Category Archives: World News

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Is a High-Pressure Economy in the U.S.’s Future?

On Friday Federal Reserve President Janet Yellen told a conference of policymakers that a ‘high-pressure’ economy may be necessary to undo the damage caused by the 2008-2009 financial crisis that caused decreased output and decreased employment opportunities. Yellen’s comments caused swift reactions in the markets, with U.S. Treasury prices falling sharply and yields shooting higher for the third consecutive week. Analysts began to speculate that such high pressure policies could pose the risk of higher inflation even while improving the economy by creating more jobs and boosting consumption.

In conjunction with Yellen’s comments on Friday, stronger-than-expected U.S. economic data was released, with retail sales showing a rise of 0.6 percent in September, the strongest gain in four months. Producer prices also showed a rise better than expected on Friday, with a rise of 0.3 percent instead of the anticipated 0.2 percent increase. Following these reports, analysts remain largely hawkish for a December rate hike. The U.S. dollar index closed at six-month highs on Friday, closing at 99.997, fueled by Yellen’s comments and the data reports.

Despite the barrage of U.S. data out last week, traders are looking towards other currencies and reports in the coming week, including China’s Q3 GDP number, U.K. employment reports and the RBA minutes. The upcoming ECB meeting will also keep eyes glued to the euro, which has recently hit lows of 1.10 against the greenback. Personally, I’ll be happy to look away from the U.S. for a minute, both from the election drama and the ongoing rate hike saga. What are you looking towards next month?

Detroit’s Bankruptcy – the Madness and the Message

Detroit, the fourth largest city in America, filed for the largest municipal bankruptcy in U.S. history on Thursday after steep population
and tax base declines sent it tumbling toward insolvency. The filing means that if the bankruptcy filing is approved, city assets could be liquidated to satisfy demands for payment.

By filing for Chapter 9 on July 18th, Detroit sought protection from all its creditors, including pensioners and government employees. Change will not be felt for at least the next six months. But Kevin Orr, the emergency manager appointed by the Governor of Michigan, Rick Snyder, says future and present retirees will definitely see cuts to the unfunded portions of their pensions. Their health-care benefits are also likely to be squeezed.

Detroit’s Debt

Detroit’s long-term debts are estimated at $18.2 billion. Of this, about $9.2 billion is in unfunded retirement benefits. Since 2008, the city has spent around $100m more each year than it has brought in. Recent attempts to fix its finances have been thwarted by a feeble economy, a shrinking population and rapidly increasing legacy costs. Property-tax revenues have declined by 20% since 2008, and income tax by 30% since 2002.

Photo courtesy: NY Daily News

The city’s fiscal crisis has been simmering for decades. Fifty years ago, GM, Ford and Chrysler assembled nearly all the cars sold in America, making Detroit a very rich city. At that time, Detroit was home to 1.8m people. Today only 700,000 remain, many of which are indigent and poorly educated—82% have no more than a high-school diploma. The city sprawls over an unmanageable 140 square miles (larger than Boston, San Francisco and Manhattan, together) and necessary services to barely-populated neighborhoods are difficult even if the city government were well-run, which it is not.

Automakers not to Blame

Though many analysts blame the deterioration of Detroit’s ‘Big Three’ auto makers for the city’s decline, others disagree. The car manufacturers have indeed struggled over the years with foreign car competition. However, the truth is that the auto industry which is now posting strong domestic profits as demand for local cars rises has not been very connected financially to the city proper and its operations for decades.

According to Jennifer Bradley of the Brookings Institution, one of the largest think-tanks in the nation, the main problem is that the leaders of Motown have run up debts that a shrinking population could simply never pay off. Those debts forced the city to raise taxes and cut services. Detroit lost a lot of its appeal and much of the population left for the loftier suburbs.  Only 30% of the jobs within the city are held by residents, and 61% of Detroiters who work do so outside the city.

Optimistic Business Leaders

Many business leaders, as well as Governor Snyder are optimistic that the bankruptcy will mark the end of Detroit’s decline. For the moment, police, fire, water and sewerage will be unaffected by the filing. A recent deal with Bank of America, a secured creditor, has also released casino revenues of $11m a month, to keep the city running.

In fact, the future of the city is contingent on the deal Mr. Orr can cut. Orr argues that, if the city is to recover, it must invest $1.25 billion in restoring services such as the police and firefighters, remedying urban blight and modernizing the city’s rundown IT systems. Neither the state nor the federal government has offered a bailout. Mr. Orr says Detroit must solve its own problems.

Despite the challenges, Orr promises that improved services are what the city needs to turn around the bankruptcy. Detroit’s debts have been put while Orr does battle with major banks and bondholders, city unions and pension and retiree groups to drastically cut Detroit’s debts and pension and health care liabilities in bankruptcy proceedings that could take years to conclude.

Orr’s team is also focusing on restructuring how the city operates, cutting down where needed and investing in public services. In what Orr noted one significant example of improvements he has already implemented. The Detroit Police Department will soon get 50 new squad cars, replacement bulletproof vests and two new devices Motor City cops have never had: electric stun guns and on-body video cameras.

Despite the hardships caused by this bankruptcy, with strong management and initiative, Detroit should be able to weather this storm and come out stronger and with clearer visions.

A Strong Message for Struggling Economies

Orr’s team is also focusing on restructuring how the city operates, cutting down where needed and investing in public services. In what Orr noted one significant example of improvements he has already implemented. The Detroit Police Department will soon get 50 new squad cars, replacement bulletproof vests and two new devices Motor City cops have never had: electric stun guns and on-body video cameras.
Despite the hardships caused by this bankruptcy, with strong management and initiative, Detroit should be able to weather this storm and come out stronger and with clearer visions. This process can stand as an example for several European cities that are floundering under heavy debts and urban blight.  For starters, Orr’s commitment to soldiering on without assistance is a noble trait that should not go unnoticed.  Though a floundering city isn’t as tenuous as a struggling country, such strength of character is commendable, and in an era where Eurozone leaders are whining and begging for bailouts, this determination should serve as an example for others.

Moreover, the lack of bailout possibilities for Detroit may actually put the city at an advantage over its struggling European counterparts, as Orr will not be required to answer to any higher powers – he will have much more freedom to lead the city to a new era without political infighting and bureaucratic delays.

There’s no question that Detroit has a long road ahead (so does the Eurozone).  But when faced with the worse of two evils, Orr’s way definitely seems a bit more promising.

 

When Religion and Economics Don’t Mix

The head of the world’s nearly 1.2 billion Catholics, Pope Benedict XVI, said that he would be leaving his position at the end of the month, citing failing health and an inability to perform his duties as the reasons for his resignation. Catholics worldwide were shocked; financial markets, not so much.

Though this is the first time in more than 600 years that a sitting pope has abdicated, there was no knee jerk market response to the papal announcement, a reaction typical of the past since popes usually died in office. The Euro moved up, then down, then up again and stock markets in Europe finished the day off higher. Ho hum.

Will there be any effect on the financial markets? It’s hard to say at this point, and could depend on how long conclave might last which might impact the decisions of a handful of die-hard Catholic investors. When the last announcement of a new pope was made, way back on April 19, 2005, Italy’s stock market tumbled 5.7%, while Germany’s DAX edged only a few points lower and the EUR/USD pair was trading at $1.2996, gaining only a few pips from the previous day’s $1.2967.

Where there might be a perhaps significant impact is on the upcoming Italian election for president and Parliamentary seats. Italy is the third largest economy in the Eurozone, and its economic health is important to the Eurozone as a whole. Any political negativity could greatly impact the Italian financial markets, sovereign bond yields and ultimately, the Euro.

It was no secret that the Pope, and indeed the whole of the Vatican, had been highly critical of Silvio Berlusconi’s shenanigans, and thus unlikely to be supportive of Berlusconi’s bid for reelection. A magazine article recently published by the Catholic Church said that Berlusconi, a “dinosaur,” put back in power could throw the country into chaos. The current Prime Minister, Mario Monti, who has consulted with the pope on numerous occasions to discuss the Italian economy, has had, if not an outright endorsement of his party, as close to it as one might get from the pontiff. With the Italian election only two weeks away, and a few days prior to the pope’s departure on February 28th one must wonder if the political dynamics in Italy might be on the verge of a major change.

 

The Syrian Question and World Forex Markets

The world seems to have grown tired of intervening in the Middle East as the slaughter of civilians in Syria (some 8,000 dead since the start of unrest about a year ago) continues, and little if anything seems to be happening to prevent it. But is the situation in Syria different or similar than the situation in Libya under Qaddafi? And what does this mean for the Forex markets, if it means anything at all? These are things that any Forex trader should consider, even if he’s only trading popular currency pairs.

Syria vs. Libya

The first thing to realize is that unlike Libya, where Qadaffi had been trying to find a way to work with the West and had been gaining a modicum of respect, Syria was already largely isolated from the world. President Bush had labeled them as an extension of the so called “Axis of Evil” (while the Axis of Evil formally included Iran, Iraq and North Korea, Syria has always been seen as something of a client of the Iranian regime) and they had minimal ties with the West to begin.

Another thing to keep in mind regarding Syria is the country lacks much of the oil wealth which Iran and Libya have enjoyed, producing just 0.5% of the world’s crude, thus making them less important on the world stage. All of this means that it’s not as crucial for the West to intervene in Syria as it was to intervene in Libya and now in Iran.inflatable pool games

It may sound callous, but the fact is that as John Foster Dulles famously put it, ‘countries don’t have friends.’ They have interests. And when the interests of the West aren’t directly tied to Syria, there is more of the moral hand wringing and less of the direct intervention we saw when NATO forced the Qaddafi government to get out of Libya.

What This Means for Forex Markets

Now, while this all may mean that for now, there isn’t much of an impetus for NATO to get directly involved, it doesn’t mean that the aggression in Syria won’t affect the world markets. The unrest there is worrisome mostly because of the fear that it could spread to neighboring regimes where there are more Western interests. Thus, expect to see some movement on Forex markets if the fighting does begin to spill over into other Middle Eastern nations.

Saudi Arabia, though they don’t share a border with Syria is also a place which could see flare ups, especially if the Syrian people succeed in ousting their dictator. This might well move Saudis, who are also ruled by a minority, to rejoin the Arab Spring and work to overthrow their leaders. For now though, the long, drawn out and bloody battles in Libya and Syria seem to be have put the kibosh on these dreams, thus helping to lower the effects on the Forex markets.

Investment

The other area of concern is international investment and I think this is again not being affected so much by the Syrian regime as it is by the Iranians and their threats to close the Strait of Hormuz. If world oil prices have been climbing, it’s not because there is much concern about the 0.5% of world crude flowing from Syria.

Bottom Line

I don’t see Syria making much difference on the world stage as far as investing and Forex markets for the foreseeable future. On the other hand, if the regime decides to try a desperate gambit to stay in power, such as attacking Israel, this could lead to a regional flare up which could, in turn, lead to a dangerous spike in world Forex markets and put investments in the region in danger.

What do you think?

Will Qaddafi’s Death Affect World Markets?

Qaddafi and the Forex MarketColonel Qaddafi, branded the “mad dog of Libya” by former president Ronald Reagan, is dead. Defiant until the very end according to his aides, he kept up his delusions of returning to power and taking Libya back for his own family’s personal gain. And now that the fighting is done with, NATO is preparing to withdraw and the Libyans are busy planning their first free elections, the question that must be asked is this: how will this affect the rest of the world? Here’s what you need to know:

Why Libya Mattered to NATO

The first question to ask if we want to understand how this will affect the world’s economy is why Libya mattered to NATO to begin with. After all, Syrians are fighting a similar battle against their dictator, but to date the leaders of NATO seem to be mum on the subject except for a handful of watered down security council resolutions.

The official answer is that Libya’s revolution had gone further than the one in Syria, to the point of open civil war and that NATO forces were there on a humanitarian mission to protect civilians in the rebel areas. However, in back rooms it has also been whispered that the real reason for NATO involvement was that Libya has oil while Syria does not. This is important because of the fact that world oil prices had been trending upward in the wake of the revolt in that country and indeed in the wake of the Arab Spring.

Immediate Reaction: Prices Trend Downward

The immediate reaction to the news of Qaddafi’s demise in world oil markets was for prices to begin to fall. However, this was quickly corrected and prices came back up again within a day or two to over $100 a barrel. Forbes, in their coverage of the death of Qaddafi speculated that world oil markets had “rapidly discounted the effect of a return of 700,000 barrels of oil” to the market.

The thing is, Libya’s oil production was fairly minimal, even before the revolution, accounting for just 5% of OPEC output and 2% of overall world oil production. This means that realistically, even if Libya’s new government rapidly cranks up the pumps and gets back to pre-revolution numbers, it will have a fairly minimal affect on the world economy.

The Elephant in the Room: Saudi Arabia

To my mind however, the elephant in the room and the one that everyone has ignored in the wake of Qaddafi’s death is Saudi Arabia. The kingdom is the world’s second largest producer of crude oil (after Russia) and thus has a much greater influence on world markets than almost any other group. The reason I’m concerned about it is that on two days after Qaddafi was killed, the heir apparent to the Saudi throne died in New York.

Crown Prince Sultan bin Abdul-Aziz Al Saud was the next in line for the thrown and news reports say that his death is throwing the kingdom into a bit of a tizzy as calls for reform grow louder now that there is no clear chain of succession. In the wake of Qaddafi’s death, I imagine that such calls could grow even more stringent as revolutionaries looking for greater freedom are emboldened in the kingdom as well.

Back to Syria

All this is also to say nothing of Syria’s Bashar El Assad, who is seeing his control crumble and his people increasingly calling for him to join Qaddafi on the dead leader’s parade. However, in the case of Syria, because it shares a border with Israel, Assad, if he feels his government is imminent danger of collapse, may well decide to try to divert his people’s attention by provoking a war with that country, thus potentially sparking another Middle East conflagration, which could in turn further disrupt world oil markets.

Bottom Line

It’s still too early to make firm predictions about what Qaddafi’s death may mean for world oil markets, to say nothing of stocks and the Forex market (both of which are quite sensitive to oil price shocks). However, it is possible to say that predictions of sharp rises in the price of oil have both been given a boost and a reason to be deflated in the wake of the news. It all depends primarily on how the rest of the Middle East takes the news and whether the Arab Spring is galvanized by it, or crushed more ruthlessly than ever.

 

Is the UK Safely Distanced from the Eurozone’s Troubles?

As an island, the United Kingdom stands apart from the rest of Europe physically, and there’s no question that over the course of time, its leaders have struggled to maintain this distinction economically as well, opting not to embrace the common currency, and instead to maintain the almighty Pound, once thought to be among the strongest global currencies.

Repeatedly plagued with problems (and with no resolutions on the horizon), the Euro is now garnering much international attention, as analysts wonder where the currency is headed, or whether adopting a unified currency was perhaps one of the most grievous mistakes of our generation.  Proponents of the Pound have taken the Euro’s failings as a validation of the detachment between the UK and the rest of Europe.  But with such close ties between Britain and her neighbors, one can’t help but wonder if the UK can truly be immune to the crises plaguing the Eurozone.

Like any infectious disease that can spread globally in mere days, fears of economic crisis are highly contagious, and it would be naïve to think that such contagion would be limited to the Eurozone.  In fact, one could argue (as I am about to do), that the most natural place for such fears to expand first are to the areas surrounding the troubled region, making the UK a prime candidate to receive the debt crisis.

There’s no doubt that if the Euro continues to fail, it will erode demand for British goods, which will have a direct impact on the country’s economy.  Likewise, the proposed Financial Transaction Tax which would impose fees on all financial transactions in Europe would increase costs for banking in the UK (as well as the rest of Europe), which would likely cause businesses to shift their banking to areas outside of the UK.

With global stock markets taking a significant hit in Q3, it’s no surprise that Fitch ratings agency has downgraded all of its projections for the coming quarter.    In the Eurozone specifically, forecasts now show near-zero quarterly growth expectations, a prediction will likely have a direct impact on the UK as well.

Although only time will tell exactly how deeply the UK economy will be affected by European debt crisis, I think it’s safe to say that there’s no way the Pound will be entirely immune from troubles, and anyone trading the GBP should keep a close eye on the trends in the weeks ahead.

 

World Bank Chief Criticizes the World

Despite the show of support from France and Germany, Greece is still the center of a great deal of speculation over its potential debt default and continued membership in the eurozone. Undoubtedly, some difficult decisions lie in store for the country at the core of the sovereign debt crisis in Europe. World Bank chief Robert Zoellick has criticized the situation as a new economic danger zone. Speaking at George Washington University, he said, “Unless Europe, Japan, and the United States can also face up to responsibilities they will drag down not only themselves, but the global economy.” He also pointed out ironically that these were the same entities that had lectured China about responsibility as a global stakeholder only to find themselves in need of taking their own medicine.

The sharp message comes as a necessary reminder to developed nations to avoid complacency in the middle of a crisis. It may even seem to some that the crisis has reached its current level and been dragged on for so long mostly due to everyone in charge passing the buck. Where European countries are unable to agree on common roles and responsibilities, Japan has procrastinated with necessary economic and social reforms, and the United States remains locked in a power struggle between opposing political parties to delay cutting the deficit.

Referring specifically to these three, Zoellick noted “They have procrastinated for too long on taking the difficult decisions, narrowing what choices are now left to a painful few.” However, the future need not be a bleak one if the leaders of these nations can pull together and get the job done. Zoellick proposes adapting the concept of foreign aid to the creation of packages that provide targeted assistance in the growth and development of third world countries and the adoption of mutually beneficial trade policies rather than simply huge chunks of free handouts. Zoellick also champions the role of women in the future, acknowledging that half the world’s population could not reach their full potential if gender inequality prevails. These are just two valid ways in which deficits can be minimized and resources can be maximized. It remains to be seen whether the world’s superpowers are paying attention or will heed Zoellick’s warning that “with power comes responsibility.”