USA Funding Growth Worldwide

The highlight of this weekly review has to be the Fed’s announcement of QE2.  This was discussed in detail during the week but additional aspects will be looked at here.

QE2 Revisited

The goal of all business and investors is to make money.  Each has a different risk appetite so the way money is invested is different.  However, there is one goal is common – make money.

A little over a year ago, I was attending a conference in Singapore for investing in the Asian ETF market.  For those who are unaware, depending on the equities exchange you use – the ETF offerings are different and unique.  Only a few of the major ETF’s (such as GLD) has a global footprint.

What struck me was the presence of investment managers for retirement funds from USA city governments and unions attending this conference.  Obviously making money was more important than being nationalistic and investing in the good ‘ole USA.  Do not think that it is only business not investing in America.

However, my point is that investment and business money gravitates towards maximizing profits.  In a global economy, money is free to move to a place where profits can be maximized.  Right now that place is NOT the USA.

When the USA makes it policy to have low interest rates to spur growth, the resulting growth cannot be confined within the national borders.  In fact.  The world has a lot of money available for investing.  What differentiates between the currencies is the expected return on your invested money.  With mediocre world growth, a lot of money is chasing fewer and fewer good opportunities. 

Availability of money for financing growth cannot create growth by itself, but only hinders growth if too little is available.  Availabilty of money (credit) is a necessary but not a sufficient condition for growth.

So when QE2 was kicked off by the Federal Reserve this past week to drive longer term interest rates lower, I was hard pressed to identify any major upside.  The Fed specifically targeted treasuries over 1 year and less than 10 signaling low interest policy for the long haul.  The government continues to flood the market with too much debt, and in the wacky world of finance, would have inevitably driven USA debt instruments (treasuries) much lower (over-supply should suppress prices) and interest rates higher as the flood of USA government debt grows.  A rise in treasure yields would not only put the government under pressure, but adds headwinds to any recovery.

However, I referred to the wacky world of finance because Treasuries have not plummetted in price in the face of increased supply but have had a rather muted response.  The 10-year Treasury yield has risen by a mere 17 basis points from its low four weeks ago and is actually down 1 bp over the past two weeks and down 4 bp over the past two months.  See the  U.S. Treasury Interest Rate History.

Other pundits can argue whether the Fed had a choice in launching QE2 – if they did it was like Sophie’s choice.  The Fed does not control the USA budget / debt, the USA laws and regulations, taxation, or trade treaties.  These elements are most of the problem.

I was trying to grasp the beneficiaries of this QE2, and could only think of the USA equities market and forex / commodity traders.  The belief by many is that the dollar will weaken, and companies with a global footprint will have significantly higher international profit growth (as expressed in USA dollars).

Of course, this line of thinking requires the fundamental belief that other currencies and governments will stand stand idly by while their currency strengthens and their perceived competitive advantage is whittled away.  It is much more likely a currency / economic war will follow than foreign countries remaining passive to USA’s quantitative easing.

It is fairly easy to identify who will suffer with the current Fed policy:

– the old who lived on social security, bond yields and the income from their CD’s (CD yields are now so low they will barely purchase a six pack of beer); and,

– the underfunded pension funds who are now denied any low risk fixed income opportunities.

So the burden of this low interest rate policy is being carried by the old (retired) and the boomers (near retired).  Our old fashioned retirement income schemes are in the toilet.   In theory, it is beneficial to the alphabet soup of generations which follow  as they have access to cheap money.  If this were only true…….

The boomers will likely avoid retirement as many will not have the funds to live.  As jobs growth is well below population growth – this means jobs will be available only through “dead man’s shoes”.  Low interest rate policies are employment NEGATIVE in the current environment.

With many commodities and products denominated in dollars, it is not difficult to see that dollar leakage spurs growth everywhere.  Businesses have dollar accounts in their local banks around the world.  Interest rates in these accounts are based on the USA prime rate.  Business can go to their bank and borrow in dollars with little risk if they believe the dollar will weaken.  No advanced economy has a currency where the government can contain monetary policy within that country’s borders.

With the Fed advertising a long term low interest policy combined with a dollar weakening – they have all but sealed carry trade of dollars (dollars borrowed and converted to another currency for ultimate use).  Carry trade works best when the carry trade currency weakens so you can pay back the loan with devalued dollars.  Hell, you can even profit by borrowing under this circumstance.

My conclusion is that monetary policy only has positive effects in your country if there are good investment opportunities available IN YOUR COUNTRY.  Otherwise, the money leaks offshore to foreign opportunities.

Economic Data this Past Week:

Econintersect remains on a recession watch as economic activity is weak.  This week, Railfax railroad counts were drifting lower but remained strong YoY.  Recession indicators of rail shipments of automobiles and scrap / waste remained strong.

Click on graph for larger image.

According to seasonally adjusted data, in September 2010 consumer credit rose 1.1% overall – Revolving credit declined 8.75% at an annual rate, and nonrevolving credit increased 2.5%.  Nonrevolving loans are for cars, education, or other credit on contract, while revolving credit is mostly credit cards.  Econintersect analyzes unadjusted data which for September yields almost identical results.  The increase is large and if continuing would break the flat trend line.

The leading indicator, the WLI for ECRI, remained flat this week at -6.5%.  Comparing its current level from 6 months ago, the WLI is telling us conditions six months from today will be slightly worse than today (the index has a forward look of approximately six months).

Econintersect has reviewed most of the economic events this week.  The hyperlinks on the chart below will bring you to the detailed analysis.

Weekly Economic Release Scorecard:

Item Headline Analysis
Employment Situation 151,000 new jobs Concern that current methodology is over-estimating jobs growth
Same Store Sales 1.3% MoM Gain  
Bush Tax Cuts   Examination within current budgetary environment
FOMC Meeting $600 billion more QE QE is a double edged sword
ISM Non-Manufacturing Survey Strong October growth Sales were up
September Manufacturing Up 2.1% Definitely up
ADP Payrolls Up 43,000 No growth in goods production
Condo Problems Outside of Florida   Similarities to Florida
Austerity and the Great Recession    
Personal Income Declined Not sure seasonal adjustment factors are correct
GDP Analysis   Main Street not seeing any growth
Banking Crisis   Has a long way  to go
Mortgage Market   Historical overview

 Bankruptcies this Week:  Wolverine Tube (WTI), MGM Holdings (MGM), Gulfstream International Group

Failed Banks this Week:

Active links are available at FDIC Failed Bank List.

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