Interesting times

I haven’t had much time to write given that now is the middle of earnings season (as companies report their financial results for the end of 2012). Having said this, there’s been a lot that’s caught my eye. Here are some of the things that have struck me:

The biggest story is the unfolding global currency war. Japan is faring well (as long as you’re not an importer). It looks like people believe Prime Minister Abe, as the Yen has dropped in value by over 13% since December 1. If you’re a Japanese exporter, you are now getting 13% more yen for selling your product in the US at a constant price. Of course, the rest of the world (ie Europe, Korea, China) need to be concerned because Japan can drop their prices in dollar terms by 10% and still receive more Yen than before the devaluation started. Mr Hollande (France’s president) has openly called for intervention to weaken the Euro. Mr Draghi, president of the European Central Bank, says he is watching the situation for signs of instability.

WSJ journal has had several stories on Chinese loans. Basically, the gist is that not all the loans are likely to be repaid (understatement). The WSJ reports that the government has encouraged lending in order to spur economic activity and maintain growth. I continue to think this is one of the main stories to watch over time (could take years to play out, but even so it is critical to be aware of the issues).

Despite concerns about these loans, recent Chinese economic data looks pretty good. Exports and imports for January expanded by 25% and 28.8% respectively. Impressive growth!

NY Times reports that the United Arab Emirates is cutting drug prices by 40%. In isolation, this is not a big deal. But other countries will follow suit. This is one story of many highlighting how drug prices are still an easy place for cash-strapped governments to seek savings.

Economic data around the world is mixed. Over the past two weeks, regional Fed manufacturing indexes have been mixed, as has been data out of Europe. On the latter note, Germany continues to do fine, whereas France is seeing contraction. France seems to me to be an under-appreciated risk. While I am not alone in making this observation, investors demand relatively low interest rates to hold French debt.

The political landscape across the globe is similarly interesting.

  • Spain’s Prime Minister, Mariano Rajoy, has been accused of taking bribes over many years.
  • Italy’s Silvio Berlusconi is regaining popularity in public opinion polls ahead of Italian elections on Feb 24. He is promising amnesty for tax evaders.
  • David Cameron has promised that, if he and his party are elected to power in the next set of elections (which will take place in 2015), he will hold a referendum on whether the UK should remain in the Eurozone.
  • Iran is promising (threatening) to ramp up its nuclear development program
  • Israel recently bombed Syria, firing at anti-aircraft weaponry that was being transported to Hezbollah in Lebanon
  • Egypt is facing unrest as Islamist lead Mohamed Morsi limits civil rights, following in the footsteps of recently overthrown Hosni Mubarak
  • Venezuela just devalued its currency by 30%. Mr Chavez remains hospitalized in Cuba since undergoing cancer surgery on Dec 11.
  • France makes advances in the war in Mali. Hard to believe that this will end with a few local victories, though.
  • Cyprus is bankrupt – will they get a bailout (Cyprus is tiny, so a bailout is affordable. However other countries will be watching and will likely want to receive similar generosity that is afforded to Cyprus)

Turning to the financial markets, the year is off to a great start. Corporate earnings on the whole have been good. Economic data, while mixed, hasn’t suggested anything that merits great concern. As central bankers have insisted over time, higher asset prices produce a wealth effect leading to more consumer spending and greater stability. Seems the markets agree.

This is a smattering of stories that have made an impression on me over the past few weeks (this is totally unscientific . . . just me reflecting on some of the current events that I see as meaningful). There is a lot happening that bears watching. These are interesting times.

sources: UAE to Cut Costs of 6,619 Medicine Brands by Up to 40 Percent-WAM (NY Times); Loans to Steel Traders in China Pose Risk (WSJ); China Regulators Move to Restrain Lending (WSJ)

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