Sunday, September 29, 2013

As the Climate Change Debate Continues, the UN Releases a Report for Policymakers

Last week, the United Nations released its “Climate Change 2013: The Physical Science Basis: Summary for Policymakers” report. The study’s co- chairperson Qin Dahe said, “Our assessment of the science finds that the atmosphere and ocean have warmed, the amount of snow and ice has diminished, the global mean sea level has risen and the concentrations of greenhouse gases have increased.” Co-chairperson Thomas Stocker said, “Continued emissions of greenhouse gases will cause further warming and changes in all components of the climate system. Limiting climate change will require substantial and sustained reductions of greenhouse gas emissions.” Observations from the report include:
  • the atmospheric concentrations of carbon dioxide (CO2), methane, and nitrous oxide have increased to levels unprecedented in at least the last 800,000 years. CO2 concentrations have increased by 40% since pre-industrial times, primarily from fossil fuel emissions and secondarily from net land use change emissions.”
  • each ofthe last three decades has been successively warmer at the Earth’s surface than any preceding decade since 1850,
  • it is virtually certain that the upper ocean warmed from 1971 to 2010, and it likely warmed between the 1870s and 1971,
  • over the last two decades, the Greenland and Antarctic ice sheets have been losing mass, glaciers have continued to shrink almost worldwide, and Arctic sea ice and Northern Hemisphere spring snow cover have continued to decrease in extent and
  • Climate change discussions have been hampered by mistakes and misrepresentation of facts by proponents on many sides of the debate. These discussions have often been framed in terms of job growth/destruction, energy independence/security and economic development/growth
  • The UN report does not cover much new ground but it does reinforce the view of significant environmental impacts.  
  • While progress may be slow, increased actions by governments and awareness by consumers will likely drive demand for solutions
  • Success solutions will require an understanding of technological innovation, public policy dynamics and business fundamentals

Friday, September 27, 2013

"How the Economic Machine Works" by Ray Dalio of Bridgewater Associates

This video (posted Sept. 22, 2013)  focuses on three economic drivers: 1) productivity growth, 2) the short term debt cycle and 3) the long term debt cycle.

Bridgewater Associates is the largest hedge fund in the world and manages about $150 billion.  Ray Dalio’s net worth is about $13 billion

While other topics may be more engaging, this one has more impact than many others.  Dalio  does a good job presenting the material.   Toward the end of his presentation, Dalio concedes that some policy makers do not understand this material very well.

Sunday, September 22, 2013

On the Wealth Effect, Monetary Morphine and Transitional Issues

When the U.S. Federal Reserve said it would not reduce its stimulus efforts, at least in the short term, many investors were very surprised.  This news triggered strong positive moves in equities, commodities and interest rate sensitive assets, while driving a strong move down in the value of the U.S. dollar on Wednesday (markets pulled back by Friday).  Note: These stimulus efforts, called Quantitative Easing, have been controversial and have expanded the Federal Reserve’s balance sheet from less than $1 trillion before the Great Recession to over $3.6 trillion today (some people refer to this process as printing money).  This stimulus activity sought to stabilize the economy and create a “Wealth Effect” - where people would feel richer, increase their spending and drive economic growth.

While real estate and stock prices have improved in recent years, data released by the U.S. Census Department last week revealed that the Wealth Effect is likely benefiting only a small portion of U.S. citizens.  For example, median household income was stable during 2012 at $51,017, but this amount is down 8.3% since 2007, and slightly lower than what households made in 1989 ($51,681 in current dollars).  Also during 2012, 15% of the population (46.5 million people) was at or below the poverty level.  This is an increase of 2.5% since 2007.

Reacting to the news, Congressman Kevin Brady, Chairman of Congress’ Joint Economic Committee said, “Those [Federal Reserve asset] purchases may have helped juice profits on Wall Street, but they have done little, if anything, to help struggling families on Main Street. In fact, this heavy dose of ‘monetary morphine’ may have actually slowed the economy’s healing process.”
  • During October 2010, Chairman Ben Bernanke said, “there are clearly many challenges in communicating and conducting monetary policy in a low-inflation environment, including the uncertainties associated with the use of nonconventional policy tools."  While these tools have provided some economic value, the recovery process has taken longer than expected.
  • With the Federal Reserve's leadership in transition, Janet Yellen may be the front-runner but a smooth transition is not assured.
  • Given weaker than expected economic fundamentals, the investment environment may encounter increased volatility.

Sunday, September 15, 2013

On Retail Sales, Income Disparity, Big Banks and More

U.S. retail sales (reported by the Commerce Department) last week increased by a lower than expected 0.2% in August. Also, the Thomson Reuters/University of Michigan consumer confidence index dropped to 76.8 from 82.1, the lowest in 5 months.

The New York Times reported that income disparity in the U.S. during 2012 was at its highest level in over 100 years, with over 50% of U.S. personal income concentrated within the top 10% of earners, according to economists Emmanuel Saez and Thomas Piketty. They also found that from 2009 to 2012, while average U.S family incomes increased 6%, the top 1% incomes grew by 31.4%, but the bottom 99% incomes grew by only 0.4%.

In China, factory output increased by 10.4% from last year (9.9% was expected).

In addition, high profile investor/trader Stanley Druckenmiller commented in a Bloomberg interview that: “I believe the [equity] market is topping” and “I probably have the smallest positions I’ve had” and “right now, I am lost. I don’t play when I am lost. I know in the future I won’t be lost.”

Finally, as the fifth anniversary of the Lehman Brothers collapse approaches, Richard Fisher, Federal Reserve Bank of Dallas CEO and Harvey Rosenblum, executive vice president and senior policy adviser wrote, “We have learned that the largest financial institutions are a dagger pointed at the heart of our economy. A recent New York Times editorial noted that, regarding the controversies surrounding JPMorgan Chase, “the underlying problem is not only this or that violation, but the fact that the sheer size and scope and complexity of the banking behemoths defy controls, encouraging speculation and bad behavior….We would add undermining free-market capitalism and nearly bankrupting the United States. But we would note that it is unfair to single out JPMorgan Chase. Several other megabanks nearly brought down our economic and financial system five years ago and might easily do it again.”

  • Regarding the U.S. economy – With consumers facing higher payroll taxes, limited job opportunities and muted income growth, the decline in consumer confidence is disappointing but not surprising.
  • Regarding income disparity - improvements from these extreme levels may occur at a slow pace, which could lead to increased social friction.
  • Regarding China – the better than expected factory output suggest that global economic trends may be improving.
  • Regarding Druckenmiller’s comments – with conflicting economic data and uncertainty about economic policy, it is likely that other investors share his short-term caution as well.
  • Regarding Fisher’s comments – with megabanks now larger than before the financial crisis, it seems that Dodd-Frank is a poor piece of legislation and that leading politicians and regulators have limited capacity and/or interest in addressing the broad set of financial sector issues that remain.

Sunday, September 8, 2013

"Where Have All the Good Jobs Gone?"

Last Friday, the U.S. Bureau of Bureau of Labor Statistics said 169,000 jobs were added during August (economists expected 180,000), with growth primarily in part-time and lower paying jobs. In addition, the unemployment rate fell to 7.3%, down from 7.4% in July, with the decline mostly a result of 312,000 people dropping out of the workforce. Notably, the labor-force participation rate declined to 63.2%, the lowest since August 1978. (This rate measures Americans employed or looking for work).

After these results, the following comments from “Where have all the good jobs gone?”, a July 2012 report from the Center for Economic and Policy Research, are worth considering:
  • “The U.S. workforce is substantially older and better educated than it was at the end of the 1970s … we would have expected the share of good jobs to have increased in line with improvements in quality of the workforce. Instead, the share of good jobs in the U.S. economy has actually fallen… at every age level, workers with four years or more of college are actually less likely to have a good job now than three decades ago. This development is even more surprising because the economy also has almost twice as many workers with advanced degrees today as it did in 1979.
  • We believe that the decline in the economy’s ability to create good jobs is related to deterioration in the bargaining power of workers, especially those at the middle and the bottom of the income scale. The main cause of the loss of bargaining power is the large-scale restructuring of the labor market that began at the end of the 1970s and continues to the present.
  • The share of private-sector workers who are unionized has fallen…
  • Many jobs in state and local government have been privatized and outsourced.
  • Trade policy has put low- and middle-wage workers in the United States in direct competition with typically much lower-wage workers in the rest of the world.
  • A dysfunctional immigration system has left a growing share of our immigrant population at the mercy of their employers, while increasing competitive pressures on low-wage workers born in the United States.”

As the U.S. economy continues to heal (although in an uneven fashion), Friday’s employment report suggests that challenges remain. The observations from the Center for Economic Research should be included along with other factors contributing to a potential long-term structural change. Based on the weakness of the jobs report, speculation about a continuation of the U.S. Federal Reserve's stimulus efforts may increase. Expect more market swings.

U.S. Labor Participation Rate

Sunday, September 1, 2013

Syria's Crisis is the Focus

Since the 2011 Arab Spring uprising that increased instability in the Middle East, various rebel groups in Syria have been fighting to overthrow President Bashar al-Assad‘s regime. This violence has resulted in over 100,000 deaths and millions of Syrians fleeing to refugee camps in Turkey, Lebanon, Jordan and Iraq.

On August 21, 2013, it was reported that chemical weapon attacks took place in Ghouta, a suburb northeast of Damascus, Syria.  While United Nations investigators have had limited access to the area, death toll estimates range from 322 to 1,729, with U.S. intelligence reporting 1,429.  Doctors without Borders reported about 3,600 patients at local hospitals had “neurotoxic symptoms” from the attack.

Responses from political leaders include:
  • U.S. President Barack Obama – he is considering a “limited, narrow act... we're not considering any open ended commitment. We're not considering any boots on the ground approach",
  • French President Fran├žois Hollande -”France is ready”,
  • British Prime Minister David Cameron - "I understand the deep skepticism that my colleagues in parliament and many members of the public have about British involvement in Syria. I hope this doesn't become the moment where we turn our back on the world's problems",
  • a representative for German Chancellor Angela Merkel - "there has been no request to us for a military commitment, and a German military commitment has never been considered by the government” and
  • Russian President Vladimir Putin - “"we have to remember what has happened in the last decades, how many times the United States has been the initiator of armed conflict in different regions of the world … did this resolve even one problem?"
Note: During an October 2011 interview with the U.K’s Sunday Telegraph, Syrian President Assad said “Syria is different in every respect from Egypt, Tunisia, Yemen. The history is different. The politics is different…Syria is the hub now in this region. It is the fault line, and if you play with the ground you will cause an earthquake … any problem in Syria will burn the whole region. If the plan is to divide Syria, that is to divide the whole region."

While military intervention into Syria is controversial, questions to consider include:
  • how will a U.S. military strike change the Syrian President’s tactics?
  • could violence expand into other countries?
  • how would a destabilized Syria change Middle East dynamics?
As political leaders, the media and investors focus on Syria, global market will likely be choppy until clarity improves.