Weekly Economic and Market Review
I’ve been worried about the US economy for some time now and particularly about the high unemployment rate, but I feel so much better now. Last week, President Obama named Jeffrey Immelt, the CEO of General Electric, to head his Economic Recovery Advisory Board. No wait, that’s what it was called when Paul Volcker was complaining that it was nothing more than a P.R. stunt and President Obama was doing his best to ignore the 6’8″ former central banker – which isn’t an easy task by the way. Now the new and improved panel is called the President’s Council on Jobs and Competitiveness which will surely make it more effective since it retains all the powers of the previous council plus a spiffy new name. Okay, it doesn’t have any powers but it does have Jeffrey Immelt who has created jobs as the head of GE. Yes, most of them were with Washington, D.C. lobbying firms but lawyers need jobs too, right? We’ll just overlook the fact that GE has fewer employees now than it did in 2001 and assume he is concentrating on the competitiveness part of the panel.
I admit I was a little skeptical of this advisory board at first. After all, Immelt’s GE spent more on lobbying than any other company in the US last year ($39 million) so it would be easy to be cynical about his appointment. Immelt obviously has major management skills though. He was clever enough to own a couple of small Utah banks that allowed GE to borrow on the cheap through the government’s Temporary Liquidity Guarantee Program. Using the advantage of a government guarantee for its debt, GE Capital managed to survive even as its smaller less well connected competitors with no government guarantees ended up in bankruptcy court. I’m sure more jobs were saved at GE than were destroyed at their competitors and if it’s good for GE it must be good for America. Besides DC math on jobs saved is clear – a job saved is a vote saved. So my cynicism is obviously misplaced. Immelt didn’t get the job because he’s good at playing the DC game; he got the job because he’s a job creator.
The other members of the panel are equally adept at creating jobs. Robert Wolf runs UBS’s Americas unit which didn’t even have to access TARP – if you don’t count getting paid $5 billion or so from taxpayers via AIG. As for creating jobs, well UBS has aided in the creation of new businesses by firing over 10,000 employees the last several years. How can we possibly even count the number of new jobs created by ex-UBS employees? Heck, it might even be as high as 10,000. And how about Jim Owens, the former chairman of Caterpillar? When it comes to creating entrepreneurs, CAT beats the pants off UBS, laying off 20,000 back in 2009. And how about another member, Richard Trumka of the AFL/CIO? He knows how to make money that’s for sure. No, wait a minute, that was money laundering he took the fifth amendment to avoid talking about. I guess we can at least say that he created a job for himself. There are rewards for those who keep their traps shut and don’t rat out their pals. The AFL/CIO demands a strict adherence to omerta and so does Trumka.
To get serious for a minute, this advisory board is a prime example of why I am so skeptical about this economic expansion and the ability of politicians to enact good economic policies. This advisory board will not and cannot create any jobs except possibly support positions to produce reports the President can ignore if they don’t assist his re-election efforts. This isn’t serious economic policy; it’s theater of the absurd. It isn’t just President Obama either; Republicans have done nothing but preen for the tea party since taking the House. I suppose I should wait until after the State of the Union address this week – which usually sets the agenda for the coming year – but we’ve been suffering from lousy economic policies for a long time and I don’t think we have time to waste on PR BS.
There are serious economic problems coming down the pike that depend on the US getting its act together. The inflation problems that are now evident in many emerging markets cannot be solved in a pro growth manner without a change in US policy. The root of the problem is the ongoing lack of investment in the US that forces capital to seek higher returns elsewhere. Reversing that capital flow will require seriously addressing our fiscal problems and making the US a more attractive place to invest. Advisory boards and symbolic legislation will not get the job done. The debate on tax reform and deficit reduction needs to start now.
The economic data last week was again fairly strong. I have remained fairly positive about the US economy over the last year even as many others fretted about a double dip recession. The US economy though does not exist in a vacuum; my concern is the ability of our economy to absorb an exogenous shock. The Fed’s continuing QE folly may be pumping up the US stock market but it is also creating problems elsewhere. Rising energy and food prices are already creating political havoc overseas and can be attributed directly to Fed policy. Countries trying to address inflation will find that they truly do have a Phillips curve tradeoff to make since it is the Fed creating the inflation and they have no control over Fed policy. Any way China chooses to address their inflation problem will have adverse effects on their economic growth. For now they have chosen to accept higher inflation rather than higher unemployment but that may not be tenable. If it isn’t and China’s economy slows significantly, what are the consequences for US and world growth? I’d venture to say that at least in the short term they aren’t positive.
The only way to mitigate the international effects of Fed policy is to change our economic policies such that capital starts to flow back to the US and away from the emerging markets. Increased demand for dollars – as long as the demand is for dollars to be invested productively and not in US Treasuries – would reduce inflationary pressures in emerging markets while also raising US growth. That is a positive way to solve the emerging inflation problem. All the alternatives are negative for world growth and could have severe consequences for financial markets.
As I said above the economic data was generally positive. The Empire State and Philly Fed surveys both showed solid growth but both also showed significant price pressures. Housing starts and existing home sales offered some decent news on the housing front. Starts weren’t great but some of that was due to weather and permits were up a lot. The permits numbers also pushed the leading indicators higher. On the consumption side, both the Goldman and Redbook reports showed significant slowing since the holidays. Some of that may have been due to bad weather but it could also be something more durable. There is no way to know until we get more data. Jobless claims continued to confuse dropping back to 404K. I hope that is a resumption of the downtrend but I just don’t know.
The US stock market had its first down week in two months last week (although the Dow managed to post a small gain). Earnings were center stage and were generally positive. Unfortunately, it seems in many cases that good wasn’t good enough. Apple reported great earnings but the news of Steve Jobs’ health problems weighed the stock down by over 6% on the week. Google also reported good numbers but a management shakeup seemed to spook investors. Several other high tech companies reported good numbers but reduced outlooks and that knocked the NASDAQ down hard on the week. There were exceptions; GE managed to report good numbers that were better than expected and also raised their future guidance and the stock moved up strongly. How much of that was due to Immelt’s lobbying skills and how much due to a better economy and how much due to GE’s general wonderfulness is hard to say.
As you might guess from reading above, I am not positive on emerging markets right now. I still have some exposure to those markets but it is dwindling. Last week I sold Chile and Peru. I also sold the last of our Australia position. My aversion to emerging and resource heavy markets is based mostly on a fear of a slowdown in China. That may also have an impact on commodity prices but at least for now the commodity uptrend continues. It is possible that even if China slows commodities continue to rise as capital fleeing China and other emerging markets finds a new home in commodity markets. I doubt it but it is a possibility.
I am increasingly bearish on risk assets even as market sentiment remains quite positive. I don’t want to get too negative as there are still plenty of positives especially in the US economy but if we get an external shock I suspect we won’t have much if any warning. Turning cautious too early and missing some of the gains seems like a small price to pay for a good night’s sleep.
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