The IMF’s new forecast for the world economy calls for 4.8% growth for all of 2010, or slightly higher from the July prediction. The outlook for the U.S. economy, however, was revised down for this year: 2.6% vs. the summer forecast of 3.3%.
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IS RECESSION RISK FADING?
The first batch of September’s economic reports are out and they suggest that the economy continued expanding last month. The ISM manufacturing and services indices (released on Friday and yesterday, respectively) show an economy that’s still growing. It’s a mistake to read too much into these numbers, given the challenges that still confront the U.S. There are also several weeks of September reports to digest in the month ahead. But the early signs from the ISM benchmarks, at least, offer support for cautious optimism.
READING ROUNDUP FOR TUESDAY: 10.5.2010
►IIF warns of a dollar collapse, and rising capital flows to emerging markets
Euro Intelligence
“The Washington-based Institute for International Finance has warned of a crash in the dollar as a result of the Federal Reserve’s expected policy of further monetary stimulus, according to Frankfurter Allgemeine. In a report, the IIF calls on the Fed to pursue a monetary policy that supports foreign demand for US goods. Otherwise there is a threat of a significant spike in capital flows to emerging markets, which would rekindle global imbalances and financial instability. The managing director of the IIF is quoted as saying that market participants have to be persuade that the large economies comprehend their collective responsibility to achieve balanced and sustainable growth. The IIF also published its forecast for net capital flows into emerging markets, raising its previous 2010 estimate of $709bn to $825bn.”
►Yield Hunt Leads to Currency Debt
Alex Frangos and Mark Gongloff/Wall Street Journal
“The global rush for yield is driving investors to buy emerging-market debt issued in local currency, adding foreign-exchange fluctuations to the list of risks bondholders face.”
BUBBLES, REBALANCING & THE AVERAGE INVESTOR
Jason Zweig at The Wall Street Journal warns that the bond market is in a bubble. He may be right. Or not. It’s always hard to tell when bubbles are lurking. That doesn’t mean we shouldn’t try, but we need to be wary of going off the deep end too.
READING ROUNDUP FOR MONDAY: 10.4.2010
►Cheap Debt for Corporations Fails to Spur Economy
Graham Bowley/New York Times
“American corporations have been saving more money since the financial collapse of 2008. But a recent rush of blue-chip bond offerings — including a $4.75 billion deal last month by Microsoft, one of the richest companies in the world — has put even more money in their coffers.
Corporations now sit atop a combined $1.6 trillion of cash, a figure equal to slightly more than 6 percent of their total assets. In the first quarter of this year it was 6.2 percent of assets, the highest level since 1964, when it was 6.4 percent.
When will they start spending that money — in particular, by hiring?
That is part of what has become the great question of this long, jobless recovery: When will corporate America start to feel confident enough to put its cash to work, building factories and putting some of the nation’s 14.9 million unemployed to work?”
BOOK BITS FOR SATURDAY: 10.2.2010
● The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World
By Eric J. Weiner
Review via New York Times Book Review
“The ‘shadow market’ Weiner refers to — not to be confused with the ‘shadow banking system,’ which was largely blamed for the collapse of our economy — is ‘the invisible and ever-shifting global nexus where money mixes with geopolitical power,’ a vague and ominous allusion to sovereign wealth funds, hedge funds and private equity funds. Weiner argues that these huge pools of unregulated capital have come to dominate the world financial system, largely without our noticing it, and that as a result the United States has lost much of its economic influence. While he discusses the investment arms of the governments of Qatar, Singapore, Abu Dhabi and Saudi Arabia, the book could have been subtitled ‘How China Cooked America in Soy Sauce and Ate It for Dinner,’ since China is Weiner’s most intimidating example. According to his worldview, our friendly adversary in the Far East has the United States in a headlock, and we should all be stockpiling potato seeds and scrambling to learn Mandarin.”
SPENDING & INCOME RISE IN AUGUST, SUGGESTING LOWER RECESSION RISK
Today’s spending and income report for August is no silver bullet, but it suggests that the risks of recession and deflation have fallen for the immediate future. The economy, in other words, appears stronger than it appeared over the summer.
GUESSTIMATING FUTURE INFLATION
The Federal Reserve has been trying to juice inflation higher for some time, and it appears that it’s had slight if precarious success over the past month. The market, at least, is pricing in slightly higher inflation for the decade ahead, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries. As of yesterday, this inflation forecast was 1.78%, up a bit from 1.52% at the close of August, when worries of deflation were raging.
RETHINKING A DOLLAR-HEAVY ASSET ALLOCATION
“Like it or not, significant dollar depreciation is more probable than most now suppose,” writes Simon Johnson, a professor at MIT’s Sloan School of Management, in a Bloomberg column today. The market seems to be discounting no less. Certainly the gold market is roaring higher in part because the odds that the dollar will fall in the months (years?) ahead look quite a bit better than even.
READING ROUNDUP FOR WEDNESDAY: 9.29.2010
►Cultivating the Chinese Consumer
Stephen Roach/NY Times
“On Wednesday, the House of Representatives is set to pass legislation that would allow trade sanctions to be imposed on China as compensation for its supposedly undervalued currency…The currency fix won’t work. At best, it is a circuitous solution that would address only one of the many pressures shaping the imbalances between our two nations; at worst, it would lead to a trade war, or risk jeopardizing China’s understandable focus on financial and economic stability.”
►Gold hits all time high, eyes on Fed’s next move
Lewa Pardomuan/Reuters
“Gold hit a lifetime high on Wednesday, its 10th record in 12 sessions, as the dollar dropped against a basket of currencies on expectations the Federal Reserve would take new measures to shore up the economy.”