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Today's Commentary: 01.30.05

The Dilemma in Davos
The World of Money

The World Economic Forum convened in Davos this week to discuss how the wealthiest nations should conduct themselves in the coming year, what problems to focus on, and more importantly, how to save their smaller, financially troubled neighbors. The United States, who in the past was represented by the likes of Vice President Cheney and the Secretary of State Colin Powell, sent no high level official from the administration to represent our position.

That's unfortunate. Perhaps we had good reason to be absent from this meeting of G8 nations.

The third world nations seem prime to accelerate into the new century if the hackles of the past can be removed and a few concessions can be made to ease the transition. And in part, the moneyed nations want to help. What they lack is the understanding of the nuances of nation building in the twenty first century.

The economic influences that lead to national strength are vastly different than they were a decade ago. The future beckons for African leaders and the quest to join the elite, the financially endowed nations, the masters of the marketplace, is the driving force that has kept many struggling countries from simply crumbling.

The president of Nigeria, Olusegun Obasanjo was correct in refuting former President Bill Clinton's assumption that leadership, developed through systems, cheap medications and debt relief were the keys to healing the ills in this troubled part of the world.

Obasanjo, sharing the stage with Bono, BIll Gates, Tony Blair and Thabo Mbeki, president of South Africa, said in clear but punctuated tone that the problem was capacity. Economics would solve the problem, he seemed to suggest, understanding that this was the reason many of his people chose life abroad to life in Nigeria. He gave as an example, 5,000 doctors who, according to Obasanjo, trained in his country but practice in foreign lands.

The need for debt relief would, as Clinton pointed out, pay far greater dividends than stepping in at a later date to try and save the government and its people from insurgency. The money owed by these countries is a drop in the bucket compared to the cash we are pouring into Iraq and relief would be the quickest way to help. He was right but it is doubtful that this was the message that would have been conveyed by the Bush administration.

The economic stability in this part of the world would open American doors to another marketplace willing to supply us with cheaply made goods. But the economic equilibrium would be shifted in such a way as to make us an unwitting accomplice in our own demise. Americans have been doing their best to help the rest of the developing world, why should we ignore Africa?

Globally, we are the big spenders on the block. We exercise our right to buy with impunity and the continued ability to borrow to satiate those desires. A new market in Africa would not be a two way street anymore than Asia currently is. Of course, it would take a while to get to the level of financial savvy that the Asians have as they continue to comfort our fears and fed our weakness for debt by purchasing our Treasuries at a steady pace.

But few of us understand the consequences of this. As the trade deficit widens and our current accounts deficit grows, we risk lowering our standards to meet the rising world economy rather than the "all boats rise" belief that is currently embraced.

The dilemma in Davos for America is simple. We are almost, but not quite, among those struggling African nations. As we continue to borrow, we send the wrong economic message to the world. Debt without consequences does not exist. At some point, you need to, as the saying goes, "pay the piper".

But there are many who would disagree with this scenario. We are not a nation in danger of collapsing under our own deficit spending. We are, after all, the United States, capable of great and wonderful economic ideas. But those ideas have become ideals and these have a diminishing market value.

Markets are mobile and although we understand this, we do not fully accept the consequence of even more companies eyeballing greener pastures overseas. "Globalization and the movement of capital flows lead to things happening much more dramatically" Michael Rake, International Chairman, KPMG said, "and require an ability to lead a company that is flexible and quick in adjusting to different circumstances."

He was also concerned about the weakened dollar, the growing income disparities in this country, and our lack of understanding in the cause and effect of such loose spending policies.

But the American people, unwittingly could be at the center for the biggest shift in this mobilization of business. Growth of business overseas depends on the strength of the demand here at home. Strength of demand depends on income equality, which has begun to shift markedly in the last several years, accommodative monetary policies, and the ability to one day make our case of the forum at Davos asking that our debt might one day be relieved as well.

Today's Commentary: 01.24.05

Da i numeri
The Art of Manufactured Data

You can't help but wonder, if investors responded to the inauguration with a rapid retreat, which also helped mark the continued streak of losing weeks since everyone seeming embraced the new-year, what will they do when polarizing economic policies are debated in the public forum? Chances are the markets will seek some shadowy corner, no doubt regretting their own greed for the fattened coffers that any privatization plan will provide and hiding as the fallout from such radical ­ and unnecessary ­ change is proposed.

Mr. Bush was sworn in last Thursday and the world collectively worried about the freedom he repeatedly mentioned ­ 27 times. Comparisons have been made to previous inaugural speeches, an oratorical event that maps out the strategy for the next four years. JFK's name has been tossed around by those seeking to put this president in a more favorable light, ignoring some glaring differences between not only the time when those speeches were given but the man.

The world is very different now from the one Kennedy was elected to protect. We were financially solvent. Kennedy had the money to spend on a Cold War; Bush cannot fund his billion dollar a day war in Iraq without borrowing.

Mr. Bush has a whole new set of problems facing his second term, many of which are his creation. Because of a widening hole in current accounts and the federal budget, any surpluses that had been squirreled away systematically by the previous administrations could have been used to fund his Iraqi incursion. Instead, those surpluses have been turned in deficits. The concern is how much more can he/we borrow.

Every month, the once ignored report on international transaction is released. This is a cause for great anxiousness among financial institutions. October began the worrying in earnest as the Treasury Department, the author of this data reported that foreign investment had tapered off significantly. This piece of monthly data is the monetary infusion from foreign investors needed to fund the next big project cooked up by the administration - Social Security and tax reform - and to keep the first term's programs funded.

The generous investment from out-of-country investors has brought this report front and center. Looking to it for financial clues on sentiment, institutions have begun to pay closer attention to the data largely as a predictor of when the country will cross the line from being able to stand behind claims that we are still a good investment and not just another banana republic.

The flattened yield curve on the Ten-year Treasury, the intermediate note of choice for foreign banks should have most investors concerned. January equity performance aside, the bond market has been treading water at best. Call it what you want, but yield just ain't what it used to be.

That yield curve by the way, is looked to for future economic growth - a flat curve signifies slower growth ahead - and monetary policy - higher interest rates in the short term usually points toward a tightening of money supply. At last but not least, a flattened curve can predict a lack of corporate profitability.

On the corporate side of borrowing, paying fixed income investors for risk is down among those with the worst credit which allows these companies to provide their equity investors with some sort of payout for their trouble, boosting dividends and/or swaying the wary to bulk up on the stock. The bonds are still chock full of risk but because of the current credit environment, you won't find the high yield that usually accompanie repayment for such risk.

So what can the coming months hold for the second- termer, the markets, and those pesky and growing more fickle foreign benefactors? Expect the worst.

Mr. Bush and his staff of number shifters will try to make their case for a change in the best government program ever created. They will make their crisis-speak front and center, offering more doomsday scenarios each outing. The fact that this might sway the folks who voted for him, the rest remain steadfast in the opposite corner. As do a number of very worried members of Congress whose election in 2006 will be the test of whether Social Security is still a political third rail.

The markets will continue to shout at prisoners. This obscure reference stems from an old Italian tradition of asking asylum prisoners for lottery numbers and receiving what they believed were winning combinations. Those investors who have paid heed to market prognosticators, the ones who think that the first three weeks of '05 were simply a temporary shake-down of an overly bullish run-up in the last month of last year, the ones who point to charts and numbers as the reason to keep those dollars involved will be proved wrong.

Those foreign investors want just a few things in return for their trouble as well. They want to see the U.S. do well, get a grip on runaway spending, and finish what they have started. What they do not want is a strong dollar, more requests for frivolous pipedreams that need their financial support, and they want us to stop mentioning Iran. The quicker we clean-up Iraq and get out, the sooner Iran will stop gesturing at their need for increased geographic strength. Foreign investors do not mind financing the risk of sending our soldiers into harms way. What they anticipate as a result of our efforts are hungry markets for their cheap goods, available resources, and better place to finance growth.

And that would be the final stroke for a debtor nation like us.

The Blue Money Report
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