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Chart of the Week: Slowest Economic Recovery Since the 1960s

Rob Bluey

November 4, 2012 at 11:35 am

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This Central American Nation Is Spending Roughly 50% Of Its Entire Economy On Infrastructure


by Simon Black, Sovereign Man

March 8, 2012

Panama City, Panama

I had dinner the other night with a bank executive in charge of government finance who told me that the aggregate spend of all the infrastructure projects in Panama totals more than $13 billion. This is roughly 50% of the entire Panamanian economy.

The equivalent in the United States would be the government announcing a ‘Rebuild America’ infrastructure spending initiative in the range of $8 TRILLION! No doubt, it’s a lot of money for this small country.

Panama (and particularly Panama City) has been in a seemingly perpetual state of construction for nearly 10-years. The long boom in residential construction created an impressive skyline of condo towers along the new Cinta Costera. But residential demand peaked and petered several years ago.

In an effort to keep the party going, the government has essentially swapped a residential construction boom for an infrastructure boom.

There are so many projects here, you’d think you were in Chonqing, China. And it’s made life miserable for anyone who has to get into an automobile– Panama City’s already dismal traffic has now become utterly hopeless.

The real issue is that Panama’s debt has been steadily rising to finance several projects. In many cases, the debt increase has outpaced the country’s dizzying GDP growth. For example, Panama’s debt rose 10.3% in 2010, while GDP only increased 7.5%.

According to some of my local attorneys who work on the deals, many of these infrastructure projects are now being creatively financed: selling bonds of off-the-books quasi-government entities that own securitized future cash flows.

It’s all an elaborate process to keep the debt from hitting the government balance sheet and obfuscating Panama’s true fiscal status. Official debt is now hovering near 50% of GDP, but the actual figure is much higher.

It’s possible that some of these projects will prove to be good investments– it’s not the same as Chinese ghost cities down here, Panama has legitimate infrastructure needs and is building accordingly.

What remains to be seen, though, is what happens after the infrastructure projects are complete in, say, another 5-years. The hope is that the real economy will have grown enough to absorb the loss of infrastructure spending. This supposition is not out of the question… but it’s definitely not guaranteed.

For now, nobody seems to mind. People are working, they’re making money, the country is improving… and except for the obvious and ridiculously high inflation rate, life is good.

To be clear, Panama is definitely a good news story. It has had one of the most resilient economies in Latin America over the past few years, and perhaps more than anywhere else in Central America, Panama has a very clear (and growing) middle class.

When you go out at night, you see Panamanians out on the town spending their discretionary income… and I mean regular Panamanians, not just the Porsche-driving 20-year olds who inherited papi’s business.

A strong middle class with disposable income is important in any healthy economy, and its emergence marks the transition from ‘developing’ to ‘developed’ nation. Panama still has a -long- way to go, but it’s moving in the right direction.

When I think back to how this place used to be 10-years ago (and all the years in between that I spent here) versus today, the positive change is overwhelming. When I think about how places like the US and Europe used to be 10-years ago, the change is resoundingly negative.

It’s this trend, by far, that’s most important.

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How Much Of A Threat Is Oil?

9 March 2012 by Cullen Roche

Here are some good macro thoughts that put the oil threat into perspective (via Credit Suisse):

“The impact on GDP: each 10% rise in the oil price takes 0.2% off US GDP growth and 0.1% off global growth. This time the negative impact of a high oil price on growth is limited as: oil is only 10% above its 6-month MA (changes matter more than levels for growth); other energy prices are muted (coal prices are at 12-month lows, US gas prices down 40% yoy) and CPI food price inflation should fall by 5pp from here (adding 0.7% to disposable income); critically, unlike 2008 and 2011, neither the ECB nor GEM central banks are likely to raise rates in response to higher energy costs; and US macro momentum is currently consistent with GDP 0.8% above 2012 consensus, suggesting some buffer before consensus estimates get downgraded.

Impact on equities: since 2007, equities have tended to fall when oil prices rise by 40% yoy (i.e. an oil price of c$150/bbl). From a macro perspective, we would start worrying if the rise in the oil price pushed up US CPI above 4% (that is when equities de-rate, c$160/bbl), US GDP started being revised down (c$150/bbl) or European inflation rose above 2% year-end (c$140/bbl). Another warning signal is when inflation expectations decouple and start falling as oil continues to rise (as has happened in the past week). Each 10% rise in the oil price takes 2% off European EPS and c1% in the US, on our estimates (yet current valuations can accommodate a c10% fall in earnings).

From a regional perspective, we rank countries’ sensitivity to oil by looking at: net oil imports, energy’s weight in the CPI, output gap and the correlation with oil prices. The winners from a higher oil price are Norway, Russia and Canada, while Thailand, Turkey and Korea are negatively affected. We show cheap domestic plays in the ‘winners’ and expensive domestic plays in ‘loser’ countries.”

Source: Credit Suisse


UBS: This Is What The World Will Be Like In 2012 And 2013


by Joe Weisenthal

For readers of Wall Street research, we’re getting close to the most exciting time of the year: Forecasters will start making their big predictions for the coming year and beyond.

Of course, that will really start heating up in December, but it’s already beginning.

Recently UBS‘ economics team of Larry Hathaway, Paul Donovan, Andrew Cates, and Christine Li came out with their forecasts and themes for 2012 and 2013.

First, they identify three big themes:

  • Sovereign stress: This means a range of things, not just the crisis in Europe, but also the emergence of groups like the Tea Party and Occupy Wall Street, which have coincided with a collapse in support for elected officials. Weak governments will wind up producing bad policies, which of course have all kinds of economic ramifications.
  • Excess capacity: The world is beset with “swathes” of excess capacity, most notably seen via high unemployment in developed nations. Simple manufacturing capacity remains weak, which is a hindrance to growth and high wages, and it means that growth will be uneven. It also means inflation, mostly, won’t be much of an issue.
  • An emerging world: As they put it, it’s the most obvious of the three. But the bottom line is that stronger balance sheets and better fundamentals will continue to bolster the emerging world.

Now, as for specific predictions for the economy in 2012 and 2013…

  • Global GDP growth of 3.1% in 2012 and 3.4% in 2013.
  • The eurozone will be in a recession in early next year. 2013 will see eurozone growth of just 1%.
  • The US will avoid recession, growing 2.3% in 2012 and 2.7% in 2013.
  • Emerging economies will engage in more monetary and fiscal stimulus, and maintain their trend growth rates.
  • Central banks around the world will keep monetary policy very loose. The Fed will lift interest rates in the second half of 2013.
  • The biggest downside risk is an intensification of the eurozone crisis.
  • The biggest upside risk is much better coordinated global economic policy.

Anyway, as we said, this is just the tip of the iceberg for Predictions Season. We’ll be bringing you a lot more.


A Grim Warning For The Global Economy..


by Joe Weisenthal

From the OECD (via Bloomberg), a prediction of mediocre growth and a call for “bold action.”


Bold decisions are needed from the G20 leaders meeting in Cannes this week to get the global economy back on track, said OECD Secretary-General Angel Gurría.
An important first step has already been taken with the debt and banking crisis rescue plan announced by EU leaders on October 26 2011, but these measures must be implemented “promptly and forcefully”, he added.
Presenting a special Briefing Note ahead of the Cannes Summit, Mr Gurría said without decisive action the outlook is gloomy. The OECD projects GDP growth to remain weak in the advanced G20 economies over the next two years while the pace of activity in the major emerging markets is likely to be lower than in the pre-crisis period.

The near-term outlook

  • Uncertainties regarding the short-term economic outlook have risen dramatically in recent months. A number of events, notably related to the euro area debt crisis and fiscal policy in the United States, are likely to dominate economic developments in the coming two years. In an “events-free” scenario and in the absence of comprehensive policy action to resolve current problems, real GDP is projected to grow by about 3.9% this year, 3.8% in 2012 and 4.6% in 2013 on average in G20 countries.1 This average masks a wide divergence among country groupings, and emerging-market economies are much more buoyant, despite some softening. In the euro area, a marked slowdown with patches of mild negative growth is likely. Growth is also projected to remain weak in the United States, with a gradual pick-up from 2012 towards the end of the projection period. Unemployment is set to remain high in many advanced countries.
  • A better upside scenario can materialize if the policy measures that were announced at the Euro Summit of 26 October are implemented promptly and forcefully. These measures go in the right direction and could help restore confidence and create positive feed-back effects that could trigger a scenario of stronger growth.
  • In contrast, the outlook would be gloomier if the commitments made by EU Leaders fail to restore confidence and a disorderly sovereign debt situation were to occur in the euro area with contagion to other countries, and/or if fiscal policy turned out to be excessively tight in the United States. OECD analysis suggests that a deterioration of financial conditions of the magnitude observed during the global crisis (between the latter half of 2007 and the first quarter of 2009) could lead to a drop in the level of GDP in some of the major OECD economies of up to 5% by the first half of 2013.
    Appropriate policy responses
  • To resolve the euro area crisis, it is important to clarify and implement fully and decisively the measures announced on 26 October to break the link between sovereign debt and banking distress, to deal with Greece, to ensure that the sovereign debt crisis does not spread to other European countries and to secure appropriate capitalization and funding for banks. Detailed information is needed on how the package will be implemented.
  • In the advanced G20 economies, interest rates should remain on hold or, where possible, be reduced; notably in the euro area. Central banks should continue to provide ample liquidity to ease financial market tensions. Further monetary relaxation, including through unconventional measures, would be warranted if downside risks intensify. In the emerging-market economies, the stance of monetary policy should be guided by the outlook for growth and inflation, which remains comparatively high.
  • Strong, credible medium-term frameworks for fiscal consolidation and durable growth are needed to restore confidence in the longer-term sustainability of the public finances and to build budgetary space to deal with short-term economic weakness. Those advanced economies with sounder public finances can provide additional counter-cyclical support.
  • Structural reforms are essential to boost the growth potential of G20 countries, to tackle high unemployment and to rebalance global demand. In view of weak growth in the near term and impaired fiscal positions in most advanced economies, priority should be given to reforms that offer comparatively strong short-term activity gains and facilitate longer-term fiscal consolidation.
  • In Cannes, G20 leaders will discuss an Action Plan with bold commitments for mutually reinforcing macroeconomic policies and structural reforms. In 2008, G20 leaders rose to the challenge with a clear and coherent plan and we avoided a second Great Depression. Today, the adoption and implementation of the Action Plan is just as imperative to restore confidence through decisive actions in specific countries and regions.

The projections reported in the Briefing Note are preliminary and will be updated in the OECD Economic Outlook No. 90 to be released on 28 November 2011.


Does this administration understand what economic growth means?



Discussing economic growth usually causes a negative knee-jerk reaction in progressive liberals, because private sector growth implies some capitalist is making profits even if it means job growth.

Economic growth is the mother’s milk of conservative thought. Conservatism is not an ideology. It is a philosophy. In fact it is opposed to hard line ideologies. It is a moving target because it is based on practical principles, respecting tradition but accepting change.

The ultimate in profound economic change was the Industrial Revolution, which transformed the course of human history and has morphed into the technological revolution, which ushered in economic conservatism as we know it today. An explosion in economic activity followed, resulting in the creative destruction of existing jobs. The net result was more productive jobs, as less productive jobs were destroyed. Automobile assembly lines versus wagon manufacturing, word processors versus manual typewriters, etc.

Undergirding this stunning achievement was the hallmark of conservative principles — that the notion that property rights and freedom should be inseparable in the hands of creative, entrepreneurial inventors who attract investment capital. (Turn the entrepreneur loose.) Conservatism is, and remains, all about economic growth and private sector jobs.

Command and control economies could never have inspired the Industrial Revolution. Even China has embraced market capitalism, referred to by their own communist leaders as a “socialist market economy with Chinese characteristics.” Here’s what Chinese President Hu Jintao tells his bureaucrats: “The functions of government must be separated from those of economic enterprises … Government should not intervene in economic operations.”

How about that! Economic growth with job creation. A communist ordering his government to get out of the way of business — totally antithetical to the ideology of U.S. progressive liberals. This is not meant to be a partisan slam, but rather to suggest economic policies that focus on government regulation are misguided in this global economy.

Countless numbers of inventions created by the legions of brilliant European entrepreneurs as the Industrial Revolution unfolded would have would have never seen the light of day in contemporary America. Englishman George Stevenson’s first steam locomotive used in coal mines (1840) and German Gottlieb Daimler’s first modern gas engine (1850) would still be on the drawing board if they had to deal with U.S. federal government bureaucracy, (EPA, NHTSA, NLRB and OSHA, to mention some) plus state and local permitting agencies — and sadly these start ups would probably go broke lobbying and from incurring attorney’s fees.

Big government enthusiasts have no interest in property rights and even less interest in individual freedoms; whereas the philosophy of economic conservatism implies robust support for private sector economic progress.

As we become more like European socialists, the U.S. economy will become less dynamic and entrepreneurial. Socialism is an ideology, not a philosophy. It is a belief system that advocates the control of production with the government. Its focus is on big government — not property rights, and surely not wealth creation with its capital investment and entrepreneurship.

Look: Economic growth should clearly be our priority to get us out of this recession; not bigger government, more rule-making and higher taxes. And this bears repetition: The only way out of this mess is to encourage capital investment in our economy to stimulate economic growth which leads to jobs.

The extraordinary challenge American business now has is how to remain at the top of the global value chain. This is also the goal of emerging market countries, as it was for Japanese industry years ago.

Japan educated and trained a hardworking, dedicated skilled workforce to manufacture the highest quality products. They didn’t innovate. They weren’t entrepreneurial. They simply copied and mastered western technology of that time with unmatched quality standards. But the government, (“Japan Inc. as it was called then) did not get in the way of industry with regulatory restraints. This made the difference.

This brings to mind the missionary zeal of progressive ideologues mixing social policies with economic and financial policies, ever since the New Deal. We’re so used to this, we don’t realize it. For example economists agree that the genesis of this financial crisis really started with the FHA and their Fannie Mae and Freddie Mac G.S.E.’s promoting home ownership — on the surface a laudable social policy; but look where this policy took us: another bubble that created a lot of jobs from Main Street (construction and related jobs in the real estate business) to Wall Street. But it also created a lot of crooks along the way from the ordinary guy, up the food chain to the crooks on Wall Street.

A more recent example is the fetish this administration has for solar energy that resulted in an ill-conceived federal loan of an astounding $535 million to Solyndra that was doomed from the beginning, and is now in bankruptcy, throwing 1,100 people out of work. The Department of Energy has already granted a whopping total of $38.6 billion in loans for “green” projects.

It now appears as though two top executives will take the 5th Amendment and refuse to answer questions at a Congressional hearing. This will end up as another classic case of political corruption. Behind the scenes is a billionaire Democratic fundraiser with close ties to the administration. Obama’s political advisers were pushing for a “green jobs” photo op for the president at all costs, to promote his economic stimulus plan.

There is no doubt that entrepreneurial, innovative Americans will develop cutting edge, affordable solar energy over time. But clearly, at this time in history, it would make more sense for the government to fast-track drilling for oil and natural gas in the U.S. (we have more natural gas than the Saudis have oil) or the development of clean coal technology, rather than sending all our dollars offshore to the Middle East. Private industry would jump at the chance with no loans required.

Our only priority should be economic growth with the end goal of private sector jobs. This is what pragmatic economic conservatism is all about.

If the president and his inner circle of power abandoned yesterday’s failed socialist nostrums and focused on common sense, confidence in government would return.

Original Article

The Up-and-Coming Presence of India in Latin America


By Jaime Daremblum

The competition between China and India – the world’s largest dictatorship and the world’s largest democracy – will be a defining feature of 21st-century geopolitics. Because China opened its economy more than a decade before India did, the Middle Kingdom has a clear head start in the global battle for economic influence. Yet the South Asian giant is rapidly gaining ground on its northern neighbor, and over the long term its democratic system seems far more stable than the autocratic Chinese model. When assessing U.S. grand strategy in Asia, American policymakers view India as an important counterweight to China. Closer to home, India may also serve to balance Chinese economic clout in Latin America.

“China’s rise in bilateral trade with Latin America is the greatest of any region in the world – an astonishing 18-fold increase over the past decade,” Agence France-Presse reports. Chinese commodity demand has greatly boosted GDP growth in Argentina, Brazil, Chile, Peru, and other resource-rich countries, thereby lifting millions out of poverty. These economic benefits are worth celebrating. Yet Beijing’s burgeoning hemispheric footprint has prompted security concerns in Washington, since Chinese military and political ambitions remain so murky. Moreover, China is helping to prop up the Hugo Chávez regime in Venezuela, and it is also expanding cooperation with Chávez acolytes in Bolivia and Ecuador while strengthening ties with the Castro government.

Whereas Beijing’s newfound interest in the Western Hemisphere has understandably raised some eyebrows, India’s growing activity is unambiguously good for both Latin America and the United States. In a recent issue of Americas Quarterly, political scientist Jorge Heine and Indian diplomat R. Viswanathan observe that trade between India and the Latin America/Caribbean (LAC) region increased eightfold between 2000 and 2009, reaching about $20 billion. To be sure, that figure is dwarfed by overall Chinese trade with the LAC region, which totaled roughly $140 billion in 2008 (according to the Latin Business Chronicle).

But as The Economist noted a few years ago, Indian companies “have begun to make significant investments in software, pharmaceuticals, business software and natural resources.” (By contrast, Chinese investment in Latin America “has hitherto amounted to less than meets the eye.”) Since 2000, write Heine and Viswanathan, Indian companies have poured $12 billion worth of investment into six key LAC economic sectors: agrochemicals, energy, information technology (IT), manufacturing, mining, and pharmaceuticals. Indeed, many Indian firms have established a big presence in the region, including ONGC Videsh (an oil giant), Tata Consultancy Services (an IT powerhouse), and United Phosphorus (a massive agrochemical company).

Indian investment is helping Latin America to diversify its sources of economic growth, making the region relatively less dependent on commodity exports. But what about low-wage Indian manufacturing? Doesn’t it pose a competitive challenge to Latin America, where manufacturing wages are higher? To a certain degree, yes. Broadly speaking, however, “Indian exports to the region are not a threat to Latin American industries,” as Heine and Viswanathan stress. “Over half of them consist of raw materials and intermediate goods such as bulk drugs, yarn, fabrics, and parts for machinery and equipment, which can help Latin American industries cut production costs and become globally competitive.”

In a 2010 study (“India: Latin America’s Next Big Thing?”), Inter-American Development Bank economist Mauricio Mesquita Moreira concluded that, while “the fundamentals exist for a strong trade relationship between the two regions,” economic cooperation is being hampered by tariffs and other trade barriers. The hope is that incremental progress on trade expansion will discourage protectionist policies. “More trade is likely to strengthen the virtuous circle in which trade boosts incentives for cooperation while cooperation creates even more opportunities to trade,” explains Moreira.

The recent growth of trade and investment ties between India and Latin America has encouraged warmer diplomatic relations. By 2009, note Heine and Viswanathan, LAC countries had 18 diplomatic missions in New Delhi, and India had 14 missions in the LAC region, up from twelve and seven, respectively, in 2002. The single most important bilateral relationship is that between India and Brazil, Latin America’s largest economy and most populous country. In 2003, the two nations joined with South Africa to sign the Brasília Declaration, which launched the India-Brazil-South Africa Dialogue Forum, or IBSA. The goal of this trilateral mechanism is to promote greater three-way cooperation on issues such as trade, investment, education, poverty reduction, and the environment. “Brazil has what India lacks: a large and fertile land mass with abundant water that can significantly increase the production of food – something India will always need, be it soybean oil, legumes or sugar,” write Heine and Viswanathan.

As Indo-Brazilian economic links continue expanding, we can expect the two governments to pursue closer collaboration on non-economic matters, including military affairs. This will unnerve the Communist rulers in Beijing, who fashion themselves the undisputed leaders of the developing world and fear the rise of India. Washington won’t always agree with New Delhi’s foreign-policy decisions, but it should welcome a robust Indian presence in Latin America. After all, on the biggest economic and strategic issues of the day, India and the United States are natural allies.

Original Article

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