ANZ: We Are Still Bullish on Natural Resoures

According to the conventional wisdom, if China slows down, Australia will catch a cold.  A natural resources boom has fueled a twenty year expansion in Australia's economy. Does the slowdown in the BRICs, and particularly the "C" (China), mean the end of this Aussie expansion? No says Mike Smith. The chief executive of ANZ discusses his country's and his bank's prospects and plans with FT's Jeremy Grant in this 5:19 minute video.  But Mr Smith does not see everything as rosy in the Lucky Country: he argues the wider Australian economy needs modernization:

Blankfein Is Bullish on the U.S. Economy & Stocks

Davos, Switzerland is where the world's fanciest people get together, network, and opine about the world.  

In this video, CNBC's Andrew Ross Sorkin and Lloyd Blankfein, Goldman Sachs chairman & CEO, discuss the global economic outlook. 

From the World Economic Forum:

Bullish Baltic Dry?

September 28 2011: The Baltic Dry index, a measure of the use of the largest ships, has climbed sharply of late while all else is bearish.   In this video, FT investment editor, James Mackintosh,  analyses what this apparently bullish signal tells us about the outlook for the world economy. (3m 29sec)

http://video.ft.com/v/1187399924001/Bullish-Baltic-Dry-

Revalue or else?

October 5 2011: Back in 1971 Richard Nixon risked a trade war to force the rest of the world to devalue the dollar. The US Senate is considering a similar move to force China to revalue the renminbi. Here James Mackintosh, analyses why the world needs the Chinese currency to appreciate much further. (3m 59sec)

http://video.ft.com/v/1202190857001/Revalue-or-else

Twenty Years of a Convertible Ruble.

For approximately 500 years the Russia has used the ruble as its currency. Since the Soviet Union's fall in 1991, the country has undergone some drastic changes, including the ruble. After the fall the Russians focused on the challenge of converting their centrally planned economy to that of a market based economy with an emphasis with global integration. In 1991, the USA and the IMF recommended the economy undergo a radical “shock therapy” approach to market oriented reform. Rather than kick starting the Russian economy it led to collapse. Millions fell into poverty and corruption and crime grew rampant.

Hyperinflation resulted from the removal of the Soviet price controls. There were monumental difficulties in actually implementing the fiscal reforms. The govenment depended heavily on short-term borrowing to finance its budget deficits from 1991 until the 1998 financial crisis. These financial problems were exacerbated by low prices for Russia’s major exports a lack of investor confidence. The led to a falling ruble, a weakened banking system, and the constant threat of runaway inflation.

Despite these ongoing economic difficulties Russia and its ruble continued to struggle forward, claiming small victories along the way. In 2000, Russia successfully upheld its external debt obligations in addition to making a large advance payment of principal to loans from the IMF and building up its own Central Bank reserves. In 2002 the Russian government successfully assumed its payment of roughly $14 billion in official debt payments coming due. It was able to accomplish these feats through a sound government budget, improving trade, and substantial current account surpluses.

The current account surpluses caused the ruble to appreciate rapidly in value. However given its role in Russia’s exports, the country and the economy depend heavily on the price of energy. The 2001 U.S. recession and the global slowdown after the high tech burst caused energy prices to fall. In 2002 the G8 nations cancelled $20 Billion of the old Soviet Union’s debt. They hoped this would induce Russia to use these savings to safeguard Russia's nuclear and other dangerous materials from terrorists.

In 2004 the Stabilization fund of the Russian Federation was established and integrated into the federal budget as a safety net against falling oil prices. This was aimed at keeping the ruble stable through turbulent times in the energy sector.

The battle for economic stability lasted for more than half a decade. However, in 2007, Russia achieved one of its goals when the IMF certified the Russian economy had achieved macroeconomic stability.

In 2009 Russia’s GDP grew at its fastest since the fall of the Soviet Union. This meant that Russia and its ruble had officially overcome the consequences of the 1990 recession and economic collapse. Throughout all of this the ruble has been under the strains of inflation, although unemployment was cut nearly in half from 2000 to 2007.

In 2011 the upheaval in the Middle East has provided Russia with higher prices and increased demand for its energy exports as it helps to fill the gap left from reduced production in the Middle East. This will hopefully bring welcomed news for the Russian economy and its ruble.

The ruble has improved much more than Russian politicians and laws so that investors having greater faith in the currency than the integrity of its government.

-Stephanie Giberson

Scott Davis, UPS, and the Economy

May 21 2011 Scott Davis, the chief executive of United Parcel Service, tells the FT’s Gillian Tett that US growth numbers are disappointing. Mr Davis points to exports as a bright spot but says that there needs to be more forward movement on bilateral free trade agreements.

Click through this link to see the UPS Chief talk to the Financial Times it takes 8m 36sec:

http://video.ft.com/v/952418309001/UPS-s-Scott-Davis-full-interview

No Wonder We Have a Trade Deficit: Did You Know You Need Permission to Export Natural Gas?

As the U.S. Balance of Payments Drives Us Deeper Into the Hole

The U.S. is running a current account deficit of almost a half trillion dollars (c. $450 billion.)  China has accumulated some $2 trillion of dollar denominated foreign exchange reserves in its $3+ trillion hoard.  The U.S. Treasury is in hock to China for over $1.1 trillion.  Our energy trade deficit was approximately $850 billion in 2010.  That means that other than energy, our current account had a surplus of some $400 billion.

Getting our international accounts into surplus and preserving the reserve currency status of the dollar should be a priority.  The President has called for doubling our exports in five years.  It is not clear what might make that happen, but exporting something the U.S. has in surplus should be good news.  Or so you would think.

Cutting Into Our Energy Deficit Should Be a Good Place to Start

Gregory Meyer writes in the Financial Times, "The US approved the first exports of large quantities of natural gas through the Gulf of Mexico," specifically, the Department of Energy granted a license for Houston's Cheniere  Energy to "refit a gas import terminal to condense and ship up to 2.2bn cubic feet a day" of liquified natural gas (LNG.)  According to the DOE, "In August 2010, [Cheniere's] Sabine Pass Liquefaction, LLC filed a two-part application requesting authority to export up to 803 billion cubic feet per year of domestically produced natural gas as LNG for a period of 20 years. On September 10, 2010, the Department approved these exports to 15 countries with which the U.S. already has a Free Trade Agreement covering natural gas. Today the Department is extending this authorization to include all other countries except those that lack the ability to receive imports or those with which trade is prohibited by U.S. law or policy."

Please note: Cheniere had to ask permission to help right our balance of payments! 

Apparently we have rules that prohibit exporting natural gas.  Getting a "Get Out of Jail Free" card also allows others to lobby against the license.  In this case a group called the Industrial Energy Consumers of America lobbied against Cheniere.  No wonder the dollar is on the ropes!

Are these rules some fossilized leftovers from the 1970s?  ("A sober economic historian would judge the years 1973 to 1982 as the worst decade in the last sixty years." See also "When Will They Ever Learn?") In that horrible decade, we had widespread natural gas shortages caused by government price controls.  A tangled web of administrative rules, laws, and policies tried to contain the damage done by price controls.

Some background:

Pioneers like Michell Energy developed some tricky technology that has allowed Americans to tap huge new reserves of natural gas.  These reserves are trapped in deep shale formations that require very unconventional drilling techniques to capture the gas.  These reserves ("shale gas" for short) have been the focus of a drilling boom in the U.S. and have created an enormous glut of natural gas.

This is the one great "good news" news story in recent years for the U.S. economy. Natural gas prices are fluctuating near $4 per mmBtu. Henry Hub Natural Gas settled at $4.32 today.  This is close to a third of its 2008 peak.  By way of comparison, the energy equivalent price of oil would be about $16 per mmBtu.  This means Americans are getting a great bargain.

Internationally, prices are much higher.  Britons pay over twice our price for natural gas and in Asia the price is more like four times as much.  In much of the world, natural gas contracts are tied to the price of oil.  Why are these price differences not arbitraged away?  It is not easy to get natural gas from one place to another.  The U.S. has facilities for re-gasifying imported liquified natural gas (LNG).  These facilities were built in the 1970s: remember those artificial shortages?  Our facilities are limited for liquifying natural gas for export.  Hence this project and similar ones.  How many are going to rush to invest in such facilities if they will wait for eight months may to be told, "No you can't!"

Wichita's Unemployment Rate Rises Seasonally to 8.4 Percent; GDP Grows at 2.4 Percent; and Europe's Mercedes Reves Up

The Stock Market Falls Again

Here it is Friday afternoon and the U.S. Stock Market is down some more after a 144 point plunge yesterday. The Fed of Philadelphia's activity index took a dive and new claims for unemployment jumped over a half million. That latter is one statistic economists do not want to see rise and it is one of the Conference-Board's leading indicators. Yesterday's plunge turned a nicely developing  global rally into a global route.

Markets have been particularly spooked since the Commerce Department issued its GDP report a week a go.  The economy grew at a 2.4 percent rate in the second quarter.  This was seen as lack luster growth.  However the deceleration was not due to a lack of demand but to an over appetite for imports.  Real, domestic final demand grew at a 4 percent annual rate.  More economic stimulus would further aggravate our current account balance.

Its Bureau of Economic Analysis revised the last two and a half years of national income accounts estimates showing, as I expected, that the recession was deeper and the recovery stronger than previously reported.

Good News From Germany

The global rally had been fueled by news that the Bundesbank had increased its forcast of German economic growth. Germany is the Eurozone's engine. Moreover the strength in the world economy is reflected in the new resource M&A boom according to Javier Blas and William MacNamara in the Financial Times. They report, "The rise of China and India has sparked a renewed surge in aggressive dealmaking in the resources sector, with more than $50bn in proposed take­overs this week alone wagering on continued strong commodities demand."

The American stock market is focused on the possibillity of a "double-dip recession."  As I said yesterday, "I don't see a double-dip recession, either here or nationally...It's too late for one to start. They need to happen within 12 months."  We had a  double dip recession in 1973-75.  The economy fell in response to the oil shock of the arab oil embargo.  The economy recovered in the first half of 1974, but as inflation artificially inflated manufacturing order books, firms soon found their perceived demand to be ephemeral.  Industrial activity plunged after June in the "second dip."  The recession of 1982 followed closely (fourteen months) on the heels of the 1980 reession leading some economists to argue it was really one double dip recession not two separate recessions.

There real recession threat for the U.S. is more medium term.  When tax hikes and the supply side effects of the new health care legislation hit in 2011 and 2012, we could see something like the "Roosevelt Recession" of 1937-38.

Wichita's Good Bad News.

Dan Voorhis of the Wichita Eagle reported, "The July unemployment rate in the Wichita area hit 8.4 percent — worse than June, but much better than the 10.3 percent in July 2009."   That compares with 8 percent in June.

The rise is seasonal.  As Voorhis points out, "The unemployment rate typically rises in July as thousands of students and school staff enter the work force looking for jobs."   Chris Moon in the Wichita Business Journal notes that "metro [Wichita] had 26,669 people who were out of work, up from 25,184 a month ago."

To look past the seasonal effects, compare July's unemployment rate to the same month in 2009 (10.3%.)  That is a big drop.   This is the third straight month that the unemployment rate improved compared to a year ago and that provides grounds for optimism.   The Eagle quotes this Friends University professor as seeing "encouraging economic trends that will soon translate into better employment.  'I can see the unemployment rate in the fall closer to 7 percent than where it is now.'
[and the] strength in commercial aircraft construction and a general demand for Wichita-made products in other parts of the globe.."

Kansas

Seasonal factors drove the state unemployment rate up for July to 6.9 percent.   Kansas Department of Labor economist Tyler Tenbrink said "Kansas continued to see steady but slow job growth in July. An increase in goods producing jobs, like construction, are very important. We are still seeing a decline in some service providing jobs, like information services and financial activities. A bright spot this month within those declining industries was administrative and support services, which includes job placement services for temporary workers. We are particularly interested in job gains in this area because employers tend to use these services before hiring permanent workers. This industry saw its first over-the-year job gain since June 2008, a positive indicator that we may continue to see growth in other industries in the coming months."

The Economist on the The German Economy

Asia's growing economic power.

The Economist shows graphically that Asia is regaining the economic dominance it enjoyed a millennium ago - but it still has some way to go.

When the Euro Sneezes, Does the Aussie Dollar Catch Something?

WSJ's David Wessel joins the News Hub and discusses why Europe's problems threaten not just Europe. Note the great view of the Sydney Opera House seen from St. Aloyisius? The next building after that is the Parthenon in Athens.

Has Greece's Profligacy Made Some Top European Stocks A Buy?

The Euro crisis has driven the currency down versus the dollar making Europen stocks cheaper for those of us who buy with greenbacks. It has also driven European stock prices down in Euros.

Does this mean there are bargains?  Vito J. Racanelli, Barron's European Editor suggests some candidates:

As Australia Goes, So Goes the Global Economy?

Andria Cheng previews this week's news from Asia.

Australia's GDP and Rate Decision: Among the world's central banks, the Reserve Bank of Australia (the RBA) has aggressive withdrawing monetary stimulus The RBA is expected to keep its rates steady as European debt worries roil global markets.

China's Purchasing Managers' Index will show where the world's second largest economy is going.

Here is a Barron's video:

The Giant To The South: Prometheus Bound?

In this Financial Times video, Jonathan Wheatley reports on the colossal challenge facing Brazilian farmers and manufacturers because the country lacks the infrastructure, the roads and port facilities, to export its wealth.  (3m 24sec)

May 26 2010

Risk Aversion

Aline van Duyn reports that investors are running away from risk.  Could it be that we are mostly talking about speculators who being subsidized by too cheap money compliments of Chairman Bernanke? 

Henrique de Campos Meirelle On Brazil's Success Through the Financial Crisis

Henrique de Campos Meirelles is the Governor of Banco Central do Brasil. Maybe Ben Bernanke could learn a thing or two from this interview with the economist:

Maybe You Prefer Pisner Urquell or Budweiser (from České Budějovice!) or Klášter, But István Szoke Thinks Staropramen Is a "Hidden Gem."

The MoneyMeisters (I can not call them breumeisters) at Anheuser Busch InBev are shuffling their portfolio.  They are selling to private equity investors, CVC, their eastern and central European operations and distribution system for $2.2 billion.  Matthew Curtin judges "CVC is paying around nine times last year's Ebitda assuming it hits its return targets, triggering another $800 million payment to ABI. CVC will fund the deal with $1 billion in debt raised from a variety of banks. The three times debt to Ebitda is well below the six times-plus multiples typical during the boom."  EBITDA is earnings before interest, taxes, depreciation, and amortization.  It is an operating cash flow approximation that is often used in valuations. Lex in the Financial Times adds, "Evolution Securities estimates $2.23bn represents about eight times 2009 earnings before interest, tax, depreciation and amortisation. That is some way below the 10 times-plus of big boom-era beer deals but for AB InBev it is respectable enough, given the potential extra $800m payments."

Matthew Dalton fills out the price: "AB InBev will receive $1.62 billion in cash for the Central and Eastern Europe assets. AB InBev will also receive a $448 million unsecured deferred payment obligation from CVC with a six-year maturity that can be extended 2 years, paying interest at between 8% and 15%. Finally, AB InBev will get $165 million in minority interests."

He tells us "The operations being sold are located in Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia."  CVC gets to "brew and/or distribute Stella Artois, Beck's, Löwenbräu, Hoegaarden, Spaten and Leffe -- AB InBev's main brands in Europe" in those countries.  They acquire, among other brands, Staropramen.

InBev wants to focus on big brands in big countries.

But how good a deal is it for the buyers?  Yes they are paying less than the heady multiples of the bubble years. It looks like they have been clever in structuring it.  Interestingly, according to Martin Arnold and Philip Stafford, "István Szoke, head of CVC’s new central and east European buy-out team, told the Financial Times that Staropramen was 'the hidden gem' among the assets."

The deal turns financially on buying at the bottom and an eventual recovery in revenues as the local economies recover.  Mr Szoke told FT, "We think we are buying this business at somewhat of a trough, as we expect the [east European] region to recover and grow, which will benefit the top line of the company." The Czech Republic, a world leader in beer consumption, is like the caboose on a train in the globalized economy.  “We were surprised by how hard beer consumption has been hit in the region,” said Mr Szoke. “But beer consumption is driven by disposable income and that will recover once this crisis ends in a year or so.”  Since world trade started turning around in early spring, maybe the caboose will make back to the pub by next year.

The Rise of the Loonie

The Canadian dollar is so strong, the Bank of Canada may intervene lest a too strong Loonie stifle the recovery north of the border.

China Is #2 In the GDP Tables

Wikipedia summarizes the rankings of the world's economies measured by GDP at Purchasing Power Parity (PPP) prices. The U.S. is #1 still, but China is now #2.

The BRIC Rally Is Based On Fundamentals

Dominic Elliot told us in the July 27th Wall Street Journal that "the 'BRIC' acronym [was] created in 2001 by a team led by Jim O'Neill, Goldman Sachs Group's chief economist to mean Brazil, Russia, India and China. The bank fashioned the acronym while making a prediction about the speed of growth of the four biggest emerging markets."

In his interview with Mr. O'Neill, you will find his case that their recent spectacular stock market performance is based on fundamentals.

China May Be the World Economy's Engine of Growth, But Are Mr, Han's Gauges Accurate?

Earlier this week, Jamil Anderlini wrote in the Financial Times that "China’s gross domestic product figures" do not add up: "the latest set of first-half numbers provided by provincial-level authorities are far higher than the central government’s national figure, raising fresh questions about the accuracy of statistics in the world’s most populous nation.

"GDP totalled Rmb15,376bn ($2,251bn) in the first half, according to data released individually by China’s 31 provinces and municipalities, 10 per cent higher than the official first-half GDP figure of Rmb13,986bn published by the National Bureau of Statistics.

"All but seven of the regions reported GDP growth rates above the bureau’s first-half figure of 7.1 per cent. At the start of the year, Beijing set 8 per cent as China’s growth target for the year. [read more]"

Since China is becoming such an important economy, what its economy does moves world stock markets. Given commentators' cult of GDP as a metric, the shakiness of China's national income accounts drives prudent investors to their worry beads.