Sunday, July 31, 2011

Is China's high-speed rail system about to slow down?

A week ago, two high-speed trains collided in the eastern province of Zhejiang (the first stopped by a lighting strike, while the second crashed after passing a defective warning signal). The government, in an attempt to “manage” the situation, started to bury the evidence at the scene, which led to outcries by the press and negative comments share across the Internet. This incident follows dismissals earlier this year of China's railway minister,Liu Zhijun, and a leading engineer, Zhang Shuguang, for potential corruption.


  • The accident is tragic and the government’s handling is, at best, misguided. While China’s high-speed rail system (consists of a build out of approx. 2,800 miles of track since 2007) has been a symbol of its economic ascendance; corruption, poor construction and questionable financing are tarnishing its image. 
  • This incident joins other large public works projects around the world that are populated with hoodlums and mishaps. 
  •  However, China’s crowded roads and canals need transportation alternatives. Expansion may slow in the short term, but progress will continue.

U.S. economic reality check

As the world looks on in amazement at the U.S. Congress’ process for addressing the August 2nd debt ceiling deadline, the U.S. Commerce Department, on Friday, reported that 2nd quarter GDP grew at a lower than expected 1.3% annual rate (1.8% was expected). Additionally, 1st quarter growth was reduced to 0.4%, from a prior 1.9% rate. (Note: GDP growth of 3% or more is needed to reduce the heightened levels of unemployment).

MY TAKE: While the poor GDP numbers surprised many Wall Street players, these unfortunate results likely affirm the broader view held on Main Street. This economic setback will increase tension in the polarized debate on how the U.S. addresses its financial challenges. In the short-term, a debt resolution will likely be reached by Congress and signed by the President consisting of vaguely defined multi-trillion dollars cuts, with details set by committees at a later date. In the longer term, hard choices are unavoidable in the areas of health care and retirement entitlement cuts and government downsizing. Winston Churhill’s view that "Americans can always be counted on to do the right thing...after they have exhausted all other possibilities" is facing a serious test. A more likely outcome is that clarity will remain elusive and can-kicking will continue.

Sunday, July 24, 2011

U.S. Congress plays Chicken with Global Economy

Global markets rallied in recent days as progress was made in dealing with the Greece debt mess and expectations that the U. S. Congress would raise the debt ceiling in a timely manner. However, recent “on-again, off-again” news flow from Washington feels more like labor negotiators positioning for a walkout rather than a process to address the most significant economic challenge of a generation.

With budget discussion swinging between the potential for President Obama to override Congress by enacting provisions of the 14th Amendment (suggested by Bill Clinton and others), and the idea that a default may be the only path forward (supported by Congressman Ron Paul), it seems that rational discourse is not in play. At best, a hasty and half-baked solution

Dodd-Franks and the financial crisis - have lessons been learned?

A year ago last week, the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law. While positioned as the most significant financial regulation changes since the Great Depression, debates persist on its interpretation and how new agencies such as the Financial Stability Oversight Council, the Office of Financial Research, and the Bureau of Consumer Financial Protection will be funded.

MY TAKE: High level contributing factors to the financial crisis included a lack of oversight and accountability by policymakers, businesses and consumers. Specific contributing factors included: 1) the expanding power and influence of Fannie Mae and Freddie Mac, 2) the November 1999 repeal of Glass-Steagall Act which regulated the financial services industry for 60 years, 3) interest rate cuts by Fed Chairman Alan Greenspan to stabilize the economy after the 9/11 attack – which lead to the “punchbowl” era of monetary policy, 4) an SEC exemption, in 2004, that allowed 5 investment banks to increase their leverage ratio to 40:1, up from 12:1 (they were Lehman Brothers, Bear Stearns, Merrill Lynch, Goldman Sachs and Morgan Stanley – each either collapsed or needed significant bailouts) and 5) a declining saving rate by U.S consumers. Sometimes simplicity is a good indication that lessons were learned from past mistakes. In 1933, the Glass- Steagall Act passed in Congress without controversy and its length was 30 pages. Dodd-Frank is 2,300 pages long, and its regulatory interpretations continue to expand. Perhaps we have more learning to do.

Sunday, July 17, 2011

Is the "Murdoch mess" symptomatic of larger global economic issues?

The phone-hacking scandal at Rupert Murdoch’s News Corp., which resulted in 1) the resignations of Dow Jones CEO and Wall Street Journal publisher Les Hinton and U.K. newspaper head Rebekah Brooks, 2) the collapse of a takeover bid for the U.K.’s BSkyB network and 3) recognition that Scotland Yard either overlooked or suppressed information on the potential hacking of nearly 4,000 people, is reshaping many lines of business and political influence.

MY TAKE: While Britain’s Labor Party leader Edward Miliband said “It’s not just about one individual, it’s about the culture of an organization”, it is likely that the culture of abuse, poor judgment and lack of oversight includes some government and political leaders as well. As global policymakers attempt to manage a broad array of debt crises, many are constrained by alliances with interest groups, political ideologies, or poor comprehension of the challenges. In the Eurozone, questions persist on the validity of the banking stress tests released on Friday. In the U.S., policymakers continue to dance around the $14 trillion deficit. NOTE: on Friday, Pimco’s Bill Gross said people do not understand what is going on, “The U.S. has a $60 trillion net present value liability burden, and that constitutes Medicare, Medicaid and Social Security in combination. That is 4-5 times GDP and it certainly exceeds those liabilities in Greece, Portugal and Spain. Ultimately, the U.S. has a big, big problem.”

Sunday, July 10, 2011

U.S. jobs data: good, bad or ugly?

Last Thursday, the closely watched ADP National Employment Report showed that the U.S. labor market added 157,000 new jobs in May - this beat estimates of about 70,000. On Friday, the U.S. Bureau of Labor Statistics reported that only 18,000 new jobs were added - the lowest increase in nine months. Responding to the poor results, President Barack Obama renewed his focus on investing in roads, bridges and railways and commented, “Right now, there are over a million construction workers out of work after the housing boom went bust, just as a lot of America needs rebuilding”.

MY TAKE: While many economists and investors were caught off guard by the difference in the two reports, it is important to understand that the ADP report surveys the private sector (about 340,000 companies), while the U.S. Labor Department surveys about 140,000 businesses AND government agencies. While these conflicting reports are unsettling, there are signs of improvements in retail sales, along with increases in North American rail traffic. However, the lack of clarity from Washington policy makers on debt ceiling and other budgetary issues continues to contribute to global economic uncertainty.

As Earnings Season Begins, It's All about the Forward Outlook

OK – you have heard it all before, investors are concerned about: 1) problems in the U.S. housing market, 2) federal, state and municipal government budgets issues, 3) Eurozone financial bailouts, 4) inflation in developing countries, 5) Middle East and North African political conflicts and 7) supply chain issues related to Japan’s earthquake/tsunami. This week, 2nd quarter earnings season begins with financial results from firms such as Alcoa Inc. (US: AA), Citigroup Inc. (US: C), Google Inc. (US: GOOG), Infosys Technologies Ltd. (India: INFO), JP Morgan Chase & Co (US: JPM), Tata Consultancy Services Ltd (India: TCS) and Yum! Brands Inc. (US: YUM).

At this time last year, equity markets under stress and the U.S. Federal Reserve responded by turning on the printing press with its QE2 stimulus efforts. Today, with the QE2 process over, the management commentary from hundreds of companies in the coming weeks will be critical components in assessing short and intermediate term economic and investment trends.

Sunday, July 3, 2011

Some mixed messages from global manufacturers

The purchasing managers index (PMI) is a significant indicator of economic sentiment. A PMI reading above 50 suggests economic expansion, but the direction of change from the prior month is also important. On Friday, the U.S. PMI rose to 55.3 in June, up from 53.5 in May (a decline to 52 was expected). In China, the PMI was 50.9 in June, down from 52 in May - its lowest level since February 2009. In India, PMI fell to 55.3 in June - a nine-month low. In South Korea, PMI dipped to 51.1 in June - a six-month low. In the U.K, PMI decreased to 51.3 in June from 52 in May - a 21-month low. For the Eurozone region, PMI dropped to 52.0 in June, down from 54.6 in May – an 18-month low. Additionally, the Bank of Japan’s quarterly Tankan index of manufacturing sentiment fell to minus 9 in June from 6 in March (a negative number suggests a more pessimistic mood).

MY TAKE: While most of these results suggest slower levels of economic growth, they do not point to contraction. Contributing factors to the weakness may include supply chain disruptions from Japan’s tsunami, as well as efforts by some governments to manage inflation. Until unemployment levels, wage stagnation, and sovereign debt issues improve, economic expansion will be constrained and global markets will likely remain volatility

Greece's tragedy continues

With its government debt of about €350 billion approaching 160% of GDP, Greece desperately needed cash to keep its government working and fund its interest and principal payments. This past Wednesday, the Greek parliament approved a new austerity plan, which was required by the European Central Bank (ECB) and the International Monetary Fund (IMF) in order for euro-zone countries to provide a second funding package of about €120 billion. Additionally, part of the austerity plan includes a privatization fire sale of about €50 billion of government owned assets, consisting of land, airports, companies, etc.

MY TAKE: While markets rallied on these short-term fixes, the intertwined relationships among unions, politicians and other interest groups continue to bog down effective long-term solutions to the country’s dysfunctional mess. This socio-economic tragedy is not over yet.