Glimmers of Hope
Listening to the prophets of doom on CNBC where I catch most of my daily entertainment, you’d think the election of Barack Obama as POTUS ushered in Armageddon. The precise value of CNBC as your source of financial news and information is this: if you wanted to short a stock, catch Jim Cramer’s “Buy! Buy! Buy!” hot stock pick; or if you wanted know which CEO’s quarterly forecast not to believe, pick any CEO interviewed by Maria Bartoromo, CNBC’s “money honey.” If you wanted to learn how to butcher the English language, you could listen to yammering news readers – errr, I mean news anchors – like Wolf Blitzer and John King of CNN. Or for comic relief, you could tune in to the yahoos over at FOX news who, if President Obama were to walk on water their headlines would scream “Obama Can’t Swim!”
Obamanomics Team
I mean, really, when you stop to think about
all the things our new President has accomplished in barely six months in office; the fact that the man acted decisively, in the public interest, and with all due haste to stanch the hemorrhaging economic wounds left by the previous eight years of what can only be described, to put it in polite terms, as “infierno!” I’m surprised more people don’t consider President Obama a savior. But seriously, in my considered opinion as a Wall Street professional, I track the numbers and follow trends – both qualitative as well as quantitative measures – and though you haven’t started hearing much about it yet in the MSM, there really are ‘gilmmers of hope’ on the economic horizon. Not least of which is that banks are lending and are profitable again. Morgan Stanley for instance re-paid a +20% annualized return on the governments bailout (TARP) investment; while Goldman Sachs’ return of bailout funds paid +23%. The President has posted better investment returns for American taxpayers in six months than their financial advisors have posted in the last six years! Not bad…
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Take the Obama stock market rally, for example – up an astonishing +45% since the Dow bottomed below 6500 on 9 March 2009, now trading in the 9,300 range. The stock market is a leading economic indicator. The markets moving higher indicates there is enough investor confidence in the future of the economy to risk capital that investors and companies will make money reflected by inflating stock prices. But stock market performance alone is not the full measure of a President’s effectiveness. In addition, national GDP is trending back up, corporate profitability is up, consumer confidence is up, along with consumer spending. These are very positive developments. And the unemployment figures are equally as impressive: let me explain. In January 2009, the month President Obama took office, the economy was spiraling – and quickly. Over 700,000 jobs were lost in January 2009, the month Bush left office. Today, according to the July unemployment figures, the economy shed 247,000 jobs in the month of June. True, people are still unemployed and that’s never a good thing. But it equally true, and even more impressive in economic terms, that there are 500,000 fewer job losses per month than when President Obama took office. Housing starts and sales are trending up, apparently after bottoming this Spring, and mortgage applications are up +20% vs same time last year. The auto industry is generating revenues again as auto sales climb higher on the merits of the President’s popular and successful cash for clunkers program – even in the face of GOP opposition. Think about it: the so-called “patriotic” Republicans – the party of “No” – by opposing, purely for partisan gain, the President’s efforts to drive economic recovery, Republicans are taking a firm stand against an economic recovery. People, wake up!! If you’re not persuaded by my take, then try these:
Consider the article in Forbes magazine (or view video interview here) this week by NYU’s Stern School Prof. Nouriel Roubini’s – sardonically called “Dr. Doom” because he had the good sense to call the Great Recession, with precision, fully three years before it happened – outlining impressive glimmers of hope for recovery throughout the global economic recession. (See Forbes article below)
Or Gail Collins’ cognitive wit in this piece about President Obama’s progress report six months in.
This week, I take a look at which countries have best weathered the global recession and credit crunch. All economies have been affected by the crisis, but a combination of policy responses and strong fundamentals has given some countries, especially some emerging market economies, a relative edge. These same strengths could lead the countries I highlight below to perform better as the global recovery begins, even if their growth rates remain well below 2003-07 trends.
What do these countries have in common? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in countercyclical fiscal and monetary policies, actions that were not possible in past crises. In contrast, countries that borrowed heavily to finance domestic consumption in the days of easy money are now facing sharp economic contractions. Despite the relative strength of these countries, however, their ability to return to sustained growth will depend on structural reforms that support consumption.
Latin America
A couple of countries in Latin America have thus far been able to weather this crisis better than their neighbors. Brazil and Peru stand out for their relatively healthy fundamentals and financial systems. Both countries have benefited from being relatively closed economies and from having diversified export markets and products. They also took advantage of the boom years (2003-08), reducing external vulnerabilities and increasing savings (fiscal and international reserves). By the time these the crisis hit, both countries had well regulated financial systems that saved them from being contaminated by toxic assets. The fact that their domestic credit markets are at an early developmental stage, so consumption is not very dependent on credit, helped them shelter internal demand. Finally, these countries enjoyed strong policy credibility.
Brazil
The Brazilian economy is definitely showing signs of resilience, given the massive adjustments among the developed economies. As early as Q1 of 2009, GDP data showed signs of resilient consumption despite the contraction in investments and the collapse of the industrial sector. Throughout the second quarter, manufacturing continued to show very weak performance vis-à-vis 2008 levels, although the sector has shown some tentative signs of improvement on a monthly basis. In the meantime, the retail sector continues slowly to adjust to a much less favorable environment than in 2008, and sales growth keeps on moderating, due to slower real income growth and a challenging credit atmosphere. Yet consumer confidence, which has now almost returned to precrisis levels, could support consumption, despite the labor market losses to come. The central bank’s own assessment of the state of the economy suggests that the monetary and fiscal stimuli will remain in place to help the recovery process. The fiscal packages for infrastructure and the housing sector, as well as the tax breaks to the auto industry and capital goods sales, should in part support the labor markets and the expansion of domestic production.
Asia-Pacific
Australia
Australia narrowly escaped a technical recession by force of luck and policy. Despite a slowdown in global manufacturing activity, China and other emerging markets continued to tap Australia’s abundant natural resources, boosting Australia’s net exports in 2009. Meanwhile, a leap in fiscal spending and a reduction in policy interest rates prevented a sharp falloff in consumer spending and housing prices. Thanks to resilience in Australia’s twin pillars of growth, exports and domestic demand, expenditure GDP growth turned positive in Q1 2009. Production and income measures of GDP nevertheless indicate Australia is effectively in recession, but the good news is that the bottoming of production around the world suggests Australia will avoid technical recession this year and that its effective recession will be brief.
China
China’s aggressive fiscal and monetary stimulus helped reaccelerate growth in the first half of 2009 from a near stall at the end of 2008. Manufacturing is expanding, new orders are up and the property market correction has been clipped. Yet it remains uncertain whether the government’s response merely bought time. China’s stimulus adds its own risks, including those of asset bubbles, overcapacity and nonperforming loans. Yet there are some signs that, supported by government incentives, domestic demand has been stronger than anticipated. A sustained increase in consumption, which has lagged overall growth in recent years, would require a reallocation of funds domestically, likely through patching holes in the Chinese social safety net. The Chinese stimulus has been dominated by infrastructure projects, which could boost productive capacity but would do little about structural factors that keep national savings rates high. However, there could be space to implement some such countercyclical policies in H2 2009 and 2010. If so, the Chinese recovery could have greater legs and could provide more support to other countries. If these efforts fail or are delayed, however, Chinese and global growth could be much more sluggish.
India
Despite slowing from highs of 8% to 9% growth, India’s economy will grow close to 6% in 2009. Amid domestic and global liquidity crunch, large domestic savings and corporate retained earnings are financing investment. Sluggish labor market and wealth effects have hit urban consumption. But low export dependence, a large consumption base and the high share of employment (two-thirds) and income (one-half) coming from rural areas has helped sustain consumption. Pre-election spending, especially in rural areas, and high government expenditure, are also pluses. Timely monetary and credit measures have played a key role in improving private demand, liquidity and short-term rates and reducing the risk of loan losses. Credit is largely channeled by domestic banks, especially state-controlled ones, which have low loan-to-deposit ratios and little exposure to toxic assets. IT exports have held up despite repercussions on jobs and consumer spending. The oil price correction cushioned India’s trade deficit and large foreign exchange reserves helped the country withstand capital outflows in 2008. High returns in real estate and infrastructure and planned liberalization also helped boost capital inflows and asset markets when global risk appetite revived recently.
Europe
Norway
Although Norway’s economy slipped into negative growth in the fourth quarter, its downturn will be among the mildest of advanced economies, with analysts expecting a contraction in the range of 1.0 to 2.0% in 2009 and a return to growth in 2010. What set Norway apart are years of current account and budget surpluses (both in the double digits as a percentage of GDP), a sizable public sector and a hefty war chest of oil revenues amassed in the Government Pension Fund. Consequently, Norwegian policymakers have had ample room to use fiscal and monetary policy to soften the downturn.
Statistics Norway estimates the impetus from fiscal policy in 2009 to be 3% of mainland GDP–the strongest stimulus since the 1970s. Meanwhile, the benchmark interest rate is at an all-time low of 1.25%, down from 5.75% in October 2008. Also helping to alleviate the pain of contraction is the fact that Norway’s economy is well equipped with automatic stabilizers. Given Norway’s comparatively bright outlook, there is talk that the country will be the first among advanced economies to hike rates. The central bank sees the first hike coming in Q2 2010, though some analysts think it may come earlier.
France
The French economy managed to avoid a recession in 2008 and is expected fare best among the big four euro zone member countries in 2009. France’s more balanced domestic demand-led growth model has served it relatively better during a synchronized global downturn. The large social safety net fully served its automatic-stabilizer purpose in a countercyclical manner. Fiscal measures were targeted to the short term and included mostly nonrecurring spending. France’s relatively healthy banking sector received targeted support and is in a position to fully sustain the recovery in the euro zone.
North America
Canada
Despite relatively sound finances that helped it outperform the rest of the G7 in 2008 and early 2009, Canada’s exposure to the U.S. for trade and investment suggests its recovery may lag that of the U.S. (a trend that Q2 2009 data seems to support). However, a more consolidated financial sector with lower leverage, lower default rates and a revival of domestic demand should support recovery in 2010, albeit one characterized by below-potential growth. Canadian households and corporations still have more access to credit than their U.S. counterparts, a factor that helped buffer Canada from a more severe property market correction. Yet the nascent revival in consumption may be weaker than the Bank of Canada expects. The rebound in commodity prices is mixed news. Higher commodity prices and greater demand for metals, if not yet for oil and cheap natural gas, should contribute to an expansion of mining and energy output–but too strong a surge could boost the Canadian dollar, exacerbating Canada’s manufacturing weakness as it boosts labor costs. Read more here…
