<
Economy

U.S. Should Increase Exports To Avoid Another Recession and Financial Crisis

Howard F. Rosen of The Peterson Institute for International Economics presented a testimony on International Trade to the Senate Finance Committee Subcommittee this month. He argues that “In order to avoid another financial crisis and recession, it is imperative that America produce more than it consumes and increase the amount of goods and services it exports.”

The following are some of the key takeaways from his interesting testimony:

Singapore Leads the Top 10 Asian Cities of the Future List

The fDi Magazine has published the Asian Cities of the Future 2009/10 list. Singapore tops the rankings followed by Tokyo and Shanghai.

Top-10-Asia-Cities

The selection methodology:

fDi Cities of the Future shortlists are created by the independent collection of data by fDi Benchmark across 133 Asia-Pacific cities. This information was set under six categories: economic potential, human resources, cost effectiveness, quality of life, infrastructure and business friendliness. A seventh category was added – FDI promotion strategy. In this category, 24 Asia-Pacific cities submitted details about their promotion strategies and this was assessed and scored by the independent judging panel.

Cities could score up to a maximum of 10 points for each individual criteria, which were weighted by importance to give the overall scores. Where data was available only at a national rather than city level, a lower weighting was generally applied.”

Hong Kong came in at 4th and Seoul was ranked the 5th. In addition to Shanghai the two other Chinese cities included in this list are Guangzhou and Beijing.

The Latest External Debt Position of European Countries

The credit rating agency Standard & Poors downgraded Greece’s credit rating today.Last week Fitch downgraded Greece’s rating. Both the agencies cut the credit rating due to the country’s huge debts. The public debt of Greece stands at $442B and its public deficit is about 13% of GDP.

In Debt Fears rattle Europe the Journal notes that the Euro tumbled to $1.4505 yesterday. Austria nationalized Hypo bank on ECB’ s orders and there are new fears that another Austrian lender may be in trouble as well. Hypo bank is the sixth largest bank in Austria and ran into trouble due to hidden losses from its exposure to Eastern Europe.

The European countries with huge budget deficits are Portugal, Ireland, Italy, Greece and Spain which are now dubbed as “PIIGS” by traders.

The External Debt of Greece stands at $552B at the end of Q2,2009 as the table shows below. The external debt rose a massive 481.87 % in 2008 due to wasteful spending by Greek politicians.Most of the money went to fund social spending and high wages paid to public workers many of whom were hired by politicians to show their gratitude for electing them.This is why Greece continues to be the poorest country in Europe and its credit rating
was downgraded.

Gross External Debt Position (in US$ millions)

Country 2008Q4 2009Q2 Change in percentage
Austria 832,753 832,416 -0.04%
Belgium 1,354,299 1,271,796 -6.09%
Bulgaria 51,456 51,811 0.69%
Croatia 54,769 57,678 5.31%
Czech Republic 80,428 80,074 -0.44%
Denmark 588,776 607,375 3.16%
Estonia 26,843 25,332 -5.63%
Finland 339,454 364,850 7.48%
France 4,935,009 5,021,325 1.75%
Germany 5,158,439 5,208,468 0.97%
Greece 504,612 552,791 9.55%
Hungary 215,265 220,295 2.34%
Ireland 2,355,639 2,386,612 1.31%
Italy 2,328,235 2,567,067 10.26%
Latvia 42,257 39,597 -6.29%
Lithuania 32,473 32,263 -0.65%
Luxembourg 2,020,065 1,994,299 -1.28%
Netherlands 2,461,402 2,452,293 -0.37%
Norway 475,919 548,104 15.17%
Poland 243,477 248,689 2.14%
Portugal 484,710 507,002 4.60%
Romania 102,181 106,677 4.40%
Russian Federation 480,479 475,561 -1.02%
Slovak Republic 52,527 63,429 20.76%
Slovenia 54,608 53,204 -2.57%
Spain 2,316,545 2,409,516 4.01%
Sweden 617,309 669,097 8.39%
Switzerland 1,304,956 1,338,732 2.59%
Turkey 278,146 268,559 -3.45%
Ukraine 101,654 100,576 -1.06%
United Kingdom 9,041,357 9,087,661 0.51%

Source: The World Bank

Portugal, Ireland, Italy and Spain also have high external debt levels. Italy’s external debt increased by over 10% from the start of the year thru 2Q,2009.

More on this topic (What's this?)
“Greece – A Line in the Sand?”
Unfolding Sovereign Debt Story
Read more on Investing in Greece at Wikinvest

High Economic Growth Does Not Guarantee Strong Investment Returns

Is there a strong correlation between high economic growth and strong investment returns?. A recent study of economic growth in 14 industrialized countries by Orbis, the global asset management partner of investment management firm Allan Gray of South Africa, proves that there is very little correlation between growth in real dividends per share over the 20th century and economic growth.

Chart - Real Dividend Growth Per Share and Economic Growth

Real-GDp-Dividend-Growth-Correaltion

Via Equinox.co.za

Many investors mistakenly believe that high-growth countries will deliver high investment returns. The study used real dividend growth per share instead of earnings since earnings are impacted by accounting changes over the years. Dividend growth is a good indicator of returns delivered to shareholders.

From the chart above, we can infer that Japan had an annual real GDP growth of 4.2% in the 20th century. But it had a negative dividend growth rate of 3.3% per year during the period. Italy, Belgium, France, Germany, Spain, the Netherlands, Switzerland and Ireland also had positive GDP growth but negative real dividend growth.

Even when the real GDP and dividend growth rates were going in the same direction, the differences between the two rates were too high.Canada, USA, the UK and Australia had this scenario.

Overall it is not the high-level economic or industry conditions that affect a company’s performance. Rather it is the competition and individual performance that determines a company’s financial success.

The above theory holds true when we look at the high growth economies of India, Brazil and China. Very people invest in the companies domiciled in these countries for their dividend growth. Similarly in the US, during the dot com era people invested for the overall GDP growth and a company’s earning growth rather the real dividend growth.

Household Savings in China, India and South Korea

The household saving rate in Asian countries like India and China continue to be much higher than the U.S. personal saving rate. In the U.S., the personal saving rate as a percentage of disposable income was just 4.4% in October this year. This rate is actually higher than where it stood in 2008. In the first quarter of last year it was just over 1%. From 2008, the rate has been increasing and reached 5% in the second quarter this year as consumers saved more of their disposable income and reduced consumption.

U.S.Personal Saving Rate by Quarter

Source: BEA

The latest edition of Finance and Development magazine from the IMF, has an interesting article titled “Rebalancing Growth in Asia”.

National and Household Savings

Household-saving-Rate-india-China-Korea

The following is a summary of main points about household savings in China, India and South Korea:

It is interesting to note than during periods of tremendous economics growth in India and China, the household saving rate has increased nicely.This is in sharp contrast to the US where the personal saving rate actually decreased to almost negative levels during the high growth period of the 1990s.

USA Ranks 114th in the Happy Planet Index

The GDP is the most commonly used standard to measure the growth and development of countries. It has many flaws such as the exclusion of variables like the quality of life. Another factor that is also widely recognized is the Human Development Index (HDI). It measures the average of income measured by GDP, health measured by life expectancy and education measured by literacy/enrollment. Similar to GDP, the HDI is also not a complete representation of all aspects of growth and development of any economy since it ignores variables such as the quality of life, the relationship between current income and growth, etc.

The London-based independent think-and-do tank New Economics Foundation(NEF)  developed a new measure called the Happy Planet Index (HPI) back in 2006. It measures “the ecological efficiency with which human well-being is created around the world. The HPI reflects the average years of happy life produced by a given society, nation or group of nations, per unit of planetary resources consumed. Put another way, it represents the efficiency with which countries convert the earth’s finite resources into well-being experienced by their citizens. The Global HPI incorporates three separate indicators: ecological footprint, life-satisfaction and life expectancy.”

HPI = (Life Expectancy x Life Satisfaction)/Ecological Footprint

where Life Satisfaction is calculated based on surveys and others are hard variables.

According to this index, Costa Rica is the happiest country in the world. The USA stands at 114 just one step above Nigeria and one rank below Madagascar.

The 2009 Happy Planet Index Rankings are shown in the graphic below:

Click to Enlarge

Happy-Planet-Index-Rankings-2009

Rich countries fall in the middle of the rankings. The Netherlands is the highest ranked among Western countries and comes in at 43. Similar to Costa Rica, many of the countries that top the list are small islands including Jamaica, Dominican Republic, etc.

A few important take-aways from the THE ^UN HAPPY PLANET INDEX 2.0 report are:

In the executive summary the authors of the report write “In 2008, Americans voted for ‘change’ and ‘hope’ above else.” With one year in office, is our President Obama fulfilling their expectations?

More on this topic (What's this?)
Trading Education is Not Just About Trading Systems
Will Good News in GDP Spark a Lasting Rally?
Putting Financial Education on the Right Track
Read more on John Hancock Preferred Income Fund, Education in the US at Wikinvest