De-coupling ? NO. Re-coupling ? YES. Plus Inflation, Slowndowns, etc.
At this point we think we can probably put the de-coupling thesis to bed but perhaps not. In any case it's putting itself to bed. Over and above all that, no matter what worries we think we've got about growth and inflation, they are worse abroad. In fact both the major developed and developing economies are experiencing much worse problems on all fronts. Growth in Europe and Japan is worsening but their inflation problems are worse yet with some of the highest readings in many years. The pressures this will put on their economies and the ECB will be tremendous. Given that Europe, Japan, Canada and Mexico are still our biggest trading partners these troubles will, more than likely, soon be reflected in our own exports numbers.
There will be a fascinating dynamic play out in the currency markets however. Inflation means that the ECB and BoE need to raise rates which will put down-pressure on the $. Slowing growth will lessen US imports and put an opposite pressure on. On the other hand as long as US savings rates are low (negative actually) the US will still have to import foreign currencies to support our spending habits - this is the continuing long-term structural issue (Goldman Sachs VP calls for U.S. global policy restructuring ) that will be with us for a long time.
Meanwhile the developing economies are taking their shares of the worldwide troubles but sharing in their own unique ones. Despite the fact that growth prognostications are still astounding by historical standards in China, India, et.al. their problems is that extremely high growth is vital to holding their societies together. A fall in growth in China from 11% to 8% actually means a great deal of social unrest for example.
An interesting meme that's been given a great deal of circulation abroad is that the Fed's low-rate policies are, in effect, exporting inflation ! LOL !! Not only can foreign Central Banks manage domestic inflation problems but that's there job. Unfortunately political constraints are more severe in most of these polities so the severity of inflation controls thru interest rate increases required are not likely to be put in place. Thereby creating a viscious cycle which will exacerbate all the other problems.
International Economy
Inflation in Europe Accelerates More Than Estimated to Highest in 16 Years The inflation rate in the euro area rose to 3.7 percent, the highest since June 1992, from 3.3 percent in April, the European Union's statistics office in Luxembourg said today. The rate for May is higher than the 3.6 percent estimate published on May 30. Soaring commodity prices have pushed up costs for companies and consumers and at the same time are posing a ``serious challenge'' to economic growth, officials from the Group of Eight nations said yesterday after a meeting in Japan. European Central Bank President Jean-Claude Trichet this month said the ECB may raise its benchmark interest rate a quarter point in July, signaling he is setting aside concerns about the economy's expansion to combat inflation.
Stevens v. Bernanke Australia's central-bank governor shows how to deal with U.S.-induced inflation. The biggest problem in emerging economies isn't "the credit crunch about which we hear so much . . . but inflation." So said Glenn Stevens, Australia's central bank governor, to a business crowd in Melbourne Friday. It's too bad U.S. Federal Reserve Chairman Ben Bernanke wasn't in the audience. Unlike his Fed peer, Mr. Stevens has ruthlessly resisted inflationary pressures. Since taking office in September 2006, he has raised Australia's benchmark cash interest rate to its current 7.25% from 6%. That's a 12-year high, and it has elicited yelps from homeowners, most of whom have variable-rate mortgages. It has also ruffled political classes on both sides of the aisle who support easy money policies. Mr. Stevens sees more price pressure on the horizon in Asia, thanks to strong growth in China and "very low" regional interest rates, which generally mirror those of the Fed. That's the key message of Mr. Stevens's speech: The Fed's actions are putting emerging-market policy makers in a tough spot. That's evident from Vietnam's decision last week to lift interest rates for dong-denominated loans to 14% from 12% to stem inflation. India, Indonesia and the Philippines have also raised rates recently. China, for its part, is raising bank reserve requirements to rein in credit growth and has allowed the yuan to revalue at a faster pace to avoid importing more inflation. The Federal Reserve has a global responsibility, setting monetary policy for what can loosely be called the "dollar bloc" that includes much of Asia. Asian policy makers now have to work to restrain the inflation that the Fed has unleashed, and Australia is setting a good example of how to do it.
Hang Around 73 Years for Final Check From India: Andy Mukherjee Markus Rosgen, a Citigroup Inc. equity strategist in Hong Kong, has turned the commonly used metric of dividend yield on its head with interesting results.The inverse of dividend yield is, of course, the price of a share divided by its most recent payout. The measure can be thought of as a dividend-payback period, with a 5 percent yield implying a 20-year horizon for return of capital to the investor discounting any gain or loss from a change in the stock price. Well, the answer is almost 73 years for the MSCI India index, which makes the third-biggest Asian economy ``the most expensive market in the region,'' Rosgen and his colleagues, Elaine Chu and Brian Li, said in a report yesterday. When the outlook for capital appreciation is clouded -- as it is now, by high food and fuel prices, a global credit crunch and dinner-table talk of stagflation -- it's quite natural that investors will look for stocks that have more assured payoffs. … most investors would rather own a short payback asset,'' the Citigroup researchers say, identifying Pakistan (16 years) and Taiwan (22 years) as more attractive than not only India, but also South Korea (54 years) and China (39 years). The inverse of the payout yield is a crude measure because it supposes that a company's cash flows won't change in the future, an assumption that holds for mature enterprises in developed economies, but not for their fast-growing rivals. Even so, a payback period that's too long could be an important clue that prices are unsustainable. ``India with a 113- year payback in January 2008 was just a generation too far for most investors,'' say Rosgen and his colleagues. Sure enough, the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, has declined 30 percent this year in U.S. dollar terms, the fourth-worst performer in Asia after Vietnam, China and the Philippines. With inflation at its fastest in seven years, Indian interest rates may have to climb still higher. If Indian equities are at present vulnerable to interest rates because of their duration, then the chances of a drop in the index are high. Credit Suisse Group's forecast is for the Sensex to fall to 13,000 by the end of this year, a further 16 percent decline from the current level. Another relevant example may be of Taiwan, which, like India, had a dividend-payback period in excess of 100 years: in 1997 and in 2000. It seemed that investors would wait for two or three generations to get their money back. That show of patience proved to be ephemeral and Taiwanese companies had to increase their payout ratios, Rosgen and his colleagues noted in a research note they wrote in January. Comparison of equity duration among Asian nations
Euro-zone economy stalled in June, early data indicates The Munich-based Ifo Institute's monthly gauge of German business sentiment posted a larger-than-expected June drop to 101.3 from a reading of 103.5 in May. Consensus expectations were for a more moderate decline to 102.3, according to a Dow Jones Newswires survey of economists.German firms "have assessed their current business situation clearly less favorably than in the previous month, and they are more skeptical regarding the six-month outlook," said Ifo Institute President Hans-Werner Sinn, in a news release. "The sharp hike in oil prices is evidently becoming an increasing burden on the German economy." Meanwhile, a preliminary purchasing managers index for the manufacturing and service sectors across the 15-nation euro zone pointed to a contraction in activity in June, according to news reports. The composite PMI reading fell to 49.5 from a reading of 50.6 in May. Forecasts were for a slight drop to 50.5.
Rising Prices Can Harm Exporters at Home Rising commodity prices are creating complex challenges for commodities exporters as they struggle with social tensions and policy dilemmas. The complications highlight an economic phenomenon: Export booms have troubling side effects.