Progress in Europe

I have written a couple of times about rising protectionism, and looking at today’s stories, now seems to be an excellent time to revisit the topic. Protectionism is just one facet of how states try to wring out economic advantage over others, with currency and trade policies among the available tools. Today we have several examples.

On the currency policy front, we have “Beijing, Seoul Blast Fed Push” in the Wall Street Journal (WSJ) on page A13. The article talks about how both central banks are opposed to continued U.S. monetary easing, which encourages inflation around the world, weakens the dollar to make U.S. exports more competitive, and in general benefits the U.S. at the expense of its trading partners. Of course, this is exactly what the policy is designed to do. The ability of the U.S. to continue to follow policies that benefit itself at the expense of others, however, is dependent on the continuation of the dollar as the reserve currency, which is the other focus of the article, as both central banks advocate finding an alternative. Not an immediate concern, but a building long-term concern.

The U.S. economy continues to actively stay in one place. The papers reflect this, with headlines like “Numbers Augur Trouble Ahead” and “Obama Trumpets Revised Job Data,” both from page A6 of the Wall Street Journal (WSJ) and both painting very different pictures of where we are. Although the job figures have been revised up—meaning we actually have more than 400,000 more jobs than we thought—slowing growth and a drop in durable goods orders suggest that the future will be worse than expected. Likewise, “Chinese Slowdown Idles US Coal Mines” from the front page of the WSJ talks about how reduced exports and mining employment are hitting the U.S., while “GE’s Immelt Is Upbeat on Industrial Outlook” (p. B3) suggests that the recent industrial and manufacturing slowdown is in fact overdone. But there is cognitive dissonance within the GE article itself, with an acknowledgment that FedEx and Caterpillar are much less sanguine about the future.

The New York Times (NYT) is just as visibly conflicted. “Fearing Fiscal Cliff, Investors Cash In and Seek Safety” (p. B1) is right next to “Economy Still Weak, But More Feel Secure.” A follow-up article, “Good News and Bad in New Data on Economy” (p. B6), makes the uncertainty even more explicit. How’s that for hard-hitting analysis?

The fiscal cliff

Another bad day for Mitt Romney in the papers. The race in Ohio, which, according to the polls, is increasingly in favor of Obama, hit the front pages of the Wall Street Journal (WSJ) with “Electoral Drama Shifts to Ohio” and the Financial Times (FT) with “Romney’s options narrow as poll gaps widen.” Both articles highlight how critical Ohio is to the Republican’s national chances. The WSJ also has a useful map on page A6 that outlines exactly what states are in play, while the FT offers a look at the Ohio race in a special analysis piece on page 11, “Race for the rustbelt,” that highlights some of the state-specific issues in detail.

The race did not make the front page of the New York Times (NYT), but that paper did have a similar analysis by Nate Silver, whom I have recommended before, on page A19: “Romney’s Tough Path as He Trails in Ohio.” Silver provides an excellent breakdown of how past races have evolved and what that may mean for the race going forward. Worth reading.

We seem to be moving out of the eye of the European hurricane, as the winds are starting to blow again and people are taking cover. Spain and Greece made the front pages of the papers: the Wall Street Journal (WSJ) has “Bottles Fly as Spain’s Confidence Shatters,” accompanied by a photo of a bottle shattering on a building right by an older woman’s head as she takes cover; the Financial Times (FT) has “Spain’s premier fights turmoil,” accompanied by a picture of what looks like a masked riot policeman assaulting a member of the Spanish parliament; and the New York Times (NYT) has “New Protests Over Austerity Plans in Greece,” with a photo of a masked riot policeman running away from the remains of a Molotov cocktail. All three papers also have follow-up articles on both the Spanish and Greek protests to provide more context. Although the photos are quite scary, this is not just a photo op—it goes much deeper.

This is what it looks like when all the choices are bad ones. Everyone is looking for a solution that doesn’t require any sacrifice. The Catalonians are convinced they are paying too much, so they want to separate, which, of course, would make the problems worse for everyone, including themselves. “Spain Resists Homage to Catalonia” (WSJ, p. C12), “Spanish Ire Symbolized by a Carrot” (NYT, p. B1), and “Financial crisis stokes fires of Spanish identity” (FT, p. 4) all center on exactly this issue. What is the relevant governmental unit in Europe? At what level should different communities hang together and sacrifice for the common good? Without solving this fundamental issue, can any other issue be solved?

I want to highlight an interesting chart put together by Pete Essele of Commonwealth’s Asset Management and Research teams. Pete does excellent work in a variety of areas, but he is particularly good at putting together charts and graphics that make important points in very clear ways.

China rolled out its first aircraft carrier, in a significant symbolic move. The Financial Times (FT) covered the story in “Sea change: China enlists first aircraft carrier” (p. 6), the Wall Street Journal (WSJ) in “China Adds Carrier to Its Navy” (p. A9), and the New York Times (NYT) in “China Launches Carrier, But Experts Doubt Its Worth” (p. A4). I say symbolic because it will only be used for training and the Chinese do not yet have planes capable of carrier landings, as the NYT article points out. This is a sign of things to come, but not of things right now.

It does raise the ante across Asia, though. Japan is feeling it, per “Island spat raises military heat” (FT, p. 6), which talks about how the confrontation is getting more military in nature. Most people do not realize this, but Japan actually has an extremely capable military, including an excellent navy. If these confrontations result in Japan starting to re-arm, that will change everything about the Asian environment. This is a big deal for the next 10 years and forward.

Even though it is not on the front pages in the U.S., Europe continues to simmer and deserves an update. Spain did make the front page of the Financial Times (FT) with “Catalonian push for independence piles pressure on Spanish premier,” highlighting the problems the regions are creating for any bailout of the country. Not only that, but existing deals are also starting to show cracks; “Deal over bank bailout thrown into doubt” (FT, p. 2) discusses how Germany, Holland, and Finland are backing away from components of the bank bailout deal for Spain and Ireland that they were thought to have agreed on. Nothing solid yet, but a troubling sign.

That troubles are hitting the general population is shown not only in the recent protests in Catalonia, but also in “Protesters Take to the Street in Madrid” on page A4 of the New York Times (NYT), which references the regional protests. The Spanish government is attempting to address the issue, per “Spanish Leader Outlines Fresh Overhauls” on page A12 of the Wall Street Journal (WSJ), but markets are not convinced, as seen in “Debt Auction Shows Unease Over Spain’s Prospects” (NYT, p. B2). Spain is the bellwether here, and Hurricane Spain continues to spin.

So the U.S. markets are at their highest point since 2007. In 2007, the markets were at their highest since 2000. In 2000, the markets were at all-time highs. In 2000, values were driven by the bubble, as we now know. In 2007, spending and growth were driven by unsustainable growth in housing values and consumer borrowing, as we now know. In hindsight, those valuations were not supportable. We are smarter than that now.

I have discussed two major China themes over the past couple of months: growing cracks in the economy and—quite possibly as a result, to distract the population—growing nationalism and conflict with its neighbors. There have been riots over the second, brought on quite possibly by the first. Now, for the first time, we seem to have riots driven primarily by economic issues— not by the authorities.

The papers have stories on large riots at Hon Hai, a large manufacturer better known as Foxconn, which is a principal supplier for Apple. The Wall Street Journal (WSJ) has “Chinese Factory Erupts” (p. B1), the New York Times (NYT) has “Factory Riot Underscores Rift in China” (p. B1), and the Financial Times (FT) has “Foxconn halts production at Apple supplier after 2000 workers riot” (p. 17).

As promised, the coverage on Romney has tried to turn more favorable, with “Three Reasons the 2012 Race Could Still Change” on page A6 in the Wall Street Journal (WSJ). Notably, the turn has not been completely rounded, with the article acknowledging the problems, but the intent is there. Expect to see more—horse races are how the media makes its money.

One potential game changer is the introduction of foreign policy as a central part of the race. “Race Focuses on Foreign Policy” made the front page of the WSJ, while the New York Times (NYT) had “Republican Team Attacks Obama on Foreign Policy” (p. A11). Apparently, Obama’s lead in this area is eroding, and it represents a potential opening for the Romney team. With everything that is happening, there is the potential for a disaster abroad, which could damage the Obama campaign. This is not a guaranteed win for Romney, though, as the Financial Times (FT) points out in “Romney’s China holdings criticized” (p. 8), reminding us that Romney has vulnerabilities of his own on the international front.

Honestly, when the lead headline in the Wall Street Journal (WSJ) is about the costs of “free” checking, and it runs right above a story about the Emmys, you know it is a slow day. We have the usual follow-up stories: Greece will probably be back in the headlines soon in a big way, but for now, France is trying to buy it some more time; in China, Bo Xilai’s police chief was sentenced to 15 years, and Japan warned China on the island conflict. And, of course, we have U.S. politics.

The U.S. political stories are the most interesting, in that they don’t focus on the elections but rather on the underlying issues. The New York Times (NYT) has two articles, “Liking It or Not, States Prepare for Health Law” on the front page and “What Do Teachers Deserve? In Idaho, Referendum May Offer Answer” on page A14.

I sat down with Wall Street Week contributor Carrie Coghill to review the investing landscape. In this segment, we discuss why Congress needs to “do something smart,” and where investors can find yield and safety.

Watch: How the “Fiscal Cliff” Is Hurting the Economy Now

I wanted to mention a couple of stories today that actually brought some good news. The first two are on a point that I have made a couple of times—most clearly in the Economics and Politics webinar I linked to back in July—about how the U.S. is in a relatively strong competitive position, despite the glaring weakness of capital dependency.

The stories, “Cost advantages build case for US industrial revival” on page 5 of the Financial Times (FT) and “A Manufacturing About-Face: Made in America and Sold in China” on page A18 of the New York Times (NYT), both talk about how U.S. manufacturing is regaining its competitiveness, although they come at it from different angles. The FT story references a Boston Consulting Group (BCG) report, which predicts that growth in U.S. manufacturing could add five million jobs in the U.S. by 2020. Although the FT story indicates that some analysts are skeptical, the NYT coverage supports the idea of a revival by identifying and describing several companies that are doing exactly what is described in the headline—manufacturing in America and selling abroad.

As expected, the problems in Europe have not been solved. The eurozone continues to shrink, and a Spanish bailout continues to look inevitable. The papers had multiple stories.

The U.S. papers led with Romney stories again. The New York Times (NYT) has “Daunting Path Greets Romney Before Debates” and the Wall Street Journal (WSJ) has “Headwinds for Romney in Latest Poll Results,” both on the front page. The stories largely expand on points we discussed yesterday. The WSJ story talks about how Obama is pulling ahead in critical swing states—especially Iowa, Colorado, and Wisconsin—and is maintaining his lead in Ohio and Virginia. The NYT story expands on some of these points and adds a good graphic that lays out state-by-state comparisons.

The papers also highlight deeper issues with the campaign. The Financial Times (FT) has “Romney adviser quits campaign” (p. 5), which discusses that Tim Pawlenty—a former Republican candidate himself—has stepped down as cochair of the campaign and mentions a pointed nonendorsement by the Club for Growth, an antitax lobbying group. “Cash Low, Romney Striving to Find New Large Donors” (NYT, p. A12) expands on the financial issues facing the Romney campaign, which I discussed briefly yesterday, and “Obama, Allies Outspend GOP Rivals in August” (WSJ, p. A6) is consistent with Romney having financial issues as well.

The U.S. election (of course) was all over the papers. It is interesting to see the papers’ different perspectives: the Wall Street Journal (WSJ) on the right; the New York Times (NYT) on the left; and the British Financial Times (FT) relatively nonpartisan, but still a financial paper with all that implies. The FT linked a “Romney regroups” picture on the front page to “Romney tries to sooth donors” (p. 5), which states that Romney is trailing in nearly all of the swing states and is limiting public events in order to spend more time fund-raising.

The NYT story seems to confirm some of the FT’s key points, with “Romney Campaign Cautious with Ad Budget, Even in Key States” (p. A13). The article says that the campaign has been at a significant advertising disadvantage in key states due to limited financial resources, and that the imbalance would be even worse were it not for Super PAC spending on his behalf. The limitations are reported to be because much of what Romney has raised is earmarked for other uses, not as campaign funds. In fact, the article reports, the Obama campaign is actually raising more in usable campaign funds.

Although China’s not a big presence on the front pages today, it is again all over the news. As I mentioned yesterday, Bo Xilai’s future looks increasingly dark. Stories in the Financial Times (FT) on page 4, the New York Times on page A7, and the Wall Street Journal (WSJ) on page A10 all discuss that China has now implicated Bo in the cover-up of the murder of a British expat—the murder his wife was convicted of. The information apparently came from the (two-day) trial of Bo’s former police chief, which we discussed yesterday. How can a modern economy have a third-world legal system? I don’t think it can, at least not over time. China has benefited from low transport costs, from a perception that it was not a threatening country (at least not threatening to the West), and from very cheap labor, but all that is changing.

First, low transport costs have gone with cheap oil. Second, the perception that it is not threatening—well, look at all of the analyses I have posted over the past couple of weeks, as well as today’s “Panetta Urges Beijing to Resolve Island Spat” and “China to Probe Attack on US Envoy,” both on page A11 of the WSJ, not to mention “Brussels sidesteps China trade dispute” on page 1 and “West wrestles with China trade links” on page 4 of the FT. Finally, cheap labor is still there, but there are other countries that are as cheap or cheaper.

I was never a big fan of Popeye. The whole eating-your-spinach thing wasn’t what I was looking for as a small boy. The Federal Reserve (Fed), however, seems to be a fan of Popeye’s friend Wimpy, as the thrust of its recent policy has largely been to pay later for the hamburger we eat today.

The most recent quantitative easing (QE) program is a great example. Rather than just pushing off deleveraging for a while, the unlimited asset purchases—at least until the economy recovers—aim to stop it completely. If it were that simple, the problem would have been solved already.

Perhaps I should be more like my cable provider, which seems to have a channel for any conceivable interest, by starting a China channel, as there will certainly be enough content to fill it. The news from China continues to be worrying on both a political and an economic front.

I am going to change the format of the Yesterday’s News posts. Rather than hitting every item in one long post, I am going to have individual posts for each major story, then a clean-up post if necessary for things that are worth mentioning but don’t warrant an individual post. Please let me know whether you like this format or prefer the previous one.

The major front-page story remains the Romney video I mentioned yesterday, the one in which he basically throws 47 percent of the U.S. population under the bus. As it turns out, he also calls Mideast peace impossible, among other comments, but let’s stay with the comment about the 47 percent, as that was the focus of most of today’s articles. The Financial Times (FT) had “Romney gaffe draws fire from all sides” on the front page, quoting several Republicans denouncing the comments, as well as “Romney video stirs media debate” on page 2; the Wall Street Journal (WSJ) front page had “Video Flap Jolts Campaign,” which talks about the Romney campaign’s attempt to turn the flap into a debate on the role of government; and the front page of the New York Times (NYT) had “Romney Stands Behind Message Caught on Video,” which is pretty self-explanatory.

Apart from China, which gets its own post today, the U.S. election led the headlines. The New York Times (NYT) started with “In Video Clip, Romney Calls 47% ‘Dependent’ and Feeling Entitled” on the front page, the Financial Times (FT) had “Romney refocuses amid poll gloom” on the front page and “Romney’s chances hit by mixed messages” farther back, and the Wall Street Journal (WSJ) had “Romney Video Surfaces Just as Campaign Vows Specifics” on page A4. For anyone who missed this, there is a video that shows Romney saying he will not even try for the votes of the 47% of the population who are dependent on government, as they would never vote for him. Romney acknowledged making the comments, which were, of course, seized on by the Democrats.

The tone of class conflict in the comments, though, is at odds with the general disappearance of Occupy Wall Street. The FT had a picture on the front page, “Keeping occupied: March marks movement’s anniversary,” and the NYT had “Occupy Wall Street: A Frenzy That Fizzled” on page B1. The WSJ, interestingly, had nothing. Think about it—when was the last time you thought about Occupy Wall Street? Romney’s comments, though much more blatant than others he has made, are also consistent with public remarks he has made, to no criticism. Bad politics, perhaps, but incorrect?

Looking at the papers today, I decided to do two posts instead of one. I try to keep my posts to a reasonable length, and with everything that is going on in China, it warranted its own discussion. I’ll cover the rest of the world in a second post.

Throughout history, China has considered itself to be at the center of the world, and, because of that, the country has been known as the Middle Kingdom. In recent centuries, of course, the West has believed that it is the center. Look at any map made in the U.S., for example—we are in the middle! If you look at the news, though, it does all seem to revolve around China nowadays. Perhaps we will have to redo our maps.

Looking at the news over the weekend and today, there is no overarching theme, just continuations of earlier stories.

No prizes for guessing what the lead story is today—the launch of the good ship QE3. Front pages for all: “Fed Links New Aid to Jobs Recovery in Forceful Move” in the New York Times (NYT), “Fed Acts to Fix Jobs Market” in the Wall Street Journal (WSJ), and “Bernanke takes plunge with QE3” in the Financial Times (FT).

This is a big story. Although more QE (i.e., quantitative easing) is not necessarily a big deal, the way it’s being done shows that the Fed is all in: the open-ended nature of the program, the specific commitments, and the fact that it will go in conjunction with the existing Operation Twist. This is well in excess of what the Fed had to do, and well in excess of what many—mostly Republicans—thought it should do. The FT described the move as “stunningly bold” in a sidebar on the front page. This is a political bet, made necessary by the Fed’s conviction that—in the face of fiscal and political uncertainty in the U.S.—the economy would continue to be very weak and unemployment unacceptably high, if nothing more were done.

Unfortunately, the headline story today on front pages everywhere was the murder of the U.S. ambassador and three of his team in Libya. The Financial Times (FT) led with “Marines sent to Libya after envoy is killed in mob attack on US consulate,” the New York Times (NYT) had “Attack on US Site In Libya Kills Envoy; A Flash Point for Obama and Romney,” and the Wall Street Journal (WSJ) had “Libya Attack Sparks Crisis.” My thoughts and prayers to the families of the victims—there is not a lot else to say.

Economics got pushed to the back pages. The decision by the German court to approve Germany’s participation in the European rescue fund was on page 3 of the FT, with “Constitutional court refuse to block creation of rescue fund.” Meanwhile “In Victory for Merkel, German Court Ruling Favors European Bailout Fund” appeared on page 6 of the NYT, and “German Court Clears Rescue Fund” appeared on page 10 of the WSJ. This is a major victory for the euro, as not only was the rescue fund approved, but the language used made it more difficult for future challenges to be filed, and the conditions imposed were less than had been feared.

The common front-page story yesterday was, of course, the anniversary of 9/11. The Financial Times (FT) led with “9/11 remembered – Thousands gather at NY memorial,” the Wall Street Journal (WSJ) with “Where Towers Stood, Memories Cast a Long Shadow,” and the New York Times (NYT) with “Indelible Date, Unforgettable Lives.” It is fitting that this terrible event continues to get this level of coverage. Never forget.

No other real common front-pagers, but a couple of stories snagged two of three. The big one was the $104 million payout for the whistle-blower who led the IRS to systematic evidence that UBS had enabled thousands of Americans to evade taxes. He needs the money, as he just got out of jail on similar charges, but this will certainly aid his re-entry into society. “‘Tarantula’ snares record $104m reward for whistleblowing in UBS tax case” hit the front page of the FT, and “Get Out of Jail Free? No, It’s Better” landed on the front page of the NYT, but “Whistleblower Gets $104 million” was relegated to page C1 of the WSJ. Think this will encourage others to run to the IRS with evidence of tax evasion? Incentives work, although the jail sentence will probably mitigate any effect.

One story consistently made the front pages this morning: where is China’s presumptive new leader? “Mystery as China’s leader-in-waiting vanishes” in the Financial Times (FT), “Communist Leader’s Absence Sets Off Rumor Mills in China” in the New York Times (NYT), and “China Mystery: Where is Xi Jinping” in the Wall Street Journal (WSJ) all report the same speculation, but no one has any facts. Imagine, not all that long before inauguration, the vanishing of a U.S. president-elect. Problems? Quite possibly.

As well as China has done economically, it is clear that the political system does not operate at the same level of sophistication. Most predictions of continued Chinese economic success hinge on the ability of the government to manage the economy; to my mind, this type of story calls that ability into serious question. The FT has a good overview article, “The Ascent of the Bureaucrat” (p. 7), which discusses some of the issues associated with the current system. Given those issues, the downfall of Bo Xilai and his wife, and the current absence of Xi Jinping, you have to wonder what is happening at the top levels of Chinese politics and what that will mean for the economy, not to mention for the people.

The U.S. jobs figures and their effect on the presidential race were a flash in the pan. Although they made it to the front pages over the weekend, with “Poor jobs data hit Obama campaign” in the Financial Times (FT) and “Jobs Data Weigh on Obama, Fed” in the Wall Street Journal (WSJ), they got bumped into nonexistence on Monday.

The big stories on Monday are the pending threats to the eurozone, the German Constitutional Court decision and Dutch elections on September 12, and the slowdown in China.

Two big stories today. The Democratic National Convention (DNC) made the front page of the New York Times (NYT) and the Wall Street Journal (WSJ), but not the Financial Times (FT), and the European Central Bank’s (ECB’s) bond-buying plan made all three.

The DNC coverage is fairly vanilla, with “Obama Presses Plan for US Resurgence” in the WSJ and “Obama Makes Case for Second Term” in the NYT. More interesting is the accompanying analysis. “Campaign Confident It Has Roads to Re-election,” on the front page of the WSJ, discusses the race from an Electoral College perspective, pointing out that there is a structural advantage for the Democrats and breaking down the swing states—pretty good article. The WSJ has another note-worthy analysis piece, “Jobs Gauge Carries Election Clout” (p. A2), that talks about the importance of today’s employment figures to the election; we will discuss jobs a bit later in this post. The FT did touch on the U.S. election indirectly with a front-page article, “Draghi helps out Obama campaign,” pointing out that a European financial collapse would definitely have a negative drag on his chances for reelection.

The big story in the U.S. papers was the Democratic National Convention, and this time, Bill Clinton took his turn in the spotlight. The Wall Street Journal (WSJ) led with “Clinton Makes the Case for Obama,” and the New York Times (NYT) went with “Clinton Delivers Stirring Plea for Obama Second Term.” Not sure this counts as news—that the Big Dog is for the Democrat—but whatever.

The real news of the day, in the sense of something that might make a difference, is the announcement of the European Central Bank’s (ECB’s) plan to support the market for European government bonds. The Financial Times (FT) covered this story in “ECB resists capping bond yields in debt plan,” the NYT in “Fear of More Austerity Fuels Greek Unrest Ahead of Crucial Talks” (p. B1, the front business page), and the WSJ in “Europe Outlook Dims as Bank Meets” (p. A9) and “Moment of Truth for Draghi’s Plan” (p. C12). To get ahead of the news cycle a bit, the actual plan announced by the ECB, which will be in the papers tomorrow, is the most aggressive to date. The bank proposed the open-ended purchase of government bonds at short maturities (up to three years) for countries that are in one of the eurozone economic support facilities. In other words, if countries in trouble are willing to commit to an approved plan to balance their finances, the bank will make sure their interest rates don’t spike.

http://www.youtube.com/watch?v=WC5gHNME04E 

No news is good news

The front-page news today is the Democratic National Convention. The Financial Times (FT) leads with “Economy blow in key week for Obama,” which discusses the weak manufacturing report just released in the context of the election. The Wall Street Journal (WSJ) leads with “Democrats Rush to Rebut GOP,” and the New York Times (NYT) leads with “First Lady Tops Opening Night for Democrats.” Less meat in those articles, but that is what happened.

Not much else happening today, but there are some good stories looking ahead and some good coverage of things we have discussed in the past. The big pending issue is the European Central Bank (ECB) meeting tomorrow, and all three papers hit that. The FT has “All eyes on Draghi over bond proposal” (p. 2), stating correctly that the world will be parsing whatever he says or—possibly more importantly—doesn’t say about the ECB bond buying program. He is widely expected to announce such a program, but the details will matter—a lot. The WSJ did not deal directly with the pending meeting but did hit on a problem the ECB has that we discussed yesterday in “Lending Gaps Challenge Central Bank.” Borrowing costs are getting higher in the peripheral economies, as the euro convergence reverses, making it harder for the ECB to help them and complicating whatever is announced. Finally, we have “European leaders step up talks before policy meeting” in the FT. They have a lot to talk about. Make no mistake: this is a very important meeting for the future of the euro in the near term. Stay tuned.

So, I started off the morning doing the September Market Thoughts video. While prepping for that, I realized how much had actually happened in August, but how little of it got translated into public perception and the markets.