone is another key factor. Europe is China’s largest trading partner, and the debt crisis has led to a significant devaluation of the euro against the Chinese yuan.

The yuan, which is pegged to the U.S. dollar, is up 14 percent against the euro in just the past four months. The stronger yuan makes Chinese-made products more expensive in the eurozone, and this hurts exporters.

The three-month trend of China’s imports, a leading indicator of future exports, has already headed down. Should a meaningful export deceleration occur in the intermediate term, Chinese authorities may reverse policies to protect economic growth.

Copyright (c) 2010 U.S. Global Investors

Tags: China, Chinese Authorities, Chinese Yuan, Contraction, Debt Crisis, Deceleration, Devaluation, Eurozone, Frank Holmes, Global Recession, Imports And Exports, Leading Indicator, Meltdown, Money Policy, Property Speculation, Raw Materials, Shanghai Composite Index, Sovereign Debt, Trade Balance, U S Global Investors, Vertical Bars
Posted in Markets | Comments Off

Economy and Bond Market Notebook (5/15/2010)

Saturday, May 15th, 2010

The Economy and Bond Market Notebook (5/15/2010)

The yield on the 10-year Treasury changed very little for this week, ending at 3.46 percent, up 3 basis points.

The labor market is improving, but at a slow pace. Initial jobless claims for the week ended May 8 fell for the fourth week in a row, but the number of Americans continuing to receive jobless benefits remains high. The chart below shows the number of U.S. continuing claims for employment in thousands. On May 1 the number stood at 4,627,000, not counting the number of Americans receiving extended benefits under federal programs. The number of persons collecting emergency and extended payments decreased by about 200,000 to 5.36 million in the week ended April 24.

Strengths

• Industrial production rose in April by 0.8 percent from March, the largest gain in three months and slightly larger than the 0.7 percent consensus.
• Retail sales rose in April for a seventh straight month, increasing 0.4 percent from March and exceeding the consensus of 0.2 percent.
• The U.S. trade balance deficit rose 2.5 percent sequentially to $40.4 billion in March. It was the largest monthly trade deficit since December 2008, and indicated evidence of a recovery in the U.S. economy.

Weaknesses

• The Greece sovereign debt crisis continues to create market uncertainties. Concerns of a full-blown credit crisis have surfaced and cannot yet be ruled out.
• The home mortgage purchase application index fell 9.5 percent in the week ended May 7, the first week after the government home purchase incentives ended.
• The federal budget deficit hit an all-time high for April at $82.7 billion, higher than the consensus estimate of $57.9 billion.

Opportunities

• The best outcome would be a coordinated, comprehensive solution to not only the Greek debt situation, but a broader approach that includes all of Europe.

Threats

• Until the Greek situation is resolved with some degree of certainty, the market will be at the whim of macro risk factors.

Tags: 10 Year Treasury, Application Index, Basis Points, Bond Market, Comprehensive Solution, Consensus Estimate, Credit Crisis, Debt Crisis, Debt Situation, Federal Budget Deficit, Initial Jobless Claims, Jobless Benefits, Market Uncertainties, Mortgage Purchase, Purchase Application, Purchase Incentives, Risk Factors, Slow Pace, Sovereign Debt, Trade Balance
Posted in Bonds, Markets | Comments Off