Mobius: No global recession on the cards

Franklin Templeton’s Mark Mobius sees central bank balance sheet expansion as saving the global economy from recession in 2013.

http://youtu.be/4f3Rl6aBQmc

China is now heading toward Japan-style economic paralysis if it doesnt change course | Quartz

Jack Rodman, president of Global Distressed Solutions LLC, spent 1999 to 2011 living in Japan and China, packaging and disposing of nonperforming loans and distressed assets. He writes on the problems facing China:

At the end of 1989, Japan’s bubble economy burst and its economic miracle came to an abrupt end. The Nikkei exchange fell from nearly 40,000 to its current 10,000 range. Over the course of 20 years, what appeared to be “unstoppable” economic growth proved to be anything but.

Today, China, in some ways, appears to be closer to following Japan than to sustaining its own economic miracle. China’s Shanghai Index (stocks) has fallen from a high of 7,000 in 2007 to a low of 2,000 for the past few years, and Chinese domestic investors have little confidence in their domestic stock market. The Japanese bubble, and its aftermath, was the result of a series of domestic financial and economic imbalances, many of which China faces today—to varying if not greater degrees….

Read more at China is now heading toward Japan-style economic paralysis if it doesnt change course – Quartz.

Insight: Making France work again | Reuters

Marc John identifies the challenges facing France and how it can recover its lost vigor.

In just over 30 years after World War Two, France lifted itself from the ignominy of Nazi occupation into a sleek and modern Group of Seven economy with world-beating industrial champions in sectors such as energy and aerospace.

Its welfare system is among the most generous in the world. A road and rail transport network means its companies are within hours of tens of millions of potential customers. It is a leader in luxury goods and is the world’s top tourist destination.

But somehow that Gallic vigour is being lost.

Unemployment is at 14-year highs as plant closures mount, France’s share of export markets is declining, and the fact that no government in three decades has managed a budget surplus has created a public debt pile almost as big as national output.

After three decades of uninterrupted post-WWII boom — often described as the “Glorious 30” — the French government lost its way.

By 1980, French economic growth had shrunk to two percent compared to its pre-oil crisis rate of above six percent – a rate which France and most rich states have not seen since.

In the years that followed, governments around the world reacted in their fashion: Britain’s Margaret Thatcher faced down Britain’s unions in a drive to free up labor markets, while Scandinavian leaders sought to free their economies of debt.

In France, governments of left and right chose entrenchment: strong rises in public spending which helped ease the social and employment shocks but which sent national debt soaring from 20 percent of output in 1980 to its current record of 91 percent.

The next three decades are sometimes called the “Pitiful 30”.

Influence exerted by interest groups — or “insiders” — prevented government reform of the labor market, making France increasingly uncompetitive in the face of global competition. This is the same problem that Mancur Olson identified in Great Britain after WWII — when Britain floundered while Germany and Japan flourished. Narrow interest groups maximize their own welfare at the expense of the broader economy.

France faces massive challenges in overhauling — possibly “dismantling” — its welfare state and restoring international competitiveness. Responsibility has fallen to the unlikely figure of socialist President Francois Hollande.

Read the entire article at Insight: Making France work again | Reuters.

Most Accurate Forecaster Sees Lethargic U.S. Expansion | Bloomberg

Michelle Jamrisko at Bloomberg writes:

What [Joshua] Shapiro saw two years ago, and other economists didn’t, is that the healing this time would be slower. He and his firm [NY-based forecasting firm Maria Fiorini Ramirez Inc.] have been among the more pessimistic forecasters of a U.S. recovery, citing data that show slow growth and relatively high joblessness persisting through 2013. Shapiro predicts the U.S. economy will grow next year by about 1.5 percent.

Shapiro sees monetary policy, with the Federal Reserve benchmark interest rate at almost zero, as having a limited near-term impact on growth. And he considers the $1 trillion U.S. fiscal deficit an important drag on future expansion.

The uncertain environment should ensure the private sector remains focused on paying down debt rather than expanding investment. And that will ensure that fiscal deficits continue for the foreseeable future. What we need to take into account is how those deficits are funded. If funded by offshore investment from China and Japan, the US manufacturing sector will continue to suffer from an artificially high exchange rate. More likely is Fed funding of the deficit through QE purchases of Treasuries and MBS. That injects new money into the economy, some of which will end up in the stock market. Rising stocks, out-stripping lagging earnings, would take valuations into over-bought territory. Over-valued stocks increase uncertainty, prompting the private sector to repay more debt…… As Yogi Berra said: “It’s like deja vu all over again”.

Read more at Most Accurate Forecaster Sees Lethargic U.S. Expansion | Bloomberg.

Mancur Olson | The Economist

Mancur Olson’s 1998 obituary from The Economist sums up his beliefs as to why Germany and Japan made such startling recoveries after WWII while Britain, one of the victors, floundered.

The conclusion was striking. Narrow, self-serving groups had an inherent, though not insuperable, advantage over broad ones that worry about the well-being of society as a whole. How might that insight explain the fate of nations? In 1982, in “The Rise and Decline of Nations”, [Mancur Olson] offered an answer.

In any human society, he said, parochial cartels and lobbies tend to accumulate over time, until they begin to sap a country’s economic vitality. A war or some other catastrophe sweeps away the choking undergrowth of pressure groups. This had happened in Germany and Japan, but not in Britain, which, although physically damaged in the war, had retained many of its old institutions. Surely there was some less cataclysmic route to renewal? Yes, said Mr Olson, a nation’s people could beat back the armies of parochialism, but only if the danger were recognised and reforms embraced.

Read more at Mancur Olson | The Economist.

Lakshman Achuthan's US recession call

Sam Ro of Business Insider quotes ECRI:

So, with about a month to go before year-end, what do the hard data tell us about where we are in the business cycle? Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators – the broad measures of production, income, employment and sales – saw their high points in July….. with only employment still rising.

See chart at Lakshman Achuthan's Tell-Tale Chart | Business Insider.

Economy Adds 146,000 Jobs | WSJ.com

Neil Shah at WSJ writes:

America’s employers added jobs at a slow pace in November, easing fears that uncertainty about U.S. budget policies would stifle hiring, but fueling concerns about the robustness of the economic recovery.

The Labor Department’s latest snapshot of the job market said employers added 146,000 jobs last month. That is an improvement from the previous two months, but below the average job growth per month of about 150,000 over the past two years.

via Economy Adds 146,000 Jobs | WSJ.com.

Reid: Eurozone's 2013 Nightmare Scenario | Business Insider

In his 2013 outlook, titled In Authorities We (have to) Trust, Deutsche Bank credit strategist Jim Reid warns that Europe is headed for tough times in 2013.

Matthew Boesler at BusinessInsider writes:

Reid highlights three major issues.

To start, European stocks – and stocks in markets around the world, for that matter – are considerably overvalued based on historical correlations to PMI data….

The second problem is austerity. Most accept that austerity measures weigh on economic growth in the short term, yet euro-area governments are moving forward with plans attempting to bring fiscal budgets back into balance anyway.

…. the third problem: namely, that governments have consistently set economic forecasts too high and then failed to meet their own targets.

Read more here Reid: Eurozone’s 2013 Nightmare Scenario | Business Insider.

Jack Kemp Showed GOP How to Appeal to Minorities

Bruce Bartlett writes that late senator Jack Kemp is a role model for how Republicans should engage with minorities:

Although Kemp pushed for a cut in tax rates for the wealthy, he was adamant that all workers must share in the benefits of lower taxes. He also focused heavily on the idea that saving, investment, technological advancement and capital formation were the essential goals of economic and tax policy, because they raised productivity, which would raise the wages of workers. Today, Republicans just blithely assume that tax cuts for the wealthy will automatically help the economy without ever explaining how or why.

The key to a thriving capitalist system is a successful partnership between capitalists and labor. Capitalists benefited hugely over the last half-century from jobs the private sector created — and from rising wage levels — through growing consumption. Without consumption they would fail. Workers on the other side of the bargain have also benefited from job creation and rising wage levels. Without them they would suffer unemployment and genuine hardship. Neither side can afford to focus on their own needs without recognizing the importance of the other’s.

Mancur Olson argued that specialized unions with narrow membership will attempt to optimize benefits to their members, be it airline pilots or sanitation workers, even if this achieves a sub-optimal outcome for the economy as a whole. In other words, they will advance their own interests at the expense of others. But he also argued that broad-based unions will not, recognizing that they cannot advance their own members’ interests if the economy as a whole suffers.

I believe the same applies to capitalists. Monopolies or cartels who attempt to maximize their own profits will damage the economy, while broader-based groups will recognize that they can only maximize profits by advancing the economy as a whole — creating new jobs and lifting wage levels.

You also cannot focus solely on lifting wage levels — as Herbert Hoover attempted in the early 1930s — in the hope that this will support the broader economy. Higher wages will slow job creation and retard the recovery. The focus has to be on maximizing the total wage bill — and consumption. At times, during a recession, this requires lower wages and more jobs. But as the economy approaches full employment, wages will rise while job creation slows.

Exporting jobs offshore may serve the narrow interests of some manufacturers but is ultimately not in their long-term interest. They may gain from cheaper labor costs but they are also exporting consumption, which will directly or indirectly hurt sales.

That Kemp was an extraordinary man is also borne out by his views on immigrants, emphasizing integration rather than exclusion:

I also know that Kemp had a far different attitude toward immigrants than virtually all Republicans today. He welcomed them, seeing immigration as one of the economy’s lifebloods. He would be extremely critical of efforts to demagogue Latino immigrants who come here, legally or illegally, just looking to earn an honest living and enjoy the American way of life.

Read more here: Jack Kemp Showed GOP How to Appeal to Minorities | The Fiscal Times.

China regulator frets over confidence crisis after investment product fails | Reuters

Hongmei Zhao and Lucy Hornby report:

Investors rushed to [Hua Xia Bank Co Ltd]’s Jiading branch in a suburb of Shanghai after one of four wealth management products issued by the Zhongding Wealth Investment Center failed to pay out as scheduled on November 26.

via China regulator frets over confidence crisis after investment product fails | Reuters.