Global Markets 2010: A year of turmoil, risk, volatility and uncertainty.
Okay, I’m back. No, I wasn’t preoccupied with work or business travel; nor was I on my annual snowboarding break (that comes next month in Vermont). The simple truth is I’ve been extremely unmotivated and disengaged from life in general, and I’ve been feeling somewhat, umm, despondent. About what in particular..?? I’m not sure, really. I can’t put my finger on any one specific issue. Mid-life crisis..?? Boredom with the corporate grind..?? My search for a wife..?? The normal anxieties of life..?? I don’t know: all of the above, a combination of, or none of the above. But those seem to be my therapist’s best answers. As usual, I tend to disagree with him. In any case, I’ve been getting a ton of e-mail inquiries about the Blog, and my whereabouts and why I haven’t posted lately, so I figured I might as well cater to the demand. I’ve even received a couple of New Media writing offers in the last few weeks, but no decision yet. As I contemplate the offers, I guess my sentiments closely echo the words of the character, Rod Tidwell from the movie, Jerry Maguire. My writing, which I plan to elevate even higher this year, and my legions of followers are the one thing – actually two things – that have given me any inspiration of late. Oh, and one more thing: your loyalty as readers of my Blog placed me in the top three on FPA’s League Tables in 2010, so…
…’Thank you!’ for reading my Global Markets & Foreign Policy blog. Let’s make 2011 an even better year!
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Another year has sped by with more change and economic uncertainty and volatility throughout the global markets. From a writer’s viewpoint, 2010 was filled with some of the most dynamic and complex economic trends and global market events possible. For instance, the Euro zone debt crisis, the global currency war, coverage of the international currency war – announced by Brazilian Finance Minister and precipitated by Ben Bernanke’s quantitative easing monetarist policy – the perils of high-frequency trading, and the burdensome economic impact of two-front warfare on the domestic agenda are just a few issues that led the Global Markets through a year of risk, volatility, turmoil and uncertainty. (The Wall Street Journal did a good 2010 Market year-in-review piece that you can read here.) But there were also stories of heroism such as the trapped miners’ rescue in Chile – a rapidly developing economy (RDEs) – and tragic episodes like that of the earthquake in Haiti, and the nation’s inability to respond or recover effectively, rooted in its economic history. But before we jump into the 2010 year-in-review, I encourage readers to hold me accountable for my 2010 prognostications from the Global Markets 2009 Year in Review post, here.
The struggling economy – not just in the US, but also in the Euro-zone – was voted the top economic & market news of the year by newspaper editors surveyed by The Associated Press. The BP Gulf oil spill came in second, followed by China’s economic rise, the European Debt Crisis and the global currency war. That’s important because the Global Markets blog closely followed that trend – but with slightly more critical analysis, and a bit more of an international perspective in my coverage.
US Economy struggles: Climbing out of the deepest recession since the 1930s, the economy grows at a healthy rate in the January-March quarter. Still, the gain comes mainly from companies refilling stockpiles they had let shrink during the recession. The economy can’t sustain the pace. The lingering effects of the recession slow growth. The benefits of an $814 billion government stimulus program fade. Consumers cut spending in favor of building savings and slashing debt. Businesses hesitate to hire. Cities and states lay off workers. Growth slows through spring and summer. Unemployment stays chronically high. In May, the number of people unemployed for at least six months hits 6.8 Mn — a record 46% of all the unemployed. Pointing to the deficits, Congress resists backing more spending to stimulate the economy. The Federal Reserve seeks to fill the void by announcing it will buy $600 Bn in Treasury bonds to try to further lower interest rates, lift stocks and coax consumers to spend.
At the close of the 2010, the economy made broad gains, US manufacturers produced a little more year-over-year, and consumers — the backbone of the economy — returned to the malls but spending, even with deflated retail prices was up an anemic .02% year-over-year. The primary US index, the S&P 500, mounted a solid +13% advance for 2010 closing a volatile year that included a -17% mid-year correction (high to low) precipitated by a still unsolved ‘Flash trading’ scandal that highlights the risk, volatility and uncertainty of gambling in highly manipulated US financial Markets. Investor sentiment polling indicates there still remains a fundamentally deep distrust of US financial Markets. In fact, individual investors have withdrawn over a trillion dollars in liquidity from the Market; and returns are being largely driven by Hedge funds, Pension funds and other large public and institutional investors. (For the record, I’m probably going to get in trouble for my candor; but the benefit to my readers is that you get an unvarnished, insiders perspective that might save you bundles!) The last four months of the year alone offered a 19.85% rally as fears of a double dip recession and Euro-zone meltdown abated and stocks recouped the drawdown. The Dow, Nasdaq and Gold benchmark indexes realized gains of 11%, 19.2% and 30%, respectively.
US corporate profitability being reported, while impressive, is highly misleading. Corporate performance is benefiting from two disingenuous factors. First, a lot of corporate performance is being driven by the restructuring of corporate debt in a cheap-credit environment, the benefits of which is then reported as bottom-line “profits.” Secondly, corporations are benefitting from the flood of Federal bail-out money or cheap money policy by the Federal Reserve. The best returns in Global Markets performance did not occur in US Markets, but in Brazil, India, Singapore and Frontier Markets in Africa and the Middle-East. Smart investors who don’t want the risk – real or perceived – associated with Emerging Markets are investing in Canada, Australia and South Korean companies, ETFs or mutual funds. Alternatively, natural resources and commodities funds are also excellent asset classes when smartly chosen.
The Obama administration successfully passed $858 Bn in tax cuts and aid to the long-term unemployed. Yet more than 15 million Americans are still unemployed – and growing. The leading Economists say a full economic recovery remains years away and, independently, I agree with them, except my projection says full recovery is at least a full business cycle away.
BPs Gulf Oil Spill: As my coverage of the oil spill resulting from an explosion at a deep-sea rig used by the company formerly known as British Petroleum, but now known only as “BP,” kills 11 workers and sends millions of gallons of raw crude gushing into the Gulf threatening our nation’s food supply. The spill devastates the fishing and tourism industries along the Gulf Coast and caused unprecedented environmental damage that may last for decades. BP, under pressure from the Obama administration, set-up a $20Bn fund to compensate fishermen, restaurateurs and others who suffered negative economic impacts resulting from the firm’s negligent deep-sea operations. The oil giant still faces civil charges and a criminal investigation by the Justice Department and lawsuits from hundreds of individuals and businesses. BP’s stock market value shrinks by more than $100 billion after the April 20 disaster before bouncing about halfway back.
China’s Economic rise: China muscles past Japan as the world’s second-largest economy; and displaces Germany as the world’s leading Exporter. The World Bank says China will surpass US economic performance by 2020; others say 2030 and 2050 respectively. China’s GDP is spread out over 1.3 billion people — amounting to about $3,600 per person. That compares with US GDP of roughly $42,000 per person. In Japan, it’s about $38,000 per person. China’s high demand for raw materials and heavy machinery; along with its price-efficient manufacturing base helps the rest of the world recover from the global recession – while the US and Euro-zone remain a drag on the global economy. Market pundits and Economists debate if this so-called (by the West) “global imbalance” is the long awaiting of what was previously termed “de-coupling.” I believe it’s the latter, and where I come from, we would say China has ‘flipped the script.’ (use Urban Dictionary.com) Still, the US and Europe complain that China gives its exporters an unfair competitive edge by keeping its currency artificially low, and unfairly subsidizing emerging industries such as Green Technology. However, as I’ve pointed on in a number of my posts, that argument depends on one’s geo-political perspective. Read more on China here.
Euro-zone Bailouts: A few of the so-called PIGS of Europe – Specifically Greece and Ireland required emergency bailouts, raising fears that debt problems in the Euro-zone would continue to spread and destabilize Global Markets. European governments and the International Monetary Fund agree to a $145 billion rescue of Greece in May and a $90 billion bailout of Ireland in November. The bailouts require both countries to slash spending, triggering protests by workers. Investors fear that debt troubles will spread to Spain, Portugal and other countries, weaken the European Union and threaten the future of the euro as its common currency.
At the heart of the issue, the Euro-zone has lost industrial and investment flows. And a large part of the issue is Latin debt; it is an investment drag on Germany’s industrial output. The Euro is being held aloft by central banks in Asia, Russia, Central Europe and the Middle East seeking the Euro as an alternative to the Greenback as a place to park currency reserves. In effect, the Euro-zone is now suffering from the reserve currency curse; and it is causing major European manufacturers such as Airbus, among others, reverse arbitrage of “currency torture” as it sells in $USD, but buys in Euros, and pays its workers in Euros. As a result long-term private investors – like many technology and European manufacturing companies based in Ireland, Greece and Portugal are pulling their money out of the Euro-zone at the fastest rate since the creation of the single currency. Foreign direct investment (FDI) in plant and factories has turned deeply negative, reaching minus €149Bn ($160Bn) over the past year. It dropped to minus €19bn ($22Bn) in March alone as the soaring Euro pushed labor costs in southern Europe to uncompetitive levels.
The annual exodus of private funds from Euro-zone equities and bonds has reached almost $280Bn. And the resulting loss in corporate profitability, consumer spending and declining tax revenues have placed a severe burden on the ability of many of these companies to pay the debt on their sovereign bonds. Taken together, the total outflows have topped over €400Bn in 12 months and may spell trouble for Europe’s industry as the economic downturn gathers pace.
Rise of the G-20: The international coordination and management of the global economic crisis has elevated the G-20 – not only the power and influence of this global direction-setting world body, but also the status and influence of the world’s largest Emerging Markets. In the span of just over two years, key developing countries have accomplished what they could not achieve in the previous half a century: with the G-20 as their vehicle, they’ve muscled aside the ‘old boys’ G-7 club of Euro-Atlantic nations plus Japan and taken seats at the top table of global economic decision making. With its 5th emergency summit in Seoul, South Korea in November, the G-20 has quickly emerged as the principal agent for coping with world recession and managing globalization. And in the process has enhanced the influence and status of its member nations.
It is remarkable how rapidly the G-20 has overtaken the G-7 and how widespread that change is supported in Washington, and on both sides of the political spectrum. Tim Adams, for two years the top international official in the Bush Treasury Department, says “there is no going back to the Euro North Atlantic club that was the G-7/8.” Fred Bergsten, head of Washington’s Peterson Institute for International Economics, declares, “the G-20 should be the new steering committee of the world economy.” Jeff Shafer, an international economic official in the Clinton administration, says the inclusiveness and wide geographic reach of the G-20 makes it “tower over the outmoded G-8 [G-7, plus Russia].” Even the chief of the global bankers association, Charles Dallara of the Institute of International Finance, views the G-7/8 as “outmoded and discredited.” The G-7, to which Russia was added in 1998, had – until the Seoul Summit – guided the operations of the International Monetary Fund (IMF), where the Americans and Europeans used to call the shots.
With fast growing China, India, Brazil, South Korea, plus Australia, Mexico, Argentina, Saudi Arabia, Turkey, South Africa and Indonesia added to the G8 of four west European powers, Japan, Canada, Russia and the United States, the G20 countries comprise 85% of global GDP and 75% of world population. This economic clout, geographic diversity, and inclusiveness, says Francis Fukuyama of the Johns Hopkins School of Advanced International Studies (SAIS), gives the G20 “unchallenged legitimacy” that the G-7/8 doesn’t possess.
Financial Regulatory reforms: The White House orchestrated passage of the most sweeping re-write of financial regulatory reforms since the 1929 stock Market crash that led to the Great Depression. The near-collapse of the world financial system in 2008 and the global financial crisis that followed gave rise to widespread calls for changes in the regulatory system. A year and a half later, in July 2010, Congress passed a bill expanding the federal government’s role in the Markets, reflecting a renewed mistrust of financial Markets. The bill, which was signed into law by Mr. Obama on July 21, marks the end of decades in which the prevailing view in Washington toward the financial industry viewed Wall Street with wide-eyed obsession and heavy doses of deregulation, and self regulation. The regulatory goals in the new law include reining in the powers of the Consumer Financial Protection Bureau, reconsidering limits on debit card fees and restricting the budgets and growth of the SEC and the Commodity Futures Trading Commission.
In its broad outlines, the reforms closely reflect President Obama’s proposed financial reforms of June 2009. Its progress was marked by fierce industry lobbying and partisan battles, as almost all Republicans voted against the measure. In addition, Republicans and opponents of the law would like to reverse what they call the institutionalization of “too big to fail” for the largest financial companies. The strong Republican showing in the November Congressional elections gave new impetus to their desire to repeal or rewrite large parts of the bill. The stronger Republican hold on Congress also could also have an impact on the process of writing the mountains of regulations needed to implement the law.
The law targets risky and unethical banking practices and lax oversight that led to the 2008 financial crisis. The law creates an agency to protect consumers from predatory loans and other so-called ‘best practices’ abuses by financial firms, and empowers regulators to shut down ‘Too Big to Fail’ firms that threaten the entire system and shines more light into highly manipulated, unregulated Markets that have eluded oversight. and empowers regulators to shut down big firms that threaten the entire system and shines more light into Markets that have eluded oversight – such as options, futures, commodities and energy trading.
Global Currency War: There are mounting anxieties in Global capital markets over the divergence between China’s economic policies – specifically, its currency exchange rate policies — and the relationship that currency valuation has to a sputtering economic recovery in the rich Western economies. In fact, as I noted about China earlier this year; and in one post last month, Brazil’s finance minister, Guido Mantega, publicly warned that central banks were engaged in an ”international currency war” behind the scenes, and that Brazil would respond to protect its own economic national interests. Using exchange rates “as a policy weapon” to undercut other economies and boost a country’s own exports ” would represent a very serious risk to the global recovery,”says both Dominique Strauss-Kahn of the International Monetary Fund (IMF), and former World Bank president and Columbia University nobel-winning economist, Joseph Stiglitz – and, if I can brag a little, one of my former Columbia professors. A cautious response is emerging in global financial centers, and among central bank officials and finance ministers, highlighting the difficulty of securing international economic cooperation two years after the global financial crisis began. Above all, many argue, the present global economic recovery has shifted political power and global economic influence from the advanced Western economies, toward Asia and Latin America, whose economies have weathered the global recession far better than the US, the Euro-zone, and Japan. “We have come to the end of a model where seven advanced economies can make decisions for the world without the emerging countries,” said one European official involved in the weekend talks. Like it or not, we simply have to accept it.”
At the G-20 Summit in Seoul earlier this month, the US tried to get the world to come down hard on China for its devalued currency, but instead saw Beijing turn the tables. Instead of America leading the world in hectoring China, Beijing led the world in hectoring the US Federal Reserve on quantitative easing that international critics said had artificially lowered the value of the American dollar – a serious threat to global economic stability given the Greenback’s status as the global reserve currency of choice. As a result, many emerging economies, as well as Western allies have begun calling for a diversified portfolio of international currencies as a replacement for the ‘all-the-eggs-in-one-basket’ status of the US dollar.
“We’re still struggling with a post-unilateralist hangover,” said David Rothkopf, author of “Running the World: The Inside Story of the National Security Council and the Architects of American Power.” That hangover, he says, leads Americans to believe “that we’re the sole remaining superpower and the objective of our foreign policy is to” get sovereign nations to do what we want them to; to fall into step with our worldview and global leadership. “But the reality is, that’s not what the future holds.” Rather, Rothkopf argues, the US is heading into a future in which neither our European allies, nor countries like Brazil, China and India with increasingly independent sources of power, are no longer reliant upon, nor easily influenced by the United States, and so are pursuing their own national interests.’ Many global currency traders and central bankers refer to this economic trend as de-coupling. Read more from Helene Cooper of the NYTs, here…
Real estate/Housing crisis: Housing remains depressed despite super-low mortgage
rates. The average rate on a 30-year fixed mortgage dips to 4.17 percent in November, the lowest in decades. But home sales and prices sink further. Nearly one in four homeowners owe more on their mortgages than their homes are worth, making it all but impossible for them to sell their home and buy another.
An estimated 1 million households lost their homes to bank foreclosure, even though the pace slows after evidence that lenders mishandled foreclosure documents. Some
did so by hiring “robo-signers” to sign paperwork without checking their accuracy.
Auto Industry Rebound: Thanks to the Obama administrations rapid response with a 50Bn bailout that helped preserve 6 million good-paying American jobs, General Motors stock begins trading again. It signals the rebirth of a corporate icon that fell into bankruptcy and required a $50 Bn bailout from taxpayers. GM uses some proceeds from its November initial public offering to repay a portion of its bailout. (Washington still holds about a third of GM’s stock.) GM’s recovery helps rejuvenate the industry. Sales of cars and light trucks rise 11 percent through November compared with the same period in 2009. Shoppers who had put off replacing their old cars return to showrooms.
Global Markets 2010 Person of the Year: Check back shortly
What to Look for in 2011
