Violence - The Week In Review

It was more world focus this week than US focus. That is, US debt and equity prices were to a large extent driven by offshore events.

S&P was unkind to Greece on Monday, but then nobody cares about the periphery, except the periphery (and of course California).

Not a problem; later in the week here comes the EU with its Q1 GDP print far through expectations, due to strength in Germany and France (the rest in the trough). It’s ancient history but everybody got excited anyway; until that is they all recalled that central banks are just no fun.

China worried world markets when its Industrial Output, although vigorous, was just less vigorous than expected. That didn’t stop the Bank of China from lifting reserve requirements another 50 basis points a day later. This really worried the world’s markets, those of the US especially.

Commodity prices gyrated wildly but ending lower, partly on some corny view of a world slowing. So much for our February prediction that WTI would print 120 tagged to Middle Eastern violence. Of course in the time-tested way of economists, once our prediction comes true, even if a decade later, we’ll be sure to brag about it.


Robert Craven

China

The US and China just finished the so-called US-China Strategic and Economic Dialogue. There was progress - less protectionism from China was key among these.

China of course has been booming but we saw this morning that China’s industrial output increased less than expected (13.4% yr / yr) for April. So it looks as if the Bank of China’s tighter monetary policy is working (Apr/5 was the last rate hike). We also see that consumer inflation came off a bit in April from the 32-month March high (5.4% annualized).

These are good things and prevent a government panic. A controlled slowdown is what we all want. And US interests have improved as China appears more willing to allow the Yuan to strengthen, and the recent talks should further the process. Also, China has allowed the Yuan to strengthen to fight inflation. So this is good news for US exporters.

China is not a "wild card" in the economic sense. They are well managed. From Reuters: "The Chinese government knows it’s time for a change. The old economic model based on cheap exports and eye-popping investment can’t be sustained. The latest five-year plan, covering 2011-2015, aims to boost internal consumer demand as the main engine of growth. It envisages a bigger share in the economy for services, which are currently only 43 percent of GDP — barely half America’s level. The plan calls for more high-tech industry and for greener, less carbon-intensive growth. There’s also to be a big push into social housing, so the poor can afford somewhere to live."

Robert Craven

Offshore

Japan? What problem? China? A tad less prone to protectionism and wary of inflation, this a positive for US exporters (stronger Yuan). The EU - from each according to his ability, to each according to his needs. It can’t work. It will unravel gradually however, nothing sudden. Little impact as we have limited exposure, that region. Germany - a buoyant consumer. Best economic expansion in two decades, tied to exports. UK - a modest recovery yet a trigger-happy Bk of England caps anything more.


Robert Craven

Bad Timing for the Chinese

We see today that China’s April trade surplus with the US exploded 16%. Bad timing. Right now (5/9 the first day of talks) US officials are beating on our Chinese friends to allow their currency to adjust, to drop the claim they’re crippled. This result helps shred their argument and thus may be good news for US exporters ahead (stronger yuan).

Robert Craven

A Must Read for Obama

This week’s event calendar is light, primarily related to housing. We will also see Jan Durable orders on Thur. Durables is a key release but it’s so volatile recently that we can’t assign a risk to the number.

There is however something far more profound by the way of potential impact to US interests and prosperity than any number of key releases might ever be. That would be the eruption in the Mid East, the surging demand for consensual government.

We reprint in its entirety our sketch from May/06. Yes, we jumped the gun a tad. And yes, this administration has so far done nothing to foster democracy in this area. Nevertheless, we are witnessing the beginning of the end for a few, and the beginning of the beginning for many.

Obama needs only to let the four paragraphs below become his guide, and to sculpt US policy accordingly.



May/03/06:


Over the next 12 to 18 months we will witness a conflagration of sorts: Democracy will spread throughout the Middle East as a pace very few can now appreciate; with the encouragement of the US, dissidents will upset primitive, brutal, autocratic and theocratic regimes and replace these with a new beginning - the foundations for a responsive government.

Realists have maintained that the Mid East is the least hospitable place in the world for a democracy. They are mistaken. Arab countries have aped western ideas but sought to implement these through state power - failed capitalist dictatorships. The inevitable decay and failure, the brutality of rule have together bred a growing sub-surface counterculture of resistance. It is this reservoir of energy, before constrained or crushed by ruling thugs, that now will be married to an enlightened US policy, ultimately transforming the region. And so now we are witnessing the beginning of the end for the old order.

The Administration’s formula is a simple one. It begins with the truth that all men and women will chose self determination over a directed and compulsory existence. Next is the fact that the spread of consensual government is in the direct interest of the US. A free society is not a threat to its neighbors. Trade and enhancement of wealth are only furthered.

Finally, the US will promote democracy in nondemocratic regimes by linking our foreign policy, our money, expertise and markets to internal reform - how these societies treat their own. All the countries in the Mid East are dependent on the West. We have the leverage. Given the base of internal dissent a regime need only give a little, say in the election process in exchange for US trade preference, and the fissure provided will quickly open to unleash a torrent.

Robert Craven

Employment The Laggard

The US economy is progressing at a far better pace than most observers expected. Still, employment lags during this recovery.

Why? Shock treatment provided by Obama.

Potential employers took one look at Obama’s statist agenda and realized quickly that new employees were ticking time bombs. One could almost feel the collective corporate decision. Not just the health burden; witness the NLRB’s more aggressive attacks on the employer; then there is the notion of mandatory IRA’s for small employers. Or that in Jan/09 Obama signed the Lilly Ledbetter Fair Pay Act (S. 181). The new law will increase the number of pay discrimination claims, make them much more difficult to defend, and force employers to retain records relating to compensation decisions far longer than they have in the past.

In past reports we have quoted several CEO’s; it’s all the same - Obama scared the daylights out of these guys. The employment dept was closed. Naturally. Why in the world would anyone in his right mind want to take on a new employee with this guy at the helm?

Witness the recent sharp growth of shipping in the ports of LA and Long Beach, as reported in today's LA Times. Did trade employment numbers respond also? Only partially. As explained by one trade economist, “Trade employment numbers don’t reflect the growth in cargo movement because many companies have gotten more efficient......”

Companies made investments in efficiency, investments that were put off before. These planners were literally shocked into action.

Here is the answer to lagging employment.

Robert Craven