Next time you hear an economist or denizen of Wall Street talk about how the “American economy” is doing these days, watch your wallet.
There are two American economies. One is on the mend. The other is still coming apart.
The one that’s mending is America’s Big Money economy. It’s comprised of Wall Street traders, big investors, and top professionals and corporate executives.
The Big Money economy is doing well these days. That’s partly thanks to Ben Bernanke, whose Fed is keeping interest rates near zero by printing money as fast as it dare. It’s essentially free money to America’s Big Money economy.
Free money can almost always be put to uses that create more of it. Big corporations are buying back their shares of stock, thereby boosting corporate earnings. They’re merging and acquiring other companies.
And they’re going abroad in search of customers.
Thanks to fast-growing China, India, and Brazil, giant American corporations are racking up sales. They’re selling Asian and Latin American consumers everything from cars and cell phones to fancy Internet software and iPads. Forty percent of the S&P 500 biggest corporations are now doing more than 60 percent of their business abroad. And America’s biggest investors are also going abroad to get a nice return on their money.
So don’t worry about America’s Big Money economy. According to a Wall Street Journal survey released Thursday, overall compensation in financial services will rise 5 percent this year, and employees in some businesses like asset management will get increases of 15 percent.
The Dow Jones Industrial Average is back to where it was before the Lehman bankruptcy filing triggered the financial collapse. And profits at America’s largest corporations are heading upward.
But there’s another American economy, and it’s not on the mend. Call it the Average Worker economy.
Last Friday’s jobs report showed 159,000 new private-sector jobs in October. That’s better than previous months. But 125,000 net new jobs are needed just to keep up with the growth of the American labor force. So another way of expressing what happened to jobs in October is to say 24,000 were added over what we need just to stay even.
Yet the American economy has lost 15 million jobs since the start of the Great Recession. And if you add in the growth of…
According to a recent … report…, fully 25% of the rise in unemployment since 2007, totaling 30 million people worldwide, has occurred in the US. If this situation persists, as I have long warned it might, it will lay the foundations for huge global trade frictions. The voter anger expressed in the US mid-term elections could prove to be only the tip of the iceberg…, the ground for populist economics is becoming more fertile by the day. …
True, today’s trade imbalances are partly a manifestation of broader long-term economic trends, such as Germany’s aging population, China’s weak social safety net, and legitimate concerns in the Middle East over eventual loss of oil revenues. And, to be sure, it would very difficult for countries to cap their trade surpluses in practice: there are simply too many macroeconomic and measurement uncertainties.
Moreover, it is hard to see how anyone – even the IMF, as the US proposal envisions – could enforce caps on trade surpluses. The Fund has little leverage over the big countries that are at the heart of the problem.
Still,… world leaders … must recognize the pain that the US is suffering in the name of free trade. Somehow, they must find ways to help the US expand its exports. Fortunately, emerging markets have a great deal of scope for action.
India, Brazil, and China, for example, continue to exploit World Trade Organization rules that allow long phase-in periods for fully opening up their domestic markets to developed-country imports… A determined effort by emerging-market countries that have external surpluses to expand imports from the US (and Europe) would do far more to address the global trade imbalances … than changes to their exchange rates or fiscal policies. …
American hegemony over the global economy is perhaps in its final decades. China, India, Brazil, and other emerging markets are in ascendancy. Will the transition will go smoothly and lead to a global economy that is both fairer and more prosperous?
Children, children, please! Stop your bickering and sit down in a circle. China, have a seat, you too Brazil.
Japan, you get a Time Out. That kind of aggressive currency behavior simply will not be tolerated – you lose arts and crafts privileges for one week. Origami swans count, put that paper down!
The simple fact is that although you’d all like to be export-driven economies, this is a logical impossibility. If everyone in the G20 is to be a net exporter, then we’ll either have to convince Mongolia to start buying a lot of stuff or find alien life elsewhere in the galaxy to market and sell to.
Ah! Now you’re quiet! Very good children. Dropping your currency will be punished the same way as dropping your pants in this classroom – it is strictly forbidden.
And picking on Brazil will also not be put up with. Brazil is a growing boy and needs to be able to export, too. Stop snickering, Timmy, I saw right through your ‘Strong Dollar’ speech the other day. And China, your cosmetic rate hikes are just as phony, none of us are fooled.
Here’s the deal, children…If we can go the rest of the day without any more jawboning, saber-rattling or currency manipulation I will reinstate milk-and-cookies time this afternoon.
President Lula has called the Petrobras capitalization plan, worth $69 billion, "the biggest equity offer in the history of capitalism."
But of that $69 billion, $43.5 billion came from Petrobras itself, to pay the government for 5 billion barrels of undeveloped ultradeepwater petroleum reserves, and that in turn was paid for using a government loan.
Felipe Salto, a specialist in public accounts at the Sao Paulo consultancy Tendencias, told MNI the government loan to Petrobras was "an ingenious piece of financial engineering."
In sum, for $43.5 billion of the $69 billion capitalization, no money changed hands, as the company essentially gave the government shares in return for the petroleum reserves.
However, R$24.7 billion ($14.4 billion) of the government’s loan to Petrobras came via the state BNDES development bank. The government is lending $14.4 billion to the BNDES, which it is lending it to Petrobras, to pay the government. But government accountants are booking this $14.4 billion as revenue.
Look, Brazil is still running a surplus, so its government probably won’t have a funding crisis. But the fact that the goal was only hit via a one-off accounting move is an early warning.
I would like to place this seminar’s topic, ‘Global Governance,’in the context of global control, which is what ‘governance’ is mainly about. The word (from Latin gubernari, cognate to the Greek root kyber) means ‘steering’. The question is, toward what goal is the world economy steering?
That obviously depends on who is doing the steering. It almost always has been the most powerful nations that organize the world in ways that transfer income and property to themselves. From the Roman Empire through modern Europe such transfers took mainly the form of military seizure and tribute. The Norman conquerors endowed themselves as a landed aristocracy extracting rent from the populace, as did the Nordic conquerors of France and other countries. Europe later took resources by colonial conquest, increasingly via local client oligarchies.
The post-1945 mode of global integration has outlived its early promise. It has become exploitative rather than supportive of capital investment, public infrastructure and living standards.
In the sphere of trade, countries need to rebuild their self-sufficiency in food grains and other basic needs. In the financial sphere, the ability of banks to create credit (loans) at almost no cost on their computer keyboards has led North America and Europe to become debt ridden, and now seeks to move into Brazil and other BRIC countries by financing buyouts or lending against their natural resources, real estate, basic infrastructure and industry. Speculators, arbitrageurs and financial institutions using “free money” see these economies as easy pickings. But by obliging countries to defend themselves financially, their predatory credit creation is ending the era of free capital movements.
Does Brazil really need inflows of foreign credit for domestic spending when it can create this at home? Foreign lending ends up in its central bank, which invests its reserves in US Treasury and Euro bonds that yield low returns and whose international value is likely to decline against the BRIC currencies. So accepting credit and buyout “capital inflows” from the North provides a “free lunch” for key-currency issuers of dollars and Euros, but does not help local economies much.
The natural history of debt and financialization
Today, financial maneuvering and debt leverage play the role that military conquest did in times past. Its aim is still…
In last week’s Barron’s, I read the following quote from a fairly prominent hedge fund manager:
*Redacted* "favors emerging stock markets, Brazil and Turkey in particular, over developed markets, but he is bearish on China, citing what he views as ‘extraordinary economic imbalances and the mismanagement of its economy’."
Let me help you out with that notion, homeboy… Liking Brazil while disliking China is like favoring the Indianapolis Colts in the Super Bowl but betting that Peyton Manning will have a bad game.
I’m hearing this "Brazil is great but watch out for China" thing a lot lately. It just doesn’t work that way.
China and Brazil are quite possibly the most symbiotic investment story going right now.
It’s completely understandable if you don’t like what’s happening in China, including the crane-filled skylines, the widening gap between those who can and cannot afford city real estate, the ghost cities and the infrastructure being built just for the sake of building. But if you are a disbeliever in the Chinese boom or its ability to continue, how could you possibly want to invest in an economy like Brazil that is completely beholden to China’s appetite for building materials, finished goods and food?
Brazil’s burgeoning middle class and the rise of their own internal consumer culture are highly appealing to investors, especially when you look at the progress they’ve made in beating back inflation. But don’t for a minute think that the Brazilian consumer isn’t flourishing as a result of the world’s insatiable appetite for the country’s mineral and agricultural wealth.
Companies like Vale ($VALE) and Petrobras ($PBR) have been coining money by selling to the Chinese Dragon and that same money is precisely what has trickled into the Brazilian population’s purse.
China displaced the US as Brazil’s number one trading partner in 2008; the annual trade balance between the two nations has grown exponentially over the last decade and is now in the range of $36 billion. In May of 2009, they also signed a $10 billion oil agreement.
Many of China’s steel plants have been running in overdrive since before the 2008 Summer Games. What made this possible was the metallurgical coal they imported in huge…
Newspaper O Estado de Sao Paulo reports that the Brazilian Minister of Mines and Energy, Edison Lobao, revealed today in New York that at the height of the crisis Brazil almost bought Citibank:
"We could have bought and could have had great profit, in addition to prestige," he said. The minister said the decision not to acquire the bank was made by the government as a whole.
Mr. Lobao said that before the U.S. government had bought a third of Citi, the institution sought the Brazilian authorities. He said he did not know the "fair price" which was discussed with Brazil, but, considering the size of the country’sreserves, the country could have purchased a share of the institution.
In late July, Citigroup completed the exchange of securities of $60B that made the U.S an owner of a third of the bank. All the $ 20.3B in preferred stock and hybrid securities and equity securities issued publicly by Citi were exchanged in the offer for common shares, while the federal government shifted about $39.5B of preferred stock for new bonds.
This article by Peter Tasker, a well-regarded financial analyst in Asia, comes via the Financial Times (hat tip Marshall). He sees an enormous bubble forming in China – and parallels to Japan circa 1987:
Emerging markets, it seems, have had a good crisis. In contrast to the debt-ridden G7 economies, they have quickly resumed their growth trajectory. No surprise, then, that US emerging market mutual funds are experiencing record inflows. The stellar performance of the Brics markets – Brazil, Russia, Indian and China – is due to continue into the distant future.
Such is the narrative now forming among investors. To anyone who has lived through the rise and fall of the Japanese bubble economy, it should set off alarm bells.
Remember that it was in the years following the 1987 "Black Monday" crash that Japanese assets went from being expensive to absurdly overvalued and the Nikkei’s dizzy rise to 39,000 forced the bears to throw in the towel…
But what you saw was decidedly not what you got. The crisis, far from leaving Japan unscathed, exacerbated its structural problems and laid the groundwork for a far greater disaster…
Interest rates have been far too low for far too long. If the natural interest rate is, as the Swedish economist Knut Wicksell posited, around the level of nominal GDP growth, then China’s interest rates should have been close to 10 per cent for most of this decade. Alan Greenspan, former chief of the US Federal Reserve, has been criticised for holding interest rates too low and setting off a housing and credit bubble in the US. But if US monetary policy was wrong for the US, it was even more wrong for the high-growth countries that "imported" it. The result could only be a massive misallocation of capital…
At the 2008 peak, the price-to-book ratio of the Shanghai stock exchange was over seven times, well above the five times achieved by Japanese stocks in 1989. After the turbulence of the past 18 months, the ratio has fallen to 3.3 times, still the world’s second highest after India, and residential real estate trades at multiples of income that make the US housing boom look tame…
What is scary is that the current frothiness of emerging markets,
Paul Tudor Jones appears to have shifted from the bear market rally camp to the bull market camp. As of our last update he was firmly in the position that the market had rallied too much and was due for a downturn. Late last summer Tudor Jones stated his desire not to chase the 45% rally in stocks and rather, buy into an autumn downturn in anticipation for a year end rally:
While 45% is nothing to ignore, one should take into account that the S&P through July 31 is still down more than 20% on a price basis year-over-year. The bottom line is that we are not inclined to aggressively chase the market here. Rather, we eye a better opportunity to be long equities into year-end on a potential autumnal pullback.
He has changed his tune a bit now and believes the economy has the potential to remain quite robust into Q2 of 2010 as Fed policy remains accommodative, the dollar remains weak and inventory de-stocking continues:
The forceful policy response to avert depression tail risks posed by the financial crisis has likely unleashed a wave of liquidity which is probably greater than that of 2001-2003. Our job is to identify the best performing assets of this “Great Liquidity Race.” At present, it appears those assets are gold, emerging market equities denominated in local currencies, and commodity related stocks.
Liquidity is making its way into bond purchases by banks, into equity markets, into capital flows to emerging markets and into international reserve accumulation and related diversification away from the dollar. This will be the trend over the next quarter—or two—even before discussing potential portfolio shifts within it.
Due to this easy money approach he is becoming heavily invested in gold and other precious metals as he expects metals to win the “great liquidity race”:
“precious metals exposure has been increasing and is currently the largest commodity exposure. As a result we have included, for this quarter, a separate discussion on gold as an appendix. I have never been a gold bug. It is just an asset that, like everything else in life, has its time and place. And now is that time.”
In the bond market he likes Curve Flatteners as inflation is likely to pick-up in the coming quarters. …
Welcome to Shocked Investor, who’s first post here is about Brazil. Shocked Investor sent us an article on investing in Brazil, with an eye to the massive investments and profits he believes will be made for the Olympics/Rio 2016. Click here to read the pdf file. Enjoy! – Ilene
New VALE ad commemorating Rio 2016: "Three types of minerals will be found in Rio: Gold, Silver, and Bronze"
With Rio de Janeiro having just being awarded the Olympics 2016 there will be enormous activity and interest in Brazil. There will be tremendous investments made in the city and in the country. Whether the government itself makes a profit money-wise is a difficult proposition, and difficult to measure. However, the benefits to the country are long term and in many other indirect areas. Many companies and sectors will certainly boom and make considerable revenue. Over the next months and years we will dedicate considerable effort to dissecting these companies and sectors to pinpoint the winners. Also, in future posts, we will be talking about other companies, while not directly Brazilian ADRs, but that do most of their business – of profits – in Brazil. I know these companies and the market well, and have very good connections over there. Much more on this later. Also, please see another recent post on Brazil on September 23, with expert interviews on BNN TV.
This article shows all the current Brazilian ADRs. These are securities that can be traded in North America, like regular stocks. Most have good volumes, and most of them have options as well. Some of the companies are very large and are among the biggest in the world. For example, ITUB has a market cap of over $90B, much higher than most banks in the world. VALE is at $120B, VIV $10B, ABV, $52B, BBD $61B, and so on.
Two ETFs are also shown, EWZ for Brazilian stocks, and BZF which tracks the Brazilian currency. You will see that these stocks have gone up sharply this year. The EWZ is up over 93%, partly due to the appreciation of the Real and the drop of the
Instead of new rules making sure two people are in the cockpit at all times, how about a rule that says no one is cockpit? This is precisely how I felt after 911 and even more so after the disappearance of Malaysia Flight 370 on March 8.
The tragedy of Germanwings Flight 9525 in which a mentally ill co-pilot deliberately flew the plane into a mountain killing all 150 on board is icing cake.
Friday's release of the publicly available data from the Economic Cycle Research Institute (ECRI) puts its Weekly Leading Index (WLI) at 131.6, up slightly from 131.2 the previous week. The WLI annualized growth indicator (WLIg) is at -3.2, up from the previous week's -3.6 and off its interim low of -4.9 in mid-January.
"The Song Remains the Same"
As I type this, the featured article on the ECRI website remains the February 23rd piece, "The Song Remains the Same" (full report requires a subscription), which illustrates the shrinking GDP growth during the seven business cycle expansions since 1970:
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
Well, it didn’t take long for the bulls to jump on their buying opportunity, with a little help from the bulls’ friend in the Fed. In fact, despite huge daily swings in the market averages driven by daily news regarding timing of interest rate hikes, the strength in the dollar, and oil prices, trading actually has been quite rational, honoring technical formations and support levels and dutifully selling overbought conditions and buying when oversold. Yes, the tried and true investing clichés continue to work -- “Don’t fight the Fed,” and “The trend is your friend.”
In this weekly update, I give my view of the cur...
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While I'm not going to argue the point about the possibility that Bitcoin drops to $1, or less, (that could happen yet, but not for the reasons you propose) I felt it necessary to point out something you seem to have overlooked.
While it's likely that the US government watching Bitco...
Bullish trades abound in Cypress Semiconductor options today, most notably a massive bull call spread initiated in the July expiry contracts. One strategist appears to have purchased 30,000 of the Jul 16.0 strike calls at a premium of $0.89 each and sold the same number of Jul 19.0 strike calls at a premium of $0.22 apiece. Net premium paid to put on the spread amounts to $0.67 per contract, thus establishing a breakeven share price of $16.67 on the trade. Cypress shares reached a 52-week high of $16.25 back on Friday, March 13th, and would need to rally 4.6% over the current level to exceed the breakeven point of $16.25. The spread generates maximum potential profits of $2.33 per contract in the event that CY shares surge more than 20% in the next four months to reach $19.00 by July expiration. Shar...
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PSW Members - well, what a year for biotechs! The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down! The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months. What could go wrong?
Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.
Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies. A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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