Posted by admin on March 27, 2013 under Banking, Colorado, International, Macro Economy, Uncategorized | 
Paul Rochette, Senior Partner
Some new and persistent downside (and a few upside) international risks can affect our economy.
New risks are emerging. These include China’s housing bubble which, in terms of the number of units, makes ours look miniscule. China, to stimulate their economy, built entire cities only to find no one showed up. As a result, the Chinese economy, which has served as a global engine of growth, is slowing. While the latest figures show it not slowing as much as feared, the latest projection of growth in the 7.5% range is still a significant drop from the plus 10% range of the past decade.
In addition there is the potential for currency wars as the world attempts to stimulate their economies and support central government spending by devaluing their currencies – AKA printing money. The new Japanese Prime Minister Abe has stated that the Japanese are specifically trying to stop deflation by increasing the money supply, and that the slide of the yen is a result, not a reason, but few in Europe or the U.S. believe that. Coupled with aggressive money supply policy in the U.S. and continued challenges to the faith in the euro, a currency war may slowly emerge. The Chinese, while moving towards encouraging increased domestic consumption, are still heavily influenced by state owned enterprises (SOE’s) that wish to continue to export, and want the yuan to remain undervalued as well. All of the forces keeping other currencies weak will provide some further softening of U.S. prices, but at the cost of higher U.S. trade deficits, especially if the U.S. recovers sooner than others.
The European Union continues to be a cause for concern. After beating back the fears of a Greek default, the markets for Spanish, Italian and other southern tier debt stabilized, at least until this past week when Cyprus moved to center stage. For the first time in the euro crisis, depositors are being asked to contribute to the bailout. This is hitting depositors with more than 100,000 euro in Cyprus’s largest two banks, a large percentage of them Russians who have found Cyprus to be both a tax haven and a retirement center. The ramifications of depositors being hit means that now depositors in other southern European nations may no longer be so sanguine about the safety of their deposits, which both contributes to the growing southern European resentment towards Germany and also the growing sense that the crisis is not over. Perhaps depositors in Italy and Spain should be worried should the banking crisis not abate there. We will see if panic disintermediation hits this Thursday (3/28/13) when Cypriot banks reopen.
There are a few positive notes as well. The U.S. has entered trade talks with Japan and other Asian nations under the Trans Pacific Partnership, and is beginning talks with the EU over reducing trade barriers. Many economists agree that lowering trade barriers has net beneficial effects. With agricultural exports being one of the U.S.’s (and Colorado’s) strengths, continued global economic prosperity suggests more U.S. and Colorado exports of foodstuffs.
Canada, the EU and Mexico are Colorado’s three largest export destinations. While the EU is in the doldrums, Canada and Mexico are looking at respectable economic growth rates. Combined with China and Japan as our 4th and 5th largest export destinations, exports look to be a strong contributor to the U.S., the State and the region.
Posted by admin on January 31, 2011 under Banking, Government, International, Macro Economy, Real Estate |
- The bond market – will longer term rates increase significantly or stay steady? Quantitative Easing 2 (QE2) will end by mid-year keeping demand for 10 year Treasuries up (pushing down yields), but will investors react even more negatively to long-term debt prospects and price in greater risk. Also will they factor in the trend in long-term oil and commodity prices – thereby adding in greater inflation expectations into their desired yield?
- Emerging market economies, especially in China, and how aggressive they are in attempting to curtail inflation in their country — possibly putting them in a recession. Higher levels of inflation in China should keep their currency weaker, but that’s assuming the Yuan were freely traded on markets as opposed to being pegged to the dollar. If the Chinese cool down their economy to control inflation, worldwide demand for oil and other commodities will weaken, hence reducing inflationary prospects around the world.
- Aside from increase commoditiy demand in the developing world, will development in the northern Africa and the Middle East cause oil supply disruptions and an increase in prices?
- The degree of price stability in US real estate market – will bonds and mortgage interest rates stay low, thereby providing support for real estate prices. QE2 seems to have been primarily designed to do this.
- The trade-off between dramatically growing state and local government spending which can result in higher taxes like we saw in Illinois or substantial layoffs as we are more likely to see in Colorado. The municipal bond market could be problematic as state, local government and school districts run short on cash.
Posted by admin on November 14, 2010 under International |
In October two of our partners, Paul Rochette and Tucker Hart Adams, left the rest of us working while they traveled to Italy and the Balkans. It’s always good to do a reality check and see how others view us. Here’s what Paul and Tucker have to say about their travels.
Paul in Italy
My recent travels to Italy for a month left me with an opportunity to disengage a bit, and just notice the headlines concerning the US, rather than focusing on the detail.
In the past month, the overall theme that I found somewhat disconcerting but not surprising, was that the US is not doing enough to restrain expenditures, and in fact, through QE2, doing exactly the opposite of what they should.
While in the final stages of my trip planning the dollar to euro exchange rate stood at $1.20, by the time I completed my trip just a few short months later, it stood at close to $1.40. While that cost me an extra $1,000 or more, the real significance was the judgment by the market that the continued monetary easing by the US will end up inflationary. How things had changed in such a short period from how the possible default by Greece (and the rest of the PIIGS) had battered the euro to one where the US easing made the euro look strong.
Perhaps it was also all the strong talk of getting spending under control in Europe. After all, the French had suggested the retirement age be raised to 62 and 65 for partial and full benefits, the Brits had proposed a budget that would cut several hundred thousand public sector jobs and reduce the dole, and the Greeks had promised to do better.
Or perhaps it’s the growing sense that the Chinese are making such a strong play in the world economy, relegating the US to a smaller and less powerful one.
Tucker in the Balkans
Three weeks traveling in the Balkans in October gave me a new perspective on politics and prosperity (or the lack thereof) in the United States. Despite our problems and our penchant for constant carping, this is a pretty good place to live.
Serbia, Bosnia-Herzegovina, Montenegro, Croatia and Slovenia – pieces of former Yugoslavia – all show signs of economic growth. There is a great deal of foreign investment underway, especially in the tourist industry, and people in both cities and small towns appear moderately prosperous, despite the remaining devastation from the wars of the 1990s.
People were positive about the time under Tito’s rule, at least those who hadn’t lost a lot when everything was nationalized. Milosevic received most of the blame for what went wrong. And, it was especially gratifying in Bosnia to be told over and over, “We love the United States. You stopped the genocide and saved us. You are a wonderful country.”
