Investment Postcards from Cape Town

I reported previously on the DiscoverCard Small Business Watch, i.e. monitoring small businesses with cash flow issues. As seen in the graph below (courtesy of Clusterstock - Chart of the Day), the situation has improved somewhat, although 49% of owners have still experienced cash flow issues in the past 90 days.

Without a turnaround in this situation, small businesses will not create jobs. And this is key to the overall economic recovery as small businesses are responsible for more than 60% of employment. When asked if they are likely to hire new employees if offered a $5,000 tax credit, such as the one proposed by the Obama administration, 69% said that it was “not very likely” or “not at all likely,” 15% said they would be “very likely” to hire, 10% said they would be “somewhat likely,” and 6% weren’t sure.

Source: Clusterstock - Chart of the Day, March 9, 2010.

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George Papandreou, Prime Minister of Greece, who has just returned from meetings in Washington with US officials and President Obama, sits with Charlie Rose to discuss the Greek debt malaise.

A link to the transcript of the interview follows at the end of the post

Click here or on the image below to view the video.

Click here for a transcript of the interview.

Source: Charlie Rose, March 10, 2010.

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This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The financial press is inundated with discussions about the federal deficit and debt and the consequences thereof and our commentaries have addressed this matter also. At the cost of reiterating, we would like to share a picture (see chart 1) that presents the challenge of federal budget deficits succinctly.

Congressional Budget Office (CBO) projections indicate federal outlays as a percent of GDP will consistently exceed revenues even after the economy moves away from the peak in outlays arising from the financial crisis and associated recession. On average, the federal revenues have been about 18% percent of GDP during the post-war period. The CBO projections for the years 2012-2020 point to revenues exceeding the historical median/mean measures of federal revenues as a percentage of GDP, which makes these estimates optimistic. Federal revenues have exceeded the historical mean only in a few instances when the economy grew at a rapid clip.

The fundamentals of the economy at the present time offer little support for predictions of a strong performance in the years ahead. The graying of the population and associated social costs suggest that the projection of outlays, despite an upward trajectory in the last five years of the projection period, is possibly rosy also. Need we say more?

Source: Northern Trust - Daily Global Commentary, March 10, 2010.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

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The true unemployment rate in the United States is actually higher than we think - at 11.5%, said Stephen Roach, Asia chairman of Morgan Stanley.

“The (official) unemployment rate at 9.7% is distorted downwards by at least 3 million people who have simply given up looking for work and who have effectively taken themselves out of the work force for economic reasons,” Roach said on CNBC.

“For some bizarre reason, the US statisticians do not count these poor souls as unemployed. If you add them back in, the unemployment rate isn’t 9.7%. It’s 11.5%,” he said.

Source: CNBC, March 8, 2010.

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This post is a guest contribution by Asha Bangalore* of The Northern Trust  Company.

The employment report of February summed up the current economic situation as showing small positive improvements from the prior month, with many worrisome aspects still in place. Lest we forget other notable developments in the market place; these pictures are on our watchlist among many other economic and financial variables we follow. Inflation stories are floating around, particularly in relation to the size of the Fed’s balance sheet. As usual, there are two camps - one that fails to see inflation as a major concern given the fundamentally weak status of the economy, and the other focusing on the explosion of the Fed’s balance sheet since late-2008.  Inflation expectations are important, no doubt. The market measure of inflation expectations (10-year US Treasury note yield minus 10-year TIP rate) was 2.13% on February 26, down from a high of 2.43% on February 3 and was trading at 2.21% on March 5 (see chart 1).  Essentially, these numbers imply there is no inflationary threat around the corner.

The Fed’s balance sheet is frequently cited as a source of inflation in the months ahead; it has grown to $2.26 trillion from $2.0 trillion in the mid-2009 (see chart 2) but it has yet to move significantly higher than the level recorded in late-2008. Roughly 50% of the financial accommodation provided is being held in the form of excess reserves.  Therefore, until excess reserves are converted to credit, the inflation scare is a mirage.

The effective federal funds rate closed at 11 basis points on February 24 and was 17 basis points on March 5. One day’s mark is not a trend, but the March 5 reading of the effective federal funds rate has caught our attention. It is being explained partly as a technical issue. It appears that if this is the beginning of new trend, the arbitrage opportunity of banks is gradually vanishing into the horizon. Is this another aspect of the Fed’s exit strategy in operation? Is it a one-off event? The answer is unclear, but we are watching closely.

Source: Northern Trust - Daily Global Commentary, March 8, 2010.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

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The Chicago Fed National Activity Index (CFNAI) is a US economic indicator that receives less publicity that others, but is worth keeping an eye on. According to the Chicago Fed, “when the three-month moving average of the CFNAI moves above -0.7 following a period of economic contraction, there is an increasing likelihood the recession has ended.”  The three-month moving average of the CFNAI has held above -0.70 since November 2009.

Interestingly, when plotting the Chicago Fed series together with US real GDP growth (courtesy of Agora Financial), the relationship would indicate growth of 3-4% for 2010 - a higher number than that forecast by most economists. I will be paying close attention to the February number due out on March 22.

Source: Agora Financial’s 5 Minute Forecast, March 2, 2010.

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