Sunday, October 15, 2017

Financial Market Snapshot October 2017

United States
In the United States, the standing of President Donald Trump is getting even more precarious. He has obvious difficulties in learning that a country is not a business and that leading the government as President is not the same as being the boss of a company. His erratic behavior irritates the political establishment and the pundits of the media. Nevertheless, the U.S. economy is doing remarkably well with low inflation, low unemployment, low interest rates a good economic growth. The U.S. stock market is moving from one record to the next.  Since the election of Donald Trump in November 2016, the Dow Jones stock market index has risen from around 18,000 points to 22,872 points on October 13, 2017.
United Kingdom
The United Kingdom is on its way of becoming the sick man of Europe. After the Conservative’s Party’s disastrous losses at the parliamentary election in June 2017, its national congress at the beginning of October did not bring the desired recovery of the reputation of the party and its leadership. The majority of the government supporters the House of Commons is minimal, and the position of the Prime Minister Theresa May is under assault. The British Labour Party, under the leadership of the outspoken Socialist Jeremy Corbyn is on the rise. The economy suffers from the manifold uncertainties surrounding the conditions of the exit of the United Kingdom from the European Union (Brexit). 
In Europe, the centripetal forces are on the rise. While the history of Europe since the end of World War II was one of integration and unification, segregationist movement gain momentum. The latest point is case in the independence movement of Catalonia that wants to separate from Spain. Brexit, the decision of the United Kingdom to leave the European Union faces the domestic dilemma of an independent Scotland. In Eastern Europe, several governments of member countries of the European Union challenge the authority of Brussels. The massive immigration into Europe from the Middle East and Africa threatens the Union’s cohesion.
Africa is the underreported growth story. Several African countries register economic growth rates of more than five percent. The African population is growing strongly and modern technology spread rapidly among the young people.
World Economy
The shift of the center of world economic growth to Asia keeps going on. India is trying to catch up with China, and Pakistan is joining in. These three countries together with Indonesia comprise a population of 3.1 billion people and represents 41 percent of the world’s current population of 7.6 billion people. In as much as these countries pursue free market reforms, their economic growth will go on. Only politics can stop this trend. In this respect, however, the list of potential catastrophic conflicts is large.

Macroeconomic Data in Comparison
Economic growth
Both, the United States and the Euro Area continue on their growth path. The gross domestic product (GDP) of the United State rose from 1.9 percent in the second quarter of 2016 to 2.1 percent in the second quarter 2017. In the Euro Area, GDP rose from 1.9 percent to 2.0 percent in the same period. Over the past couple of years, the German economy works like a locomotive that pulls many of the other European countries to higher economic growth rates. While in the rest of Europe, the unemployment is still very high, Germany registers very low unemployment at the level of the United States, where the rate fell from 4.9 percent to 4.7 percent from the second quarter of 2016 to the second quarter of 2017.
Current account
As has been the case over the past decades, the United States continues to suffer from a persistent current account deficit of two to three percent. Recently, the current account deficit in percent of the gross domestic product fell slightly from 2.6 to 2.5 percent over the year to the first quarter of 2017. The Euro Area continues having strong current account surpluses although these fell slightly from 4.2 percent in the first quarter of 2016 to 3.9 percent in the first quarter of 2017.  Japan, likewise, has a strong current surplus. It rose from 3.9 percent to 4.0 percent over the year before the first quarter of 2017. The United Kingdom, which still suffers from the Brexit shock, reduced its current account deficit from 5.4 percent in the first quarter of 2016 to 3.4 percent in 2017, mainly due to its weakening economy.
After all the efforts by the central banks to ‘reflate’ the economies, the official inflation rates in the industrialized countries finally seems to take off. The rate for the United States almost doubled from 0.97 to 1.63 percent from July 2016 to July 2017. In the Euro Area, the inflation rate rose quite remarkably from 0.62 percent in July 2016 to 1.21 percent in 2017. Even Japan saw its price level to move out from a deflationary inflation rate of -0.18 to a slight inflation of 0.08 percent.
Interest rates
As of now, the policy of the United States Federal Reserve System (FED) of raising its interest rates has not yet have a discernible effect on the economy. Up to now, even the stock market seems unimpressed by the fact that the FED has doubled its policy rate of interest from 0.62 percent in July 2016 to 1.22 percent in July 2017 with the consequent effect that long-term interest in the U.S. rose from 1.50 percent to 2.32 percent from July 2016 to July 2017.
In the Euro Area, the policy interest rate is still negative at -0.33 percent in July 2017.

Economic Growth
Despite many predictions of doom and gloom for the Chinese economy, China’s economic growth goes with a current rate of 6.9 percent. Now, among the Asian countries, India is catching up with high economic growth rates after a long slow growth period. The reforms of the recent Indian governments pay off. With 5.7 percent, India is approaching the growth rates of China. Several other Asian countries remain in the league of economic growth rates above six percent and even seven percent such as Nepal (7.5 %), Laos (6.9 %), Bangladesh (6.9 %), the Philippines (6.8 %), Iran (6.5 %), Vietnam (6.4 %). The economic recovery from the war is fully under way in Iraq, which registers an economic growth rate of over ten percent.
Some African countries are doing remarkably well with economic growth rates such as of close to eight percent for Ethiopia, seven percent for the Ivory Coast and over six percent for Senegal, Tanzania, and Kenia. African countries that have growth rates of over five percent include the Central African Republic, Eritrea, Guinea-Bissau, Mali, Rwanda, Malawi, Gambia, and Togo.
Latin America
Economic growth in Latin America is lagging Asia and some leading countries in Africa along with the emerging economies in Eastern Europe. Venezuela is a complete basket case. In January 2017, Venezuela’s annual economic rate was – 18.6 %, which amounts to a veritable depression. At the same time, the country suffers from an annual inflation rate of 741 %. Both indicators are probably even worse in reality given the tendency of the Venezuelan government to manipulate and outright falsify its economic data. Brazil is slowly recovering from its deep recession. In July 2017, the annual economic growth rates rose to 0.3 percent, after having hit a low of – 5.8 % in January 2016.

Argentina’s economic growth is extremely volatile. After a deep recession with an annual economic growth rate of – 4.2 percent in July 2014, the Argentinean economy recovered with a rate of 3.8 in 2015 only to fall back again into a slump 2016, when negative economic growth rates were registered in the range of close to four percent. In July 2017, a new recovery is under way when the Argentinean economy achieved an annual growth rate of 2.7 percent. In Mexico, after a swift recovery from the 2008 international financial crises, economic growth has been relatively weak and has slowed down over the past couple of years from a rate of around four to two percent and as of July 2017 to an annual economic growth rate of 1.8 percent. 
Antony P. Mueller
October 15, 2017

Sunday, September 10, 2017

Financial Market Snapshot September 10, 2017

Financial Market Snapshot September 10, 2017
Storm Warnings
Dollar weakness
Hurricane Irma that is devastating parts of Florida shortly after the weather disaster that inundated Houston is only one of the many calamities that have hit the United States since early 2017. With a President under fire from all sides, the dollar sliding and geopolitical conflicts on the rise, the situation has continuously deteriorated since the beginning of the year. 

While the stock markets are still holding ground, the U.S. dollar, however, sends a strong signal. Since January 1, 2017, the dollar has been down by over ten per cent. Since the beginning of 2017, the official currency index fell from 101 to 91 reaching its lowest level since January 2015. Financial markets wake up to the possibility that the American currency may no longer be a safe haven. Only the lack of an attractive alternative has held the dollar relatively steady over the past decade.
Euro strength

The Euro had been under pressure over the past couple years due to the Greek debt crisis. Additional pressures came from uncertainties about the effects of the United Kingdom to leave the European Union and fears that an openly anti-European candidate could win the French presidential election. Over the past couple of months, however, currency markets have seen a strong recovery of the euro. From a rate of 1.05 against the U.S. dollar in January 2017, the common European currency has risen to 1.2035 on Friday, September 8, 2017. 
General elections in Germany
On September 24, Germans will go to the polls to elect their federal parliament. It is very unlikely that the parties that officially support the incumbent Chancellor Angela Merkel win an absolute majority. Therefore, Merkel must find additional coalition partners beyond the CDU (Christian Democratic Union) and the CSU (Christian Social Union) in order to gain her third chancellorship. Merkel’s opponent from the SPD (Social-democratic Party of Germany) has campaigned poorly and instead of the expected gains in votes, the SPD will most likely lose public support. The big winner could actually be the right-wing AfD (Action for Germany). All other parties have ruled out a collation with this anti-immigration party. Thus all comes down to the point whether the liberal FDP (Free Democratic Party) can cross the five-percent clause in order to gain seats in the parliament. Depending on the strength of FDP various coalition models will emerge either with the Green Party or the left-wing “Linke” party.
Booming German economy
Although Chancellor Merkel is under pressure because of her very generous immigration policy, the extremely good performance of the German economy is her main asset. The German unemployment rate is currently at 3.7 per cent and the inflation rate down to 1.8 per cent. Germany’s annual gdp growth rate is 2.1 per cent. The employment rate has never been higher with a rate of 75 per cent while the current account surplus beats one record after the next and is currently above eight per cent. 
Macroeconomic Data in Comparison
Economic growth
Despite a series of detrimental factors and the precarious position of the American President, the U.S. economy is powering ahead. After a gdp growth rate of 1.6 percent in the second quarter of 2016, the growth rate has risen to 2.1 per cent in the second quarter of 2017. This good growth performance is accompanied by a growth rate of two per cent in Euro Area and 1.5 per cent in Japan. Even the United Kingdom, which is afflicted by the fallout from Brexit, obtained a growth rate of close to two per cent in the second quarter of 2017.
Despite the continued policy of quasi-zero interest rate in the industrialized countries and the massive expansion of central bank money over the past couple of years, price inflation does not yet show up. For the Euro Area the figure is 1.2 per cent, while consumer prices in Japan increased by 0.4 percent. Only the United Kingdom is an exception, where, largely due to the Brexit, consumer prices are on the rise and the annual inflation rate reached 5.1 percent in July 2017.
Interest rates
Central banks in the industrialized countries continue with their zero-rate interest rate policies. Despite various announcements that the time has come to end “quantitative easing” and to raise rate finally, central bankers are still too scared to provoke an unwanted sharp economic downturn when rates rise. As a very problematic result of this policy, the global stock markets have obtained extreme valuations and show signs of a mega bubble.
In combination with the strong performance of the US economy, the unemployment rate in the United States is at a low of 4.7 percent. This rate is well below the level in the European Union, where the unemployment still stands at 9.1 per cent, particularly because of the ongoing economic weakness at the Area’s Southern fringes where unemployment rates are as high as 17.2 per cent (Spain) and 21.2 percent (Greece). Japan’s unemployment rate has been remarkably low despite relatively low growth over the past decades and currently stands at 2.9 percent.
Current Account
In the United States, the current account deficit amounted to 2.5 percent of the country's gross domestic product while Japan registered a current account surplus of four per cent and the Euro Area of 3.9 per cent in the first quarter of 2017. Due to recessionary tendencies after its Brexit vote, the British current account deficit fell from 5.4 percent in the first quarter of 2016 to 3.4 percent in the first quarter of 2017.
 Korea in the spotlight
Nuclear threats darken the outlook
Kim Jong-un, the leader of North Korea, is threating the world with his nuclear bombs. His foremost enemies are the United States and particularly the country’s neighbors, South Korea and Japan. Jong-un has an ally in the Peoples Republic of China and maybe even in Russia. The conflict over North Korea thus entails the potentials of new world war should the crisis go out of hand. China has made it clear that it does not want a unified democratic Korea at its Southern border.
Civil War (1950-1953)
The war broke out in 1950 with a communist invasion from the north that devastated large parts of the country and cost about three million deaths. In 1953, the Korean civil war had led to the separation of Korea at the 38th parallel with the establishment of a Communist North and a capitalist South.
Military dictatorship in North Korea
Since their separation, the economic performance of South Korea in comparison to the North has been extreme. While South Korea has transformed into an economic showcase with high income, the North has succumbed to a military dictatorship with a population suffering from hunger. Under the dictatorship of Kim Jon-un, North Korea has concentrated all available funds into a military program that now threatens its neighbors and the world.
Outstanding economic performance of South Korea
Since the separation of the country, South Korea has grown steadily. From a low of a per capita income of 944 US-dollars in 1960, South Korean gross domestic product per capita has crossed 25 500 US-dollars in 2016.
The South Korean economy ranks at the top of the world’s most innovative economies and counts with many world-renowned global companies.
Macroeconomic performance
The current economic growth rate of South Korea is 2.7 percent. The unemployment rate stands at 3.6 percent, while the inflation rate is 2.6 percent. Despite a heavy defense burden, South Korea’s debt ratio amounts to only 38.6 percent. In 2016, South Korea recorded a current account surplus of seven percent of its gross domestic product. While up to 2007, South Korea registered an amazing rise of its productivity, productivity has been stagnant since then – not different from what happened in Europe and the United States and in other industrialized countries.
Antony P. Mueller
September 10, 2017

Sunday, July 2, 2017

Financial Market Snapshot July 2, 2017

Global Economic Overview
New Impulses for Europe
Elections and Trump change European landscape
The past couple of months brought significant changes in Western Europe and in its relation with the United States.  Before the French presidential election on April 23 and May 7, there were still many concerns prevalent that the European project could suffer a serious setback even more so that a British general election was to be held on June 9 at the initiative of the British prime minister who wanted a clear vote in favor of a “hard Brexit”. By end of May, at the NATO summit in Brussels, there were also apparent tentatives by the American president to drive a wedge into the ranks of the members of the European Union.
Pro-European candidate wins
Different from the expectations in some corners, things turned out quite differently. First, in France, Emmanuel Macron won the presidential election. He is an outspoken supporter of the European Union. Macron’s victory against Marine Le Pen gives him a clear mandate to move ahead with a deepening of the European Union. Secondly, the US-American president has inadvertently strengthened European unity and induced the German Chancellor Angela Merkel to call for deeper European cooperation because the United States could no longer be seen as a “reliable partner”. Thirdly, the UK general election has not led to a larger majority of Prime Minister May’s Conservative Party, but to a loss of seats.
Britain’s Conservative Party suffers losses in general election
The big winner of the UK’s general election was the Labour Party, which gained 32 new seats while the Conservatives lost 13 seats. Instead of having a strong majority, as it was expected, the Conservative Party must now line up with the Democratic Unionist Party in order to hold a slight parliamentary majority. Instead of a “hard Brexit”, which Theresa May had promised, the negotiations about the conditions of Britain’s departure from the European Union will now have to settle for a “soft Brexit” which means that the residential rights of EU citizens will remain intact. As to the economic consequences of Brexit, recessions and higher inflation loom in the UK, while the rest of the European Union reported rising business confidence, low inflation and higher growth prospects.
Improving  economic conditions in Europe
In June, the Economic Sentiment Indicator (ESI) increased strongly in the euro zone by almost two points to 111.1 and for the whole of the European Union by 1.6 points to 111.3. These numbers reached the highest levels since August 2007 before the global financial crisis.
By early 2017, economic growth rates of the Euro zone reached 1.9 percent on annual basis. With 1.3 percent, the inflation rate is getting closer to the target rate of the European Central Bank (ECB), which still sets its policy interest rate at zero percent as the ECB also continues with its expansion of its balance sheet.

U.S. and Japan - Macroeconomic Data in Comparison
Economic growth
The US economy expanded at an annualized rate of 1.4 percent in the first three months of 2017, while non-residential investment was revised lower and the drag from inventories was higher than expected. The Japanese economy grew only by one percent on an annualized basis following a 1.2 percent growth in the last quarter of 2016.
In the United States, consumer prices in the United States increased by 1.9 percent year-on-year in May of 2017, which is lower than the rate of 2.2 percent rise that was reached in April.  It is the lowest inflation rate since November last year.  Core inflation slowed to a 2-year low of 1.7 percent. In Japan, consumer prices in Japan increased by 0.4 percent year-on-year in May of 2017. Core inflation increased to 0.4 percent, which is the highest rate since March of 2015.
The US unemployment rate fell further to the rate of 4.3 percent in May 2017. This is the lowest jobless rate since May 2001. However, the US labor force participation rate, which is already quite low, fell further and stands now at 62.7 percent. In Japan, the unemployment rate rose to 3.1 percent in May of 2017, up from 2.8 percent in the previous 3 months. The figure marks the highest jobless rate since December 2016.
Since the beginning of 2017, the US dollar is weakening. On Friday, June 30, the US dollar index stood at 95.9900 points compared to 103 by the end of 2016. On Friday, June 30, the rate of Japanese Yen to the US-Dollar was 111.9350 Japanese Yen per US-Dollar compared to about 115 by the end of 2015.
Current Account
In the United States, the current account deficit amounted to 2.6 percent of the country's Gross Domestic Product in 2016 compared to 3,2 percent in 2010. Japan registered a current account surplus of 3.70 percent of the country's gross domestic product in 2016 compared to 3.9 percent in 2010
Public Debt
The United States registered a government debt of 106.10 percent of the country's gross domestic product in 2016 up from 101.2 percent in 2015. Japan recorded a government debt of 250.40 percent of its gross domestic product in 2016 up from 248 percent in 2015.
Emerging Markets Scenario
Latin America: Argentina, Brazil, Mexico - Macroeconomic Performance Scenario
Economic Growth
In Argentina, the economy expanded at an annual rate of 0.3 percent in the first quarter of 2017 after a decline of 1.9 percent in the previous period. In Brazil, the economy contracted 0.4 percent year-on-year in the first three months of 2017, following a 2.5 percent drop in the previous period. Mexico experienced a good growth performance with a rate of 2.8 percent in the first quarter of 2017 well in line with the average since 2010.
In May 2017, the annual inflation rate in Argentina amounted to 24 percent. In Brazil, the inflation rate continues to fall and stands now at 3.6 percent after over 10 percent at the end 2016. Mexico’s inflation rate rose to over six percent annually in May of 2017, following a 5.8 percent rise in April
Argentina’s official unemployment rate rose to 9.2 percent in the first quarter of 2017 from 7.6 percent in the previous quarter. In Brazil, the unemployment fell to 13.3 percent in May 2017 after a high of 13.7 percent in the first quarter of the year. The unemployment rate in Mexico decreased to 3.6 percent in May of 2017 from 4 percent a year ago.  Mexico’s unemployment rate averaged 3.8 percent from 1994 until 2017. The all-time high was 6.4 percent in September of 2009. 
The Argentinean Peso continues to devalue. Argentina’s currency reached an official rate of over 16 Pesos to the US-Dollar by the end of June. The Brazilian Real stood at 3.3082 on Friday, June 30, after having reached a rate of over 4 Real to the US-Dollar in January 2016. The Mexican Peso reached 18.1228 Pesos for the US-Dollar after having hit 22 at the beginning of the year.
Public Debt

In 2016, Argentina registered a government debt of 54.20 percent of the country's Gross Domestic Product. Brazil registered a new height of its government debt at 69.49 percent of the country's gdp in 2016, while Mexico’s public debt in percent of its gross domestic product rose to almost 48 percent in 2016 after 43.2 percent in 2015 and 30 percent in 2010. 

Antony P. Mueller
July 2, 2017

Thursday, May 18, 2017

Market Snapshot May 18, 2017

New impulses for the European Union
With the election of Emmanuel Macro as the President of the French Republic, the European project is gaining new impulses. In stark contrast to his challenger, Madame Marine Le Pen who threatened to lead France out of the Euro and even out of the European Union in case she would gain the election, Macron is a staunch European. In his acceptance speech right after the election, Macron demonstrated his full support of a political European Union by having the European hymn being played before the French national anthem. The cabinet he put together includes many members with a pro-European stance.
More turmoil in the United States
Quite different from Europe, where things seem to calm down, the United States moves from one scandal to the next. The presidency of Donald Trump is under fire from all sides. Even members of his own party have turned skeptical about Trump’s capacity to lead the nation. The latest outrage that excited the media all over the United States was the leak that President Trump has shared sensitive national security material with the Russians at a recent meeting in the White House. This comes on top of claims from the opposition party of the Democrats that Trump’s had received support during the election campaign by the Russian government.
Stock market plunges
Partly as a reaction to the political turmoil at the US Presidency, the U.S. stock market has begun to give up some of the gains that the market had won after Trump’s election when rumors were mounting that Congress was trying to initiate am impeachment process against the President. Yet beyond the immediate political concerns, the stock market has also many structural reasons to fall given that valuation are overextended and the real growth prospect much less than the stock market seems to anticipate. Given the important role of the U.S. financial market, a fall of U.S. stocks will also affect the rest of the world irrespective of the specific situation in these regions.
Comeback of the Euro
The widening divergence between the United States and Europe in terms of political stability will most likely lead to a stronger Euro in the coming months. The spread could even get more pronounced when indeed the U.S. president should be confronted with an impeachment procedure. Beyond that, however, there are also fundamental reasons why the Euro should strengthen. France is surely coming out of its long stagnation along with Spain and Portugal and join the strong growth countries like Germany, the Netherlands, and Ireland. This would leave only Italy as a major country that still is in stagnation. Yet should cylinders fire in France, Italy would probably get the required impulses in order to higher economic growth.   
Economic growth
As of now, the improved outlook for economic growth seems to hold. Even is the United States should disappoint in the coming months, economic growth will get stronger in Europe. The result of the French election has given new confidence to European business. Together with the strong growth in Germany, accelerated economic growth in France will most likely spill over to Italy, the third-largest Euro economy. Even more so, there are signs the Japanese economy has finally come around the corner and move out of its decade-long period of low growth.

Prices and interest rates
The fact that price inflation has remained low even in the face of strongly fallen unemployment rates points to the expectation that and the outbreak of inflation is not imminent. There is, however, the possibility that the U.S. central bank could act proactively and go ahead before prices begin to rise significantly. As of now, given the political certainties in the U.S., the chances for a preemptive strike have diminished. Likewise, the European Central Bank will most likely wait at least as the economic situation in Italy becomes clearer. In Japan, the central bank is quite glad that the economy is moving ahead that a decision to raise interest rates is surely not a high priority
The strong labor market performance In the United States, Japan, and Germany will most likely continue.  It remains to be seen how a stronger French economy could reduce the unemployment rate of France, which is still very high. Across Europe, the employment situation is very uneven. This may contribute to a constellation where overall wage demands have remained subdued even in areas with very low unemployment rates. Some of the wage gains have come to the workers through deflation in the form of higher real wages.
Current account and exchange rates
The exchange rate between the U.S. dollar and the euro that has remained very stable over the past years will probably change in favor of a strengthening of the Euro. In terms of the purchasing power, the U.S. dollar is highly valued at its present level. The political uncertainty should come in as an additional factor to correct the overvaluation of the U.S. dollar that has been in place for quite some time and has contributed to a certain degree to the deindustrialization of some parts of the U.S. economy. It remains to be seen, however, whether the exchange rate realignment would be massive enough to correct its impact on U.S. competitiveness and do away with the persistent current account deficits of the United States.
North Korea
Slowly but surely, Venezuela is falling apart. Almost daily, there are deadly protests in the street. The government is helpless and other that to increase suppression has no way out. Foreign help from apparent allied has not shown up. No foreign power from abroad will risk a major geopolitical conflict with the United States by giving full support to the Venezuelan government. As bad as the situation is right now, as fast it could change when the present Socialist government resigns, allows open elections and makes room for a new government that promises to pursue solid free market reforms.
North Korea
Despite all warning, the leader of North Korea, Kim Jon-un, continues to push forward his nuclear program. With strong support from the United States, neither South Korea nor Japan will tolerate this North Korean policy. Yet being aware of the consequence of military conflict, the major efforts concentrate on a peaceful solution. Yet given that even the Chines ally of Kim Jon-un has no control over the North Korean leadership, the conflict is far from a solution and can turn any moment into a dramatic showdown.  
The fears of an economic collapse of China have not materialized. It seems the China has succeeded in settling down on a lower growth project, an adaptation that was highly necessary given the fierce growth of the Chinese economy over the past decades. In as much as the current U.S. administration is stuck in internal turmoil so that China may feel of having a free hand to continue its expansionary moves into the South China Sea. In going ahead with this project, the Chinese leadership may actually have a high interest in reigning in any adventurous movement by North Korea.

Turkey, a country with very close ties to the West – it is a NATO member and has been a candidate for membership in the European Union – is on its way of moving from an authoritarian regime to an outright dictatorship. These links, together with its exposed strategic location in the Middle East make it a pivotal country in the region. Over the past decades, Turkey had made great economic progress. The change towards outright dictatorship means a harsh setback for the economy. It remains to be seen whether from here on Turkey enters the spiral of political unrest and economic decline or whether the country can get out in time from this trap. 
Antony P. Mueller
May 18, 2017

Saturday, May 6, 2017

Market Snapshot May 5, 2017

Is the U.S. stock market ready to pop?

After a sharp fall during the recession in the wake of the financial market crisis of 2008 (see shaded area in the graph below), the U.S. stock market has made a turn-around in 2009. Since then equities have performed a rally that lifted the Standard & Poor’s index of 500 stocks quoted on the New York Stock Exchange from below 800 up to 2399 index points on May 5, 2017. Yet while the stock market’s valuation has tripled over the past couple of years, the U.S. economy in terms of its real gross domestic product has risen by less than 20 percent and in nominal terms about 25 percent in the past seven years.
Standard & Poor’s 500 Index, 2007-2017

Over the long run, stocks correlate with economic growth. There are, however, occasionally stretches of time when stocks outperform or underperform the real economy by considerable margins. Currently, so it seems, stock market valuation are well ahead of the real economy. Empirical evidence shows that market correction take place neither smoothly nor moderately, but the excess to the upside is followed by an excess to the downside and vice versa. 
Are there reasons to believe that a stock market correction is imminent and that such a correction would bring down valuations considerably? Such a question asks for the determinants that have brought about the current high valuations.
One indisputable reason for the elevated valuations of the stocks in the United States is the policy of the so-called “quantitative easing” that made the U.S. central bank (FED) to increase the monetary base from below one trillion to almost four and a half trillion U.S. dollars. Concurrently, the FED has brought down the policy interest rate (Federal Funds Rate) from five percent in 2007 to 0.5 percent in 2009. It was not until towards the end of 2016 that the central bank began to raise the rate in a couple of small steps to the present level of one percent, which is still extremely low.

Interest rates at such a low level have not only led to a frenzy “search for yield”. These low rates have also provoked companies to use their excess liquidity for stock buy-backs. Both policies are about to end and thus a correction of the stock market seems inevitable.
Antony P. Mueller
May 6, 2017

Friday, April 14, 2017

Financial Market Snapshot April 2017

Financial Market Snapshot
April 2017
International tensions
Political events continue to overshadow the economy. Acute tensions are on the rise about North Korea’s nuclear program and the conflict in Syria. Although the head of America’s central bank has announced the commencement of a policy aimed at bringing down the overextended central bank balance sheet to begin this year, the central bank may delay the project because of the highly uncertain political environment. This would imply that stock markets, which are already overextended, would likewise delay their correction.
European uncertainties
Political events also tend to overshadow the economy in Europe. There will be elections in France, with a right-wing populist as one of the frontrunners. Later this year, Germany will hold federal elections. The incumbent head of the government faces a strong opponent. Britain has officially triggered its exit from the European Union. Yet no one knows how the terms of separation will play out. To make matters worse, hardly a week goes by without some terrorist event in Europe and other parts of the world. The crisis of immigration remains unresolved.
Europe’s economies march at different paces. While Germany keeps doing well along with some other Northern EU countries, Europe’s South has a hard time getting out of its stagnation. 
Quantitative easing in reverse
In reaction to the global financial crisis of 2008, central banks in the industrialized countries, particularly the US Federal Reserve and the European Central Bank, have practiced a policy of “quantitative easing”, which has led to an unprecedented expansion of the central banks base money. This way, commercial banks could easily obtain funds in order to consolidate their balance sheets. This policy is about to end. The financial sector seems robust enough to support a withdrawal of base money. What lies ahead is quantitative easing in reverse.
Outlook for interest rates
The reversal of the quantitative easing policy will require higher interest rates. A continuation of negative real interest rate would drive up asset prices to unsustainable levels. In the area of monetary policy, the big questions for the rest of the year will be how the major central banks will manage to reduce their balance sheets. For this purpose, the central banks must sell a huge part of their assets, which largely consist in government bonds.
Asset prices
For almost ten years as by now, monetary policy has been extremely expansive. An enormous expansion of central bank money has taken place and interest rates have come down to zero and have turned negative in some cases. Now, as the major central banks prepare for a reversal, the question arises what will happen to the asset prices. As a reflection of the low interest rates, stocks, bonds and real estate are highly priced. In order to find buyers of their bonds, central banks must lower the prices, which will mean higher interest rates. GL
Economic growth
All major economies post relatively solid economic growth in the range of an annual growth rate of the gross domestic product between 1.5 to 2.0 percent. Germany’s export boom continues and private consumption is on the rise. In the United States, consumer confidence is getting stronger propelled by a favorable employment situation. It is doubtful, however, that any higher growth rates could be achieved in the future given low productivity growth in all major industrial countries.
Prices and interest rates
Global inflation remains low. Central banks wanted to get out of the deflationary drag and finally managed to obtain higher inflation rates. Currently, the U.S. inflation rate is close to two percent while in the Euro Area, the rate rose to 2.6 percent. With interest rates below this rate, real interest rate are negative. This constellation stimulates gross fixed capital formation. This should foster further economic growth. Negative real interest impact heavily on the German real estate market where there is no end in sight of the housing boom.
In the United States, Japan, and Germany, employment is surprisingly strong with unemployment rates below five percent. In the overall Euro Area, however, unemployment remains high. Europe’s unemployment rate has not yet fallen below the ten percent level. The highly uneven levels of employment in the Euro Area contributes to the general uncertainty about the future monetary policy actions. The absence of significant wage rises seems to be a major cause of the favorable employment situation. It remains to be seen if this situation can continue.
Current account and exchange rates
The exchange rate between the U.S. dollar and the euro has remained very stable over the past years and continues this way while the dollar has strengthened against many other currencies recently. In terms of purchasing power parity, the US-dollar is highly overvalued against almost all currencies. As a consequence, the U.S. current account deficit remains persistently high and America’s net foreign investment position is worsening. The recent meeting of the Chinese leader with the American president has defused the dispute about China’s exchange rate manipulation – at least for a while.

North Korea
All eyes are on North Korea and how the United States will react when Kim Jong-un should continue with his nuclear program. The fall-out of a military intervention would affect profoundly North Korea’s neighbors such as South Korea, China, and Japan. All three of these countries have close links with the world economy and thus any serious conflict would be strongly felt in the whole world.
President Trump has tried to find help from China in dealing with North Korea. This way, trade tensions between the United States and China have been kept low for a while. Yet the military expansion of China to South China’s seawaters does not bode well for a real d├ętente. China tries to bring down its huge position in U.S. government bonds, which will require a shift in economic strategy from exports to domestic consumption.
Middle East
The importance of the Middle East for the world economy results from its huge oil and gas reserves. Although the West is no longer as dependent on Arab oil as it was in the 1970s, the contribution of the region to the global oil supply is still important enough so that a stop of oil deliveries would severely disrupt the world economy.
Latin America
Latin America is at the fringe of global politics. Various countries in this region have enough domestic trouble to keep them busy for years to come. Different from Asia, almost no Latin American country has shown superior economic growth over the past decades. On the contrary, countries like Argentina and Venezuela are falling back and Brazil, which promised to move ahead, could not maintain its growth pace of the first decade of the new mellenium. 
Africa presents a highly mixed picture. Some African countries move steadily forward, such as the Ivory Coast, Kenya, and Mozambique, while others move backward, such as South Africa and Nigeria. Like some Latin American countries, parts of Africa have become a domain of China’s economic expansion in search of securing raw materials, space and food supplies.

Antony P. Mueller
The Continental Economics Institute
April 15, 2017

Saturday, March 11, 2017

Tranquilitiy before the crash

Tranquility Before the Crash

Main Topics

Asset markets
Since the election of Donald Trump as President of the United States the US-American stock market has rallied and with it those in many other countries. Market values have risen by the trillions. There are reasons for doubt whether gains of this dimension are justified. After all, interest rates have reached their bottom.  What will happen when interest rate start to rise? The expansive monetary policies since the crisis of 2008 have led to historically low interest rates. In some countries, even negative rates have emerged. The concerns are justified that when the phase of extremely expansive monetary policy will end, the current levels of asset valuation will fall. The fear of some observers that a crash of historic proportions is in the making is surely justified.  

U.S. Interest rates
The American central bank has been waiting patiently for quite some time to get the timing right with a further interest hike. Such a step towards higher interest rates was not opportune during the presidential election campaign even if it had been justified from a pure macroeconomic standpoint.  In the meantime, the expectations as to economic growth have become more confident and the labor market in particular has shown a very good performance recently. With the inflation rate rising, further procrastination with an interest rate hike can hardly be justified. It is unlikely that current assets valuation could withstand an increase of the interest rates that typically comes in various steps over an extended period.

President in twilight
Donald Trump has not yet achieved full recognition of his Presidential authority. Large segments of the American population still show a deep-seated mistrust against the President and his team. The President has had serious setbacks with his appointments to administrative top positions.  Trump’s announcement of protectionist measures has scared many foreign leaders, including friends and allies of the United States. The American relationship with Mexico is in shambles. The relationship with Europe has considerably cooled down.

European elections
There will be elections in France and Germany this year and all eyes are on France where the right wing nationalist candidate Marine Le Pen is a front-runner for the presidency.  A victory of her “Front Nacional” in the upcoming elections on April 27 and the run-off on May 7 would be a disaster for the European Union and probably lead to a break-up of the euro zone.  German general elections will be held on September 24, 2017 with the current chancellor Angela Merkel as the top candidate for the ruling Christian Democratic Party and its Bavarian collaborate, the Christian Social Democratic Party. The social-democratic party (SPD) has launched Martin Schulz, a former European Union politician, as its candidate who is currently leading a very successful election campaign in favor of the more social justice and closer European Union.  It is hard to imagine that if elected Schultz could cooperate with Le Pen as the new French President.

Global Scenario

Trade and foreign debt
In 2016, Germany was the country with the highest export surplus.  Germany’s current account surplus is on the way to record a surplus of almost nine percent of its gross domestic product (gap). The current account surplus comes largely from the trade balance. Germany’s annual exports amount to EUR 1.2 trillion. A current account surplus of one country implies deficits in other countries, which, in turn, mean foreign debt accumulation. The current process is not sustainable, neither for the export surplus country nor for the debtor country. The United States under Trump tries to do away with America’s persistent trade deficits, which have made the U.S the largest international debt with a negative “net international investment position” of around eight trillion US dollars in mid-2016.

Prices and money
Since the financial crisis of 2008, there have been a series of quantitative easing in the United States and Europe. These have led to an unprecedented increase of base money. The aim was to bring down interest rates. When interest rates hit zero bound, re-inflation became the aim monetary policy. In the meantime, price inflation is on the rise. The price inflation rate in the United States rose from under one percent in July 2016 to 2.5 percent at the beginning of 2017, and in the Euro Area, price inflation accelerated from a negative rate in the first half 2016 to two percent at the beginning of 2017.

Economic growth
The outlook for economic growth in the U.S. and Europe is at a solid level. In the United States, the annual economic growth rate was temporarily more than three percent in 2015 yet and has currently steadied about two percent in the beginning of 2017. In Europe, the annual growth rate of gdp oscillates between 1.5 and 2 percent since the beginning of 2015. As to the further outlook, all will depend on how markets react to a coming rate hike by the U.S. central bank.

Employment is very strong in Germany with an unemployment rate of 3.8 % and a labor-force participation rate of 75 %. In the United States, the unemployment rate stands at 4.7 %, yet the employment rate is still weak at 63 %. Despite its several decade-long stagnation, the unemployment rate has held steady at around three percent. Yet the Japanese labor-force participation rate remains to be very low at around of 58 %.

The greatest concern as to the long-run growth aspect of the industrialized countries is low productivity growth. After a rise in the aftermath of the financial crisis of 2008 due to layoffs, productivity growth has been largely stagnant in the United States with the index rising from 104 to only 107. In the United Kingdom, productivity growth has been nil since 2005 as it has been likewise the case in Japan.

Emerging Markets


After a slight recovery from stagnation in the second half of 2015, Argentina fell back into recession in 2016. The economy contracted 3.8 percent on an annual basis in the third quarter of 2016, following 3.7 percent decline in the previous period. Gross fixed capital formation fell 8.3 percent, following a 4.1 percent drop in the previous period and private spending declined 3.1 percent. Yet government spending is on the rise again since January 2016. Unemployment has risen sharply in 2016 and stands now at 8.5 percent. The inflation rate was around 15 % in in 2015, shot up in 2016 to over 40 percent.


Different from some expectations, economic growth of Brazil has not yet recovered. In the last quarter of 2016, the Brazilian economy contracted by 2.5 percent on an annual basis after a fall of 2.9 percent in the previous period.  The main factors that contribute to Brazil’s economic contraction are sharp declines in household consumption and of fixed investment.  After sharp falls in 2015 and 2016, industrial production is on the recovery and registered a 1.4 percent gain in January 2017. Brazil’s economic contraction continues. Unemployment is on the rise and increased to 12.6 percent. A lower inflation rate – down from around 9 percent in 2016 to 4.76 in January 2017, has allowed the central bank to lower its policy interest rate by 75 basis points to 12.25 percent on February 22nd 2017.


China unexpectedly reported a trade deficit of 9.15 billion dollar in February of 2017, compared to a surplus of 28.2 billion dollars the year before. While imports rose, exports fell in February 2017 by 1.3 percent compared to the same period last year while imports jumped by 38.1 percent. China’s economic growth is slowing down but still relatively high at annuals rates of over six percent since the middle of last year. Inflation is well under control at currently as China's consumer prices rose 0.8 percent on an annual basis in February 2017, compared to a 2.5 percent annual rise in January.


Venezuela is on the brink of total collapse. International reserves are down to 10657 USD Million in January from 10977 USD Million in December of 2016. Inflation is rampant, reaching an increase of 800 percent in 2016. According to preliminary figures, the Venezuelan economy contracted by 18.6 percent in 2016, following a 5.7 percent decrease in 2015.

Antony P. Mueller

March 11, 2017