Archive for September, 2014


European economic update

Tuesday 30 September, 2014

The European American Chamber of Commerce organized an economic update which featured James Bullard, CEO/President of the St. Louis Federal Reserve Bank, Nicolas Veron, Visiting Fellow @ the Peterson Institute for International Economics & Co-founder/Senior Fellow @ Bruegel. The panel was moderated by Sassan Ghahramani, President/Ceo of SGH Macro Advisors.

Bullard stated 3% growth should be achievable for the US in 2014.  Unemployment of 6.6% is still too high, but the Fed won’t start raising interest rates until unemployment falls below 6.5% or inflation rises above 2%.  Normal unemployment will drive a more normal interest rate policy.

Veron maintained that the issue today is not what the central banks do, rather it’s which countries have the most dysfunctional political processes.  The EU crisis continues to test financial systems & architectures.  The tests for EU institutions need to be redefined.  Watch for EU parliamentary elections to see if citizens are dissatisfied & how the European Central Bank (ECB) is transforming EU banking, which will hopefully create an opportunity for trust to return to the system.

Panel Q&A

Because we work with seasonally-adjusted data, the weather does not affect risk, but we have no model to evaluate this past year’s weather, so it’s OK to be suspicious.  This hasn’t received enough attention.

The reduction to 6.6% unemployment is a dramatic reduction unexpectedly soon, so now we must adjust our thinking.  Labor force participation is a long standing trend of long-term structural decline.  The drop in unemployment is a good sign & was faster than anticipated, & is remarkable in an economy that’s only growing @ 2% per year.  It’s a result of state decisions, not data conditions.  Interest rates won’t move until unemployment has moved well beyond the threshold of 6%.  Normalization of policy dictates that qualitative policy & judgement shouldn’t be tied to a particular number.

The 2012 contagion was a result of a combination of factors.  Banking union is becoming more important.  Political evolution in Germany is key, not to allow any country exit the Euro.  If there is deterioration, the ECB will act.  There are no immediate legal developments, but the relationship between Germany & Europe counts. Germany’s jurisdiction over the German Bundesbank affects the ECB’s ability to work.  The Bundesbank has been clumsy in attacking the ECB’s autonomy, & thus the ECB won, while the Bundesbank lost.  The constitutional court was smarter in trying to avoid frontal conflict.

The Fed pursued the policies of the 7 faces of  peril & was the biggest advocate for flow.  It worked well with more analysis of interest rate policy.  Quantitative easing is a powerful tool & moved markets, so now we can taper back to normal.  We won’t see a normal economy until we raise interest rates.  The committee doesn’t address specific issues of quantitative easing.  The Fed will raise interest rates fairly quickly.  The alternative is to stay @ 0% longer & lift faster.  Global interest rates are still low & this is expected to continue.  Inflation is still a puzzle & wildcard, & could force the ECB’s hand.

There is still much disenchantment in the non-German Eurozones.  Germany imposes it’s decisions on others, but Germany is still pro-Euro & pro-integration.  Other countries have different foci (focuses?).  Spain is not all skeptical, but separatism sentiments continue in Catalonia.

Politically, although there are more anti-system parties as mainstream parties decline, not all Europeans are anti-EU & anti-Euro.  Not everything can be seen through the Euro lens.  Cooperation is changing as policy makers are getting more defensive.


Venezuelan update

Wednesday 24 September, 2014

I attended this event @ the Council of the Americas awhile ago on Venezuela’s economy. The panel consisted of Alehjandro Arreaza, economist @ Barclays, Aaron Freedman, VP/Sr. Credit Office @ Moody’s, & Francisco Rodriguez, Director & Sr. Economist @ Bank of America/Merrill Lynch, & moderator Christopher Sabatini, Sr. Director @ Americas Society/Council of the Americas.

Generally, inflation is leading to devaluation of the currency, which leads to inconsistent fiscal policy. The exchange rate is unsustainable. They need to change course, but can’t devalue. The exchange rate subsidy doesn’t help their constituents-it just gives fiscal rents to importers. Inflation is up because they are just printing money instead of devaluing the currency. There are arbitrage opportunities with devaluation while the politicians get richer. The problem is as import prices go up, demand goes down, to there is no politically expedient solution.

The government also doesn’t recognize the magnitude of the level of debt. Declining oil prices make things difficult for Venezuela. They must address these imbalances.

It’s tough to get money out of Venezuela these days. There is a black market, but that’s dicey. Auto makers there have fallen off a cliff. Unfortunately companies can no longer repatriate profits & pay for imports. Strategic & essential industries can get preferential access to currency.

Another problem is with an overvalued currency, you can’t tell which are bad imports. The system is impossible to administer. The exchange rate is limited to maintain control, like in Cuba.

There is a difference between a low income economy like Cuba’s, & Venezuela. Macroeconomic distortion has simply led to financial disintermediation. They must address all imbalances-devaluation is not enough. Venezuela won’t necessarily default-that probability is only 10%, but they are suffering a death by 1000 cuts. If the price of oil destabilizes, watch out. Oil production has declined, but it’s unsure if they’ve reached the bottom. Consumption is up, but that’s distorted.

Despite a devaluation a year ago, nothing happened. It’s not likely to get better. Capital flight is $20M/year. They need a more flexible exchange rate system.

Venezuela is rated 1 notch below Argentina in credit ratings. Both have balance of payments problems. Venezuela is more combustible.

How long this can go on is a political & economic question. Regulation is no good in a volatile economy. Argentina tried & failed. Another problem is you can’t increase spending after a devaluation.