Ten Points on Global Macroeconomic Pressures

by: David Merkel, CFA

Back after a hiatus of sorts.  I should have a piece on my portfolio reshaping coming on Monday or so.  Tentatively, what I find fascinating, is that I have so many shoe and retail names near the top of my list.  Oh, and a few mortgage REITs, if they make sense… :(

But on with this morning’s topic, which deals with global macroeconomic pressures.  A few of the articles are a month dated, most are current, but this is meant to illustrate the pressures that the economy is under.

  1. Let’s start with the good news, ECRI still doesn’t see a recession on the horizon.  They’re pretty accurate, so I give them room, and mute my own views.
  2. That doesn’t mean there aren’t significant pockets of weakness.  Mortgage equity withdrawal is a spent factor, so to speak, and it ripples through current consumption and housing price weakness.  The less equity available, the less to pad consumption, and the less buying power for homes.  Credit card default rates are worsening, which can’t be good for buying power either.  On the low end of the income spectrum, many Hispanic workers are finding it hard, and that affects Wal-Mart, among other retailers on the low end.  That said, I have read that the Hispanic immigrants are much less likely to default on their mortgage loans than non-immigrants with similar credit characteristics.
  3. CLSA predicts a record gold run, and so far, gold is cooperating.  That said, it will take a lot more to get gold to $3400/ounce.  We would need a real dollar collapse, and not this slow grinding selloff.  That said, the grinding selloffs tend to persist; more on that later in this post.
  4. Of course, we could look at the price of wheat, or even just the price of stuff.  If it deals with food or energy, two items that are core to almost everyone’s budget, prices are rising.  John Wasik repeats a number of my arguments for why core CPI does not represent the diminution of the average person’s buying power.  I’m honestly surprised that no one has made a campaign issue out of honesty in inflation statistics so far.  It helped Reagan versus Carter in 1980.
  5. That said, maybe we should be grateful that fuel grade ethanol is in surplus, at least temporarily, because we can’t distribute it to the end consumers efficiently.  Maybe not.  It’s no good for price to go down, if it only indicates lack of effective end-demand.
  6. Oil at $90/barrel?  It’s partly a US dollar phenomenon (new trade-weighted low today), but not just a US dollar phenomenon.  In Euros, as I measure it, it’s a new high there as well, just not by much.   Now, when a critical commodity becomes scarce, it tends to attract wars, kidnapping, sabotage, etc., because bargaining power goes up as the price of the commodity goes up.  (Think of “blood diamonds” for another example…)  So we see pipeline sabotage, graspy politicians wanting a bigger cut of the royalties (no, not Chavez this time), and tensions between the Turks and the Kurds.  This leaves aside issues in Nigeria, and other aspects of supply disruption.
  7. Now if that’s not enough, Western oil companies, which are often shut out of places where goverment monopoly oil companies tread, are finding less oil, and find that they have to buy back stock because of a limited number of places to invest in new fields.  Now, perhaps OPEC has the same problem, but it manifests differently.  They’re making a lot of money also, and don’t want to plow it into too many new projects, for fear of killing the price.  So what do they do with the free cash flow?  Their governments buy US Treasuries and other US debt claims, closing the money loop and financing the US current account deficit.
  8. Well, maybe not entirely, though.  We had a glitch in capital flows in August, and foreigners sold more US securities than they bought by a significant margin.  Can’t help but think that it led to more pressure on the US dollar.  That said, the books have to balance: foreign capital inflows must balance the current account deficit over the intermediate term.  That doesn’t mean that they have to balance at the same price, though, just that the nominal values must balance at some implied exchange rate.  On the other hand, some nations are adjusting their currency baskets, like Vietnam and Qatar to reflect the lower value of the US dollar.  Quite a statement about their relative faith in their own currencies versus the US dollar.
  9. The US has not had a strong dollar policy for some time, despite protests to the contrary.  We are happier to see export industries prosper, US tourism prosper, and consumer buying power from abroad suffer.  My question is when we will see foreign governments notably uncomfortable.  We’re not there yet, which makes me think that the path for the US dollar is lower still.
  10. One final factor that doesn’t help: the size of the US budget deficit on an accrual basis.  Much larger than the stated deficit because of extra inflows to social security, and debt that doesn’t get counted because other government programs buy it to fund future liabilities.  Add onto that the wars which largely off-budget, and you have a significant present and future cash flow hole to cover.  Here’s to our children and grandchildren, who will have to pay it one way or another.