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  1. 1. ABRAHAM GULKOWITZ abe@gulkowitz.com 917-402-9039 2015 issue 10May 29, 2015 Hopelessly Adrift Growth is still inadequate across the globe, but dont worry its just around the corner; and too rapid growth would anyway never be good at this stage for the markets. So take on more risk. Economic growth in most major economies still shows up subpar. Call it the aftermath of the great financial crisis or something much more complex. Indeed, it may now be the related to the drastic remedies of central bankers, as well. With a persistence of zero policy rates in most advanced economies, and zero or negative real bond yields, we also have an abnormal surge in the volume of public and private debt. And with that comes a new anxiety - central banks now fear that a change in policy might rattle markets and abort still half-baked recovery paths. Investors face distortions in bond markets (including reduced institutional liquidity), fairly or fully valued equity markets and some that are at boom-bust territory, and some seriously awkward conditions in property markets. While developed markets accounted for the lions share of financial crisis problems, it is now in some key emerging countries, least affected by the past crisis, where both growth and debt appear on collision paths. Some of the shifts evident in the new World Competitiveness Rankings are very telling. Student debt may be central to the next financial crisis The Consumer Financial Protection Bureau (CFPB) yesterday launched a public inquiry into student loan services. It suspects that servicers are engaging in practices similar to those of the mortgage industry before and during the financial crisis. Student loans are the second-largest source of household debt in the United States. About one-fifth of those with student loans are in default, a total of some 8 million mostly young people. Confirmation of European growth sought Long dated 30-yr US treasuries yields hit 3% in wake of a recent selloff The recent bond selloff in Europe and the US has led to corporate spreads widening China hit by record capital outflows Stock markets and trade fail to halt trend amid low rates, strong dollar and looser capital controls German PMI data signals further slowing of private sector output growth Recovery doubts not ignored at Fed Markets are Confused on Rate Hike due to Uneven Recovery U.S. shippers expectations for freight growth has dropped to its lowest levels in nearly five years, according to a recent survey. The roughly 600 shippers surveyed by Wolfe Research earlier this year say they now expect same-store shipments to drop on average 2.2 percent over the next 12 months. Its a far cry from where shippers expectations were a year, even months, ago. Volume forecasts for the next 12 months are down 3.1 percent year-over-year and 3.5 percent since the end of 2014. Greek end game looms Revised U.S. GDP Data Shows Clear Contraction in Q1 A Big Deal - an augury of the future of the internet, mobile and media
  2. 2. The PunchLine... 2 May 29, 2015 In This Issue Headlines and data appearing in The Punch Line came from widely available publications including national and international newspapers, trade journals, economic and industrial bulletins and news websites. Engines of Growth Conflicting economic signals emanating around the globe have confounded investors and contributed to intermittent bouts of volatility, even in government bond markets. Despite massive easing, most of the global economy faces woefully inadequate growth prospects and difficult policy options. Very obvious financial vulnerabilities, and serious geopolitical concerns are aggravating the uncertainty. And lets not forget that many of the challenges are not fleeting and cannot be resolved easily (pg 11) Credit (pg 12) A New Geography of Business (pg 13) Pumping Iron (pg 14) The DNA of Business (pg 15) Real Estate and Construction (pg 16) Will Life Ever be the Same? (pg 17) Hopelessly Adrift Growth is still inadequate across the globe, but dont worry its just around the corner; and too rapid growth would anyway never be good at this stage for the markets. So take on more risk. Economic growth in most major economies still shows up subpar. Call it the aftermath of the great financial crisis or something much more complex. Indeed, it may now be the related to the drastic remedies of central bankers, as well. With a persistence of zero policy rates in most advanced economies, and zero or negative real bond yields, we also have an abnormal surge in the volume of public and private debt. And with that comes a new anxiety - central banks now fear that a change in policy might rattle markets and abort still half-baked recovery paths. Investors face distortions in bond markets (including reduced institutional liquidity), fairly or fully valued equity markets and some that are at boom-bust territory, and some seriously awkward conditions in property markets. While developed markets accounted for the lions share of financial crisis problems, it is now in some key emerging countries, least affected by the past crisis, where both growth and debt appear on collision paths. Some of the shifts evident in the new World Competitiveness Rankings are very telling. (pg 1) In This Issue (pg 2) New World Rankings (pg 3) Dislocation, Dislocation (pg 4) The Return to Normal (pg 5) You Cant Handle the Truth ! (pg 6) Market Roar (pg 7) Households (pg 8) Think it Through (pg 9) The Likelihood of Unlikely Events... (pg 10) Contact information: Abraham Gulkowitz phone: 917-402-9039 email:abe@gulkowitz.com
  3. 3. The PunchLine... 3 May 29, 2015 New World Competitiveness Rankings The World Competitiveness Scoreboard presents the 2015 overall rankings for the 61 economies covered. The economies are ranked from the most to the least competitive The competitiveness ranking is an annual survey compiled by the IMD institute's World Competitiveness Center. For its 2015 ranking, it looked into the economies of the world's most industrialized countries. IMD has based its ranking on over 300 criteria, of which about two-thirds are statistics and the remaining third gathered from opinion polls. http://www.imd.org/wcc/news-wcy-ranking New World Competitiveness Rankings Select Country Records Source: Institute of Management Development, Switzerland; Competitiveness of 59 economies, based on over 330 criteria Country20152014 2013201220112010200920082007200620052004200320022001200019991998199719961995199419901980 USA 11 12 13111111111111111132 SWITZERLAND4 2 235444688149 Sweden 9545466991414111212111414161914129 Canada 57 7677881075367981086121320 Australia18 17 16159577126947101211111215211616 Germany10 6 99101613161626232120171313121516106644 Taiwan 1113 117 6823131818111217201617151418181422 U.K.19 16 181820222121202122221916171519139191514 France32 27 28 29292428252835303023252522232222201913 Japan27 21 242726271722241721232527232126201744311 Korea 25 26 22222223273129382935372929294136302726 China22 23 2123191820171519312429282624292127263134 Note that in the early years of the rankings, China and Russia were not even considered.The US leads again, Europe recovery is weak and uneven, Asia is mixed, and big emerging markets struggle
  4. 4. The PunchLine... 4 May 29, 2015 Dislocation, Dislocation, Dislocation China Blows Its Debt Bubble Bigger There are plenty of reasons one could argue China isn't on the verge of a debt crisis: The country has $3.7 trillion in currency reserves, a closed financial system and ambitious leaders who claim to be on the case. And doesn't the biggest rally in Chinese stocks since 2008 count for anything? But like Japan and other highly- indebted countries that have struggled to deleverage, China isn't showing the requisite tolerance for pain. A case in point was the government's May 15 decision to order banks to prop up the same local-government financing vehicles, or LGFVs, that it claimed to be reining in. Then the People's Bank of China decided this week to guide the three-month Shanghai Interbank Offered Rate to its lowest level since 2008. By manipulating "shibor" in this way, the People's Bank of China is helping regional leaders accelerate their unsustainable borrowing. Neither of these steps will help China avoid a Japan-like crisis. Rather, they are likely to ensure a belated financial reckoning in the years ahead with the potential to shake the global economy.
  5. 5. The PunchLine... 5 May 29, 2015 The Return to Normal ? U.S. industrial production fell for the fifth consecutive month in April. U.S. industrial production fell by 0.3 percent (m/m), the same as in March. The continued decrease in industrial production was partly due to the sharp drop in oil and gas well drilling. Crazy Weather Patterns US treasuries have sold off sharply over the past month. The 10-yr benchmark treasury rate has gained 35bps to yield 2.15% since April 20th. The long dated treasuries have been particularly volatile over the recent selloff. The 30-yr rate has widened nearly 50bps over the past six weeks, causing the US treasury curve to steepen to its widest level in over seven months. Dollar rebounds from four-month lows An abrupt shift in 10 and 30 year US treasury yields has caused investors to sell long dated bonds at record pace. Long end US treasuries have sold off 50bps over the past month but short end only 3bps Treasury curve steepness has returned to Dec 2014 level, previously seen in 2012 This quarter has seen $1.8bn of outflows from ETFs with a long term FI approach The yens drop to the weakest since 2007 may be just the beginning as its breach of a 25-year trend suggests there are few speed bumps remaining ahead. More than ever countries are relying on weaker currencies to boost their growth prospects in the low global interest rate environment. That mechanism, however, has spluttered as the dollar has pulled back, hit by weak economic