The Global Economic Doctor

Global Economic Doctor_thumb

The Quick and Dirty

May 9, 2016

Summary: Another busy week ahead with plenty of headline risk – China, Greece and oil stealing the front pages.  Add in Donald Trump’s comments last week on US debt (there is too much and it should be reduced possibly via negotiations with creditors), Puerto Rico’s debt epic, Greece’s ups and downs with its creditors (including this past weekend’s vote to pass new austerity measures), China’s economic data, and earnings and we have the potential for greater volatility in markets in the short term.  The lineup of potential event risk increasingly points to a long hot summer – Brexit, more fun with Greece, a new government in the Philippines, and elections in Spain.  Never a dull moment.

* China’s trade numbers spooked markets overnight in Asia. In April exports contracted by 1.8%, a real downturn from March’s 11.5% expansion.  Imports marked their second month of contraction coming in at -10.9%, on the heels of March’s 13.8% upswing.  This is a point of concern for those who worry that China’s economy is stalling out or sitting on the brink of a credit-fueled collapse. Real GDP growth in Q1 was 6.7% and the government is looking to 6.7% for Q2, with growth being driven by services, consumer spending and infrastructure spending.  While we share the concerns over China’s financial system and the build-up in debt, this remains an economy that is still controlled by the government.  This functions as a brake to a hard landing (for now) and provides cover for the government to continue to push on structural reforms.  All the same, China is an ongoing point of concern and investors need to closely watch data and official announcements.

* Oil prices are driving markets, caught between change of Saudi oil minister (one of the Kingdom’s most powerful positions) and Canada’s wildfires hitting the North American country’s oil production.  Although Canada’s production hit posibly impacts supply, it is probably being overstated at this stage.  Oil is down from last week’s $45 to around $44.  Nigeria and Venezuela really need oil prices to rise, considering the troubled state of their economies and fiscal situation, though the Latin American country is in far worse shape.  The new Saudi oil minister Khalid al-Falih, a Texas A&M University graduate, is regarded as a highly competent technocrat and faces major challenges with depressed oil prices, economic diversification efforts, and the Iran-Saudi Cold War.  In other news, oil discoveries have fallen to a 60-year low as companies have drastically cut their budgets.  This raises the question of a potential oil shortage, but that would be down the road by two decades.

*Real estate news in the US: Home prices climbed in 87% of U.S. metropolitan areas in the first quarter as buyers competed for a tight supply of listings, the National Association of Realtors said. This points back to the issue of a shortage of housing for middle income families, which remains a concern vis-à-vis more fulsome US economic expansion.

* Brazil is near the senate’s vote to start the impeachment investigation for President Dilma Rousseff this week, which means that by week-end, the country could have a new leader, Vice President Michel Temer.  He faces big challenges – the economy is in its worse recession since the 1930s, inflation is on the rise, parts of the corporate sector are in disarray, and Brazil’s political landscape is polarized.  Temer’s first actions have to be forming a new cabinet, regaining public and investor confidence, and creating a working majority in Congress.  Temer’s rise is probably a positive step for markets and the country, but the action certainly leaves Rousseff supporters feeling as though there was a constitutional slight-of-hand of questionable constitutional legality. Stay tuned as there is much more to come.

* “Dirty Harry” and the Philippines:  The Philippines presidential election appears set to result in the victory of the law and order populist mayor of Davao City, Rodrigo Duterte, known for his vulgar comments and staunch nationalism. The Philippines had made considerable strides in structural reforms, strong real GDP growth and infrastructure improvements under outgoing President Benigo Aquino.  However, many Philippinos have felt left behind by the economic changes and the hard-charging Duterte (also know as Dirty Harry) has struck a responsive chord, though he has admitted that he really doesn’t understand economics and would copy the plans of his opponents. His election could have a negative impact on this Southeast Asian economy with a GDP of $290 billion.

Puerto Rico on the Mind:  US Secretary of the Treasury Jack Lew is off to Puerto Rico to see what he can do for the debt-troubled island.  Good luck with that.  Sadly the $72 billion debt issue has entered the Twilight Zone— I mean the US Congress, where most pressing issues are responded to with a glacier-like sense of urgency (on a good day).  This crisis has several more steps down before resolution.  Republicans are expected to come up with a bill this week for managing the Commonwealth’s debt, but that has yet to be seen.

This week’s headlines:

Tuesday

Earnings – Walt Disney and Hertz Global (equals mice in rental cars)

West Virgina and Nebraska hold primaries

Wednesday

Earnings – Wendy’s, Aramark, and Ambac Financial

Brazil’s Senate votes on the President’s status

Thursday

Earnings – Kohl’s, Ralph Lauren, Nordstrom and Symantec

The Bank of England meets

The World Gold Council publishes a report for Q1 global demand

Friday

Earnings – J.C. Penny

The University of Michigan Consumer Sentiment reports

Standard & Poor’s reviews Italy credit rating

Dr. Scott B. MacDonald

Chief Economist

MacDonald Scott b

      Dr. Scott B. MacDonald is Chief Economist at Smith’s Research & Gradings.
      Prior to this, he was Senior Managing Director and Chief Economist at KWR International, Inc (KWR). Prior to KWR he was the Head of Research for MC Asset Management LLC, an asset management unit of Mitsubishi Corporation based in Stamford, Connecticut (2012-2015) and Head of Credit & Economics Research at Aladdin Capital (2000-2011) and Chief Economist for KWR International (1999-2000). Prior to those positions he worked at Donaldson, Lufkin & Jenrette, Credit Suisse and the Office of the Comptroller of the Currency (in Washington, D.C.). During his time on Wall Street, he was ranked by Institutional Investor magazine as one of the top sovereign analysts.
      He did his Ph.D. in Political Science at the University of Connecticut, Masters in Asian Studies at the University of London’s School of Oriental and African Studies, and BA in History (Honors) and Political Science at Trinity College (Hartford). He has written 18 books and numerous articles. Areas of expertise are macroeconomics, international finance and geopolitical risk.

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