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The Global Economic Doctor

June 13, 2016

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The Global Economic Doctor– Click link to read the full edition.

 

 

Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

Waiting on the Wall of Worry
History is a race between education and catastrophe.
— H.G. Wells

Summary:

The global economic recovery has been fragile and growth-anemic compared to past cycles. In early June, the World Bank released its Global Economic Prospects, which commences with the following: “Growth prospects have weakened throughout the world economy.” Indeed, the World Bank has taken global economic growth down to 2.4% from the 2.9% it had forecast in January. Pain is most acute in emerging markets, which “are facing stronger headwinds, including weaker growth among advanced economies and persistently low commodity prices, as well as lackluster global trade and capital flows.”  While the World Bank report gave voice to the worries of many investors and policymakers, sentiment in the markets has decidedly turned bearish through the past week.  Equity markets continue to bleed capital, while investors continue to move into cash ($1.8 trillion in institutional money market funds as of May 30th) and higher-rated sovereign bonds. A number of central banks have moved their benchmark interest rates below zero, with strong investor appetite for the perceived safety of higher rated sovereign bonds (Germany, Switzerland and Japan) pushing the yield of more than $10 trillion of sovereign debt into negative territory.  One of the more vocal critics of this has been Janus Capital’s Bill Gross, who tweeted, “Global yields lowest in 500 years of recorded history…this is a supernova that will explode one day.”  According to Goldman Sachs, an unexpected 1 percentage point rise in US Treasury yields could cost investors an estimated $1 trillion.  To grossly understate, perhaps negative interest rates are not such a good idea and the next major market move could come when European central banks and Japan opt to end that policy. Do investors face a wall of worry as June progresses, with the upcoming FOMC meeting, the BREXIT vote, and ongoing China jitters? Absolutely!  The famous British writer H.G. Wells, who gave us The War of the Worlds and The Time Machine, is right in saying, “History is a race between education and catastrophe.”  I am hoping education wins out.

 

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The Global Economic Doctor

June 6, 2016

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The Week Ahead

June 6, 2016

Summary: Will the Fed raise rates in June or July?  Will the US central bank wait until December?  Our view has been and continues to be December.  The reasoning behind that is straightforward – a potentially volatile mix of political risk factors and mixed US economic data. The former pertains to Brexit, Spanish elections and US elections, to name but a few. The latter looks to US data that is likely to reflect an economy likely to continue to grow, but with a certain degree of fragility that perpetuates the fear that recession lurks around the next quarter.  The string of relatively solid economic data came to a halt last week with a worse-than-expected non-farm payrolls number (38,000). It appears that June is now off the menu, with July the new favorite.  We are still sticking to December as we see an ongoing lumpiness in data and wariness over geopolitical events. Janet Yellen’s June 6th talk at the Philadelphia World Affairs meeting did not change our mind — if anything it confirmed our views of her more dovish bias. This leaves investors groping through markets, willing to assume some risk, but constantly watching for the next black swan, which explains why some $1.79 trillion sits in institutional money funds.

FRED 6.6.16

The week ahead will focus two major items — primaries are held in California, New Jersey, New Mexico, and South Dakota and the European Central Bank President Mario Draghi addresses the Brussels Economic Forum.  Also on the agenda — India’s Prime Minister Narendra Modi is visiting President Barack Obama.

US Politics: While the primaries serve to confirm Donald Trump’s candidacy on the Republican side, they have greater significance for the Democrats.  Hillary Clinton is expected to clinch the Democratic Party nomination (with super delegate votes counted) this week.  However, a win by Bernie Sanders in California, where he has gained ground in recent polls, would end the primary season on a sour note for Clinton.

Although Clinton is calling for Sanders to end his campaign and move on to uniting the party, he insists that the Democrats will have a “contested convention” in July in Philadelphia. Sanders has stated that he will spend the time between the end of the primaries and the July convention seeking to sway super delegates to shift their support to him. Indeed, Sanders recently stated, “I have heard that Secretary Clinton has said that it’s all going to be over on Tuesday night. I have heard reports that the media, after the New Jersey results come in, are going to declare that it is all over. That simply is not accurate.”  This is no doubt music to Trump’s ears.  Historically the more contested a convention is, the less chance a candidate has of winning the general election.  Although there is not a love fest on the Republican side, Trump has clinched the nomination with the needed number of delegates.

Looming over the electoral landscape is the possibility that Clinton could be indicted over the State Department email scandal. If this happens prior to the July 25th-28th convention it could leave the Democrats with a major problem: their presumptive candidate facing an indictment, much of the establishment opposed to Bernie Sanders, and the super delegates probably up for grabs.  All of this contributes to making the 2016 presidential campaign one of the most abnormal campaigns ever.

Shifting Geopolitical Landscape?: Europe continues to struggle with a mix of slow economic growth, high structural unemployment (10.2% in April in the euro-zone according to Eurostat), onerous public sector debt burdens (Greece, Portugal, Belgium, Spain and Ireland), and problematic banking sectors in a number of countries (Italy is real worry).  Add to this geopolitical worries — the UK referendum, Spanish elections, restless Catalans, ongoing pressure from migration, strained relations with Turkey, and questions as to whether or not to loosen sanctions against Russia. Consequently, when Mario Draghi speaks, as he will in on June 9th, people will listen.  Euro-zone growth has been raised for 2016, from 1.5% to 1.6%, with 1.7% forecast for 2017 and 2018.  It is expected that Draghi will maintain that outlook. On a geopolitical note, Q1 2016 real GDP growth was 0.5%, driven by domestic growth and balanced by weak export growth.  The last has implications as a growing number of European Union members, including Hungary, Greece, France and Italy, have seen their exports to Russia plummet and this hurts.  At the end of May, Sigmar Gabriel, Germany’s Economics Minister speaking at a conference in Rostock, stated in regard to relations with Russia, “Isolation is not at all helpful.”  He also stated that Russia has recently demonstrated it can be a reliable partner and mentioned the nuclear deal with Iran as an example.  The EU is scheduled to meet at the end of June to renew sanctions against Russia over Ukraine and Crimea. This may not be as straightforward as expected.

From June 6th to 8th, Prime Minister Modi will be in Washington meeting with President Obama.  During the visit, the Indian leader will address a joint meeting of the US Congress.  The significance of the visit is around the growing economic and security relationship between the US and India.  Under discussion is the upgrading of the Indian Navy, joint military exercises, and reducing some trade restrictions.  India is important from the perspective of US and Indian strategic concerns over China.   Considering the rise of tensions in the South China Sea and China’s efforts to improve its transportation network in Tibet (which worries New Delhi), the Modi-Obama meeting underscores the significance of US-Indian relations with an eye to diplomatic and military cooperation.

Brexit Polls: The leave the EU campaign has regained momentum and is ahead slightly 43% to 40% (remain) in the latest Observer/Opinion poll.  According to The Guardian, the poll suggests the remain camp has lost four percentage points in the last two weeks, during which Boris Johnson, former mayor of London and Michael Gove (former Tory Justice minister) have relentlessly campaigned on the theme of immigration. Half of the 2,007 people surveyed said they believed immigration would be under better control if the UK did leave the EU.  Johnson is expected to launch a campaign to highlight the security danger of EU membership, including the possibility of Turkey’s accession to the EU.  Although we think the vote will swing back to remain in the EU, the possibility of an exit cannot be easily ruled out. In fact, concerns of that happening have weakened the value of the UK pound and put a dark cloud over UK equities.  Between here and the referendum expect Brexit phobia to increasingly factor into European markets — It will certainly be a factor in the US central bank’s FOMC meeting next week.

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.

The Global Economic Doctor

May 31, 2016

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The Global Economic Doctor – Click link for a quick checkup.

 

 

Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

Goodbye May, Hello June!
Step with care and great tack, and remember that Life’s a Great Balancing Act!
— Dr. Seuss

Summary: As May winds down, June looms.  It has great potential to be one those memorable months for investors, corporate chiefs and economic policymakers. Just to provide the high points: OPEC meets and US ISM manufacturing index reports both occur on June 2th; the FOMC meets June 14th-15th; the UK goes to the polls on June 23rd to vote on whether to remain in the European Union (EU); the European Central Bank begins its corporate bond buying program; and Spain goes to the polls to hopefully undo the deadlock from the December 2015 parliamentary elections.  Heading into the month, there has been a considerable build-up by Fed officials that rates are going up in June or July. A relatively forgettable G7 meeting in Tokyo in late May achieved little (probably pointing more to the preoccupation of leaders trying to cope with populist movements). And, there is a growing sense of disequilibrium in parts of the developing world (Brazil, Venezuela and Thailand come to mind). China’s growing debt burden is becoming more of a market focus as investors and policymakers ponder the ability of Beijing to manage it through a slowdown. In securities markets, what has been noticeable is the outflow of money from equities into fixed income and cash.  According to Lipper Fund capital flows, for the week ended May 25th, equity funds saw a net outflow of $4.8 billion, while there was a net inflow into investment grade bond funds of $873 million and $7.3 billion net inflow into money market funds. Another data provider, EPFR Global, indicates that equity funds have seen total outflows of over $100 billion year-to-date.  The VIX index (which measures volatility) ended last week at a low 13.12; we don’t expect that to last the month. Considering the economic and political landscape for June, there is a strong likelihood that volatility is going to return. It is probably a good time to put on the seatbelts.

 

 

The Global Economic Doctor

May 20, 2016

Global Economic Doctor_thumb

 

 

The Global Economic Doctor – Click link for a quick checkup.

 

 

Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

The Witches Gather
Double, double toil and trouble;
Fire burn, and caldron bubble.
— From Shakespeare’s Macbeth

Summary:
Three narratives are likely to dominate global markets in the next several months: mixed economic signals are likely to maintain an elevated level of uncertainty about U.S. economic growth and how the Federal Reserve responds to it; uneasiness about macroeconomic direction will reinforce the quiet flow of money out of equity markets and into cash, gold-related funds and the investment grade corporate bonds; and the ongoing importance of political risk (i.e., Brexit, terrorism, South China Sea and Russia) which could be disruptive to markets.  The tone of the narratives depends on upcoming data, such as U.S. housing starts, manufacturing numbers and consumer activity as well as real GDP numbers for Japan, China and key Emerging Market countries.

Along these lines, we believe that the Federal Reserve will make at least one more raise in 2016, but it will most likely come in December.  Considering the release of the minutes from the April FOMC meeting, chances have probably increased for a rate hike at the June 14-15th FOMC meeting, but we would have to question why U.S. central bankers would want to act only days before the June 23rd Brexit vote.  Polls indicate a close vote in the UK and if the British opt to cut their ties to Europe, markets are more than likely to take a tumble.  That would not exactly make the Federal Reserve look on top of their game.

At the same time, Chinese geopolitical issues (and there are a lot) will remain in the headlines, Russia remains a major geopolitical factor on Europe’s eastern borderlands and Brazil’s as well as Turkey’s politics remain in flux.  We also have our concerns over the wobbly nature of Italy’s banks and the ability of the government to gain any more traction on reforms.

The cauldron is bubbling and if you listen hard enough you can them chanting, “Double, double toil and trouble….”

 

The Global Economic Doctor

May 9, 2016

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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.

The Global Economic Doctor

May 6, 2016

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Quick Market View:

Markets Searching for Direction – Caution Is the Word of the Day

May 6, 2016

Summary:  Global equity and debt markets continue to seek a clear direction, but economic data and earnings are sending contradictory signals.  This leaves a situation in which investors want to assume risk and push markets up, but they have one eye to the door in case bad news disrupts shallow confidence and starts a nervous stampede.  The reasons for this state of affairs are numerous – uneasiness over the strength of global economic growth, yet another poor earnings season (the 4th in a row), geopolitical risks, and big questions over Fed policy (will it raise rates in June or not?).  The US April jobs report did not help matters: unemployment stayed at 5.0% and the 160,000 print on jobs was below expectations. We think this leaves the Fed holding off at their June meeting, but moving later in the year, possibly in September.

We expect investors to remain cautious, adding risk strategically. One indicater of caution about direction is that gold prices (and gold miners like IamGold, Kinross Gold and Yamana) have been on the rise. They have benefited from growing uncertainty over the global economy and the geopolitical calendar. Caution is also mirrored by U.S. 10-year Treasury yields remaining low at around 1.78%. Consequently, caution is the word of the day and this sentiment is likely to increase as we shift gears past the earnings season to the political season beginning in June. (See last item below)

  • US employment data: Initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 274,000 for the week ended April 30.  This was the largest increase since February 2015.  However, the next day’s April jobs report disappointed as the U.S. economy added the fewest number of jobs in seven months. Nonfarm payrolls rose by 160,000 jobs last month, with a marginal increase in construction and a downturn in retail employment. Unemployment remained constant at 5.0%, but that was due to Americans dropping out of the work force. Furthermore, employers added 19,000 fewer jobs in February and March than previously reported.  One of the few bright spots in the April jobs report was a slight uptick in wages. Based on this report and other mixed data as well as a looming Brexit vote two weeks (June 23rd) after the scheduled June FOMC meeting, it appears that the U.S. central bank might put off a rate increase to September.
  • Fitch Pans negative interest rates: Fitch rating agency released a study in which it noted that the almost $10 trillion of negative yielding government bonds are costing investors about $24 billion annually.  This situation is raising challenges to investors, such as pension funds and insurance companies that rely on sovereign debt as a core area for their portfolios.  If nothing else, the adoption of negative interest rates forces investors to take on riskier assets or provide their clients with poorer returns.  At the same time, negative interest rates punish savers and retirees.  Moreover, it is dubious that negative interest rates are encouraging economic growth.  It does not seem to be working in Japan. More to come on this.
  • Markets and US Politics:  Now that Donald Trump and Hillary Clinton have emerged as their respective parties candidates, there is growing talk about how the two will impact markets. The dominant view (at least based on opinion polls and a lot of talking heads in the financial press) is that the Democratic candidate is likely to win and would probably be more market-friendly as she represents the least amount of change in policies. As this line of reasoning goes, markets hate uncertainty and Trump represents uncertainty.  The American Banker has been up front saying it does not know what a Trump presidency would mean for the financial industry, while exporting companies are deeply worried that protectionism and efforts to re-write trade treaties (like NAFTA) would be highly disruptive.  At the same time, Washington has been highly dysfunctional over the past 8 years and change is badly needed, which would probably play more to Trump than Clinton. Markets have yet to factor in the outcome of the US November election, but that will change once we move past the conventions and head into the fall season. Stay tuned.
  • Japan Weaker, Weaker: Japan’s economy continues to be a weak patch. The Markit/Nikkei Japan Services Purchasing Managers Index (PMI) fell to 48.9 in April from March’s 49.9.  This is significant in that services account for roughly 65% of Japan’s GDP as opposed to 21% for manufacturing. The recent spate of bad economic data indicates the pressing need for more fiscal policy and structural reforms as opposed to the heavy reliance on monetary policy to lift the economy.
  • Turkey’s Power Plays: Turkey’s Prime Minister, Ahmet Davutoglu, announced that he would be stepping down from his position.  The Prime Minister and President Erdogan have been bumping heads over how much power their respective offices have.  In the past, the constitution gave greater power to the prime minister, with the president serving in largely ceremonial role.  However, Erdogan has increased the authority of the presidency and dominates the political landscape.  It has been reported that the two leaders increasingly held differences over the opening of talks with Kurdish separatists, the appointment of an independent central bank governor, and relations with the European Union.  With Davutoglu out, Erdogan remains the undisputed power in Turkey, which means that Turkey’s policies could be less friendly to the European Union, more hardline vis-à-vis the Kurds and even less tolerant of opposition voices. Last, but hardly least, the ongoing political drama undercuts Turkey’s attractiveness for investment.
  • Brazil’s Ratings Down, Again: Fitch downgraded Brazil from BB+ to BB and maintained a negative outlook.  As the rating agency noted: “The continuing deep economic contraction reflects the high level of political uncertainty, depressed confidence, deteriorating labor markets and strong external headwinds. Medium-term prospects also appear subdued, as the country’s investment rate has fallen in recent years and microeconomic reforms to improve competitiveness and the business environment have not made material process.”  More political drama looms ahead as the Senate moves next week on whether to investigate President Dilma Rousseff for a possible impeachment, an action that would suspend her from office.  Brazilian ratings remain under pressure and one should approach the country’s securities with a degree of caution.

The Looming Political Season:  Looking for uncertainty, look no further than the following votes:

May 9, 2016   Philippine Presidential elections

May 11, 2016   Expected date for the Senate vote in Brazil to advance investigation into whether or not to impeach the President

May 15, 2016   Dominican Republic – Presidential, congressional and local elections

May 22, 2016   Turkey – the ruling AK party will hold an extra-ordinary congress to select a new party leader and prime minister

June 23, 2016   UK – Referendum on whether or not to remain in the European Union

June 26, 2016   Spain goes to the polls again after the last vote (December 2015) failed to result in a government

June 30, 2016   Iceland presidential vote

September 18, 2016   Russian parliamentary elections

November 8, 2016   US presidential and congressional election

 

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.).
      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.

The Global Economic Doctor

May 2, 2016

Global Economic Doctor_thumb

 

 

The Global Economic Doctor                                       – Click link for a quick checkup.

 

We are proud to be able to offer the thoughts and written works of Scott MacDonald, Ph.D. as the Chief Economist at Smith’s Research & Gradings.   Dr. MacDonald has U.S. government, investment bank, and asset management experience as well as keeping a finger in the academic world.  He’s refreshingly honest, while being intelligently sophisticated – we cannot promise that you will always agree with his opinions, but we are confident that you will find it is time well spent.

Yes, the Global Economic Doctor is “In”.  He dissects three major bodies in the inaugural edition: Brazil, the U.S. Economy and Coal.  Topics so toxic that most chief economists resort to babbling platitudes designed to assuage the fears of the great unwashed masses.  He won’t insult your intelligence by telling you the U.S. Treasury is triple-A rated and everything is going to be “okay” in Brazil because China is a willing buyer of all commodities.

Think of Scott MacDonald as the consummate professional to add depth to your bench of investment professionals. We like to think of him as the engaging dinner companion you bring along for an evening out in New York or London with prospects or long-term clients.

Smith’s Research & Gradings provides the intelligence gathering, cogent analytics, and knowledge-based event risks that support the Doctor’s work and can nourish your understanding.  Moreover, Smith’s Sovereign Gradings can provide radical transparency into cross-border decision making.

Global Economic Doctor

April 26, 2016

Quick Market View:

April 26, 2016

This is a busy week on the economic front. The FOMC gets underway today and concludes with its Rate Decision on Wednesday, followed by post-meeting Press Conference, which will be closely watched with an eye to any cryptic wording that hints about when rates go up again. This is followed by the BoJ policy meeting release on Thursday as well as well as the Commerce Department releases its first estimate of Q1 2016 GDP. We see 0.6% for Q1, which is consensus. We expect the FOMC meeting to reinforce views already in the market – no immediate FOMC rate hike (though still possibility later in the year), while the BoJ meeting will reflect that the Asia Pacific country will continue to struggle against deflationary pressures. Overall, the general thrust of economic data indicates that the U.S. economy is in muddle through mode, with 2016’s real GDP growth likely to struggle to make it to 2.0%. 

Also today:

* Voters go to the primary polls in 5 states in the U.S., with Trump and Clinton seeking to consolidate their hold on their party’s respective nominations.

* About 10% of the S&P 500 reports earnings, including Apple, Chipotle Mexican Grill, eBay, Lockheed Martin, Twitter and Whirlpool. BP beat earnings (which was a surprise) due to cost-cutting, improved refining margins, and trading business did well.

* S&P downgrades ExxonMobil to AA+.  The company had been put on watch in February. This is expected to increase the company’s cost for financing.

* EU may fine Spain and Portugal for missing budget targets.  Spain still has not formed a government since the inconclusive December 2015 elections and Portugal’s leftwing government is struggling on a number of fronts, the economy and handling of bad bank debt in particular being problems.

* China state firms Q1 profits fall 13.8%.  Although the number looks a little frightening this should be expected, considering the structural changes being made in the Chinese economy and the slowdown in growth.

* The Washington-based Institute of International Finance (IIF) forecasts that China will see $538 billion in capital exodus in 2016. Some of this no doubt is being put away in Caribbean offshore financial centers or European real estate, but some of it is also going into corporate M&A activities. It is something that needs to be watched.

* Saudi prince announces new plans to end “addiction” to oil. Diversification is the key to a new Saudi Arabia, but lower oil prices and restructuring the economy also has a social dimension as many Saudis are now being asked to step up their productivity and think differently about the workplace.

The rest of the week has more earnings, the National Association  Realtors data on pending home sales (Wednesday), U.S. jobless claims (Thursday), the University of Michigan consumer sentiment survey (Friday).

Scott B. MacDonald

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.).
      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.

Smith’s US Political Event Risk Alert: Terrorism

December 7, 2015

Smith’s Research & Gradings (SRG) published a U.S. Political Event Risk Alert for terrorism on November 26, 2015.   Only a handful of these alerts have been issued in the past 20 years. Smith’s Research & Gradings was founded in 1992 to provide independent conflict-free credit analytics. Smith’s Grades for municipal bonds are used as part of Smith’s Sentinel System for the protection of America’s critical infrastructure assets. 

Smith’s Terrorism Alert (-1)  26 November 2015  Great Falls, VA  USA

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The terrorism attacks in Paris, France on Friday night, 20 of November 2015, will serve to inspire terrorism in the United States and elsewhere around the globe. SRG’s elevated alert status is based on indications that a potential attack may be underway by Daesh (aka ISIL or ISIS).

SRG is watching for terrorists to seek to infiltrate the  United States along the southern border.  Elevated awareness must be given to all flights from Central America, particularly Panama, to Miami and Sarasota.

SRG believes municipal bonds can offer investors significant protections and opportunities to profit if the conflict in the Middle East spins into a more global war.

Shiite/Sunni Conflict
SRG’s alert is not signaled based solely upon the events in Paris. The escalation of the Shiite/Sunni conflict is reaching a critical juncture.

More specifically Smith’s Terrorism Alert is being issued in connection with the potential arming of Saudi Arabia with nuclear bombs from Pakistan.

Years ago, Saudi Arabia entered into a diplomatic agreement with Pakistan, whereby it could request Pakistan deliver four nuclear bombs to the kingdom. The United States of America has never recognized the treaty agreement and is not a party to the document. The treaty was done in conjunction with Saudi Arabia providing $2 bln. of oil to Pakistan during the period of United States sanctions against Pakistan  in the late 1990s.

Even without a formal treaty, the Saudi monarchy is credited with having saved current Pakistan Prime Minister Nawaz Sharif’s life. In 2000, the kingdom provided him asylum after the Saudis convinced then-President Pervez Musharraf to release him from jail, where he had been held since the military ousted Sharif in 1999.

Two years ago, SRG was in a chatroom on the darkweb when the delivery of plans for a small “suitcase” atomic bomb were mentioned in connection with the United States sanctions against Russia. The source claimed Russia had designed  and improved plans for a small backpack delivery device.  Pakistan had purchased the plans (for more than $100 mln) and hired the Chinese (PRC) to build several (i.e. many) of these devices, the source claimed.

For more than a year, SRG’s Sentinel System has been monitoring for the development of the Pakistan-Saudi Arabian nuclear bombs.

Earlier this November, Pakistan’s chief of army staff, General Raheel Sharif, made a visit to Saudi Arabia to meet with King Salman in Riyadh, where he stressed Islamabad’s commitment to ensuring the safety and protection of Mecca and Medina, as well as Saudi Arabia’s territorial integrity.

Last week, a source in Riyadh reported an entire floor of the Four Seasons Hotel was being occupied by members of a high level mission from Pakistan. While it is not exactly clear as to the purpose of Pakistan mission, a separate source has indicated the United States of America is working to have Pakistan turnover the control and security of its entire inventory of nuclear bombs to Saudi Arabia.

Meantime, Russia has continued to build its forces in  Syria and form an alliance with Shiite forces, such as members of the Iranian Guard and the Syrian government forces are hardened troop.  In early November, France announced it was sending its nuclear aircraft carrier, Charles de Gaulle, to the eastern Mediterranean Sea to support and coordinate with the Russians. Christened in 2013, the Charles de Gaulle can launch more than 40 planes and is a fearsome fighting machine.

Whenever one considers the Syrian conflict, Jordan figures prominently in the calculations.  The Kingdom of Jordan not only stopped accepting refugees from Syria, but ordered hundreds of thousands be expelled from the camps. The displaced population has turned to Europe for refuge.

Given these events, Daesh is likely to adopt the same approach as Al Quaeda and create a disparate command structure while launching asymmetrical terrorist attacks against the United States.

Puerto Rico Conversations

November 5, 2015
James Colby

James Colby, Van Eck Global

Jim Colby, Senior Municipal Strategist and Portfolio Manager at Van Eck Global, was the leader of a panel discussion on Puerto Rico at Smith’s High-Yield Conference in Greenwich, Connecticut on October 1. Mr. Colby started the discussion with a brief introduction of the panelists.

Jim Colby:
The interesting feature about this particular panel is that we’re represented by two on the investment side — myself from Van Eck High Yield ETF and John Schorle of Invesco.

We have the insurance industry covered with Tom Weyl from National Public Finance Guarantee.  And, we have excellent legal representation  with Bill Kannel, partner at Mintz Levin in Boston.

We have a past president of the Puerto Rico GDB, Jorge Irizarry. Jorge served as president of the Government Development Bank for two terms and 8 years.

And, we have Terry Smith, founder of this conference 10 years ago and CEO of Smith’s Research & Gradings.

Manny Mirabal is from Puerto Rico and a principal of Gray Global Advisors in Washington, D.C.  Manny has spent well over 20 years of his career in and around The Hill, in and around Washington D.C., with some influential and important people in congress and on island in Puerto Rico.

So, the topic is almost like a sports page, because every single day, there are headlines. To just throw out a couple, I happened to see on Bloomberg today, which I’m sure our analysts will be talking about and discussing.

One headline reads:
Puerto Rico Talks Are Positive and Ongoing.

[AUDIENCE LAUGHTER]
Puerto Rico Working to Obtain Liquidity by November

[AUDIENCE LAUGHTER]
There is another positive headline: Puerto Rico to Introduce Professional Services and Business Tax.

In fact, Manny corrected me in interpreting this headline because it has already passed and I understand that it has in fact, been signed. So, just today those three headlines popped up on Bloomberg along with many more issues and topics.

I would like to invite Manny, who has just come state-side from San Juan to give us a little picture as to exactly what discussions have been had.  And, maybe give us a quick update on the bill that was just signed by the government.

Manny Mirabal:
I’m a government relations specialist and I basically represent clients before various bodies, whether it’s here in Washington, DC and New York or in Florida.  And unfortunately for me, since February, in Puerto Rico dealing with a lot of what’s being talked about it here today.

I have also been dealing with a number of other items related to bills that are being passed, which all converge and dovetail in some way with the fiscal situation in Puerto Rico.

Last year when I was here, I made a comment that I felt that Lisa Donahue [restructuring agent] was going to find out soon that she was in over her head.  Unfortunately, for Puerto Rico, that came to pass, but she made a hell of a lot of money by extending her contract.

If there was one door in a room with four walls, they’re sure gonna have a tough time finding their way out that door. Because those four walls have to do with politics on one side, unions who control employees — everything from vacation time, work time, break time, bonus time, whatever. And the rates that are being charged to individuals in Puerto Rico for a record service at PREPA, which had been helped tremendously because of lowering of the price of oil.  But it doesn’t take away the fact that as of today, PREPA is still negotiating to try to settle its $9 billion worth of debt.

The entities that hold/control their bonds expect to get paid.  The governor started out by saying, we are going pay our debts and there’s a general constitution obligation for GO bonds that they get paid first.

One of the things that’s so interesting about what the governor and his people have done up till now — they passed four sets of increases in taxes. The governor very conveniently, did a number of things, including increasing taxes four times since January: crude oil tax, increase the tax on consumption, currently impose new business to business (B2B) taxes, and a couple of others, all in an effort to raise additional dollars.

He also lowered some government spending.  So all told, that saved about a billion dollars.  The one thing he did not do was related to the unions.  He’s consistently said, I will not layoff anyone. It is the reason the last governor didn’t win reelection. He layed-off about 20,000 people to close the gap, because the government was employee heavy.

And this governor, learned a lesson from that, because he is trying to beat the last guy.  And he’s consistently said, I’m not laying anybody off, that is clearly part of Puerto Rico’s problem.