Category Archives: Global Economics

Division and Crisis Risk Sapping the West’s Power

My Comments: I make no apologies for having supported and voted for Barack Obama in 2008 and 2012. Much of the pressure from the right, in my opinion, is irrational and disguised racism.

Here is an opinion from England, my birthplace and true friend of America. It’s an interesting perspective and to the extent you are interested in understanding the dynamics of global economics, a helpful thing to read.

By Gideon Rachman / September 1, 2014

The people who prepare President Barack Obama’s national security briefing must be wondering what to put at the top of the pile. Should it be the Russian assault on Ukraine, or the advance of the Islamic State of Iraq and the Levant (known as Isis) in Iraq and Syria? And what items should go just below that?

The violent anarchy in Libya, the dangerous stalemate in Afghanistan, the looming political crisis in Hong Kong, or a confrontation between Chinese and US planes, near Hainan island? The US president might reasonably ask why all these crises are breaking out at the same time.

His critics have a ready answer. They argue that the Obama administration has shown itself to be weak and indecisive. As a result, America’s adversaries are testing its limits and the US-led security order is under challenge in Europe, the Middle East and Asia.

There is no doubt that the US is war-weary after the conflicts in Iraq and Afghanistan. However, the multiplication of security crises around the world is not just about Mr Obama and the US. In fact, the obsession with what the Americans are doing points to the underlying problem. Its allies have come to rely excessively on the US to guarantee their security.

As a result, the biggest weakness in the global security system is not a lack of resolve in Washington, but the learned helplessness of America’s regional allies. The Nato summit this week in Wales represents a crucial opportunity for America’s most important allies to start doing more to share the burden. If they fail, the inability of the US to police the world alone will become increasingly apparent, and the various global security crises will intensify.

The pattern of Nato spending reflects Europe’s increasing reliance on the US. At the height of the cold war, America accounted for roughly half the military spending of the alliance, with the rest of Nato accounting for the other 50 per cent.

Now, however, the US accounts for some 75 per cent of Nato spending. Last year, of the 28 Nato members, only the US, Britain, Greece and Estonia met the alliance’s target of spending at least 2 per cent of gross domestic product on defence. Even the UK may soon slip below 2 per cent, with the British army on course to shrink to about 80,000, its smallest size since just after the Napoleonic wars.

Even when it comes to the non-military side of security, the Europeans have lagged well behind. The US was quicker to push through sanctions on Russia, and its measures have been tougher, despite the fact that Russia’s undeclared war in Ukraine is a much more direct threat to Europe.

This same over-reliance on the US is evident in the Middle East. The rise of Isis is a massive threat to the dwindling band of stable regimes in the region, above all Saudi Arabia and the Gulf states. In recent years, these countries have spent lavishly on their armies and air forces. And yet it has been left to the US to wage the bombing campaign against Isis, while the nations of the Gulf Co-operation Council keep their 600 combat planes on the tarmac and complain about American weakness.

A similar pattern is on display in Asia, where US allies such as Japan and the Philippines agitate for the US to increase its military commitment to the region in response to an increasingly assertive China. And yet, even as they call for US help, America’s allies in east Asia have been unable to present a united front, in opposition to China’s maritime claims.

This litany of allied weakness is dangerous precisely because America is indeed more reluctant to “bear any burden” (in President John F Kennedy’s famous words) to uphold the international order. The Iraq and Afghanistan wars have left their marks. So has the financial crisis of 2008. Mr Obama’s reluctance to deploy military force is not an aberration or a personal folly. It is an accurate reflection of the mood of the American people, with opinion polls showing the highest levels of isolationism in more than 50 years.

That mood could shift in response to Russian aggression and to the chaos in the Middle East. However, even if it does, the days when the US was capable of being the world’s super-cop – with relatively little assistance – are coming to a close.

The World Bank estimates that this year, China will probably become the world’s largest economy, measured by purchasing power. America’s defence budget is falling, as the US struggles to control its national debt. The gradual relative decline of the US is a much worse problem than it might otherwise be, because America’s closest allies in the EU are in the grip of severe economic crises, which are eroding their ability to exercise power.

Collectively, the west now accounts for a decreasing share of the world economy – as new sources of power and wealth rise up in Asia. A western-dominated world is therefore in danger of looking increasingly like an anachronism – and that is the proposition that, in their different ways, President Vladimir Putin of Russia, Isis and the Chinese military are testing.

The perception of declining western power now threatens to become a self-fulfilling prophecy. The only way for North Americans and Europeans to stop that happening is to work together with greater determination and purpose to combat the crises burning out of control on the fringes of Europe, in Ukraine and the Middle East. That work needs to start at this week’s Nato summit.

As Benjamin Franklin put it: “We must all hang together or, assuredly, we will all hang separately.”

The World Is Marching Back From Globalisation

question-markMy Comments: Those of you who know me well do not consider me a pessimist. But this is Monday. And while I can feel optimistic about the chances for a return to good times from Florida football, the rest of the news is essentially gloom and despair. I’d much rather bring you something uplifting and motivating. But as a very tiny piece of a very big wheel, I’m powerless to do more than share this with you, hoping one of you will lift me off the floor.

My life has been shaped by how the world changed for the better following World War II. Notwithstanding the conflicts in Korea, Viet Nam and the middle east, it felt like there was a steady progression across the planet in terms of rising standards of living, health, and happiness. My family today is a reflection of that.

According to this author, the crash of 2008 has stopped that flow. The maniacs in Iraq are not fundamental to this reversal, though it will help us all if they are simply put down, like one would do with a deranged dog. I expect civilization will survive and once again move in the direction I spoke of a minute ago, but for now, and perhaps for the rest of my life, there are likely to be more questions than there are answers.

As we move toward the elections in 2016, we need to find leaders who don’t need to blow smoke and promote their own egos at our expense.

By Philip Stephens September 4, 2014

There is a mood abroad that says history will record that sanctions against Russia marked the start of an epochal retreat from globalisation. I heard a high-ranking German official broach the thought the other day at the German Marshall Fund’s Stockholm China Forum. It was an interesting point, but it missed a bigger one. The sanctions are more symptom than cause. The rollback began long before Vladimir Putin, Russia’s president, began his war against Ukraine.

The case for calling a halt to business as usual with Moscow is self-evident to anyone who considers that international security demands nations do not invade their neighbours. The valid criticism of the west is that it has been too slow to react. At every step, the Russian president has ruthlessly exploited US hesitation and European divisions.

He will do so until Nato restores deterrence to the core of European security. Mr Putin’s irredentism demands tough diplomacy stiffened by hard power. He will stop when he understands that aggression will invite unacceptable retaliation. To make deterrence credible, the alliance must put boots on the ground on its eastern flank. The Baltics have replaced Berlin as the litmus test of western resolve.

Some, particularly though not exclusively in the rising world, have seen sanctions through a different prism. By punishing Russia economically, the US and Europe are undermining the open international system. Economics, this cast of mind says, must be held apart from the vicissitudes of political quarrels. Why should new powers sign up to a level international playing field if the US and Europe scatter it with rocks in pursuit of narrow interests?

These critics are right to say an integrated global economy needs a co-operative political architecture. Sanctions against Ukraine, though, fit a bigger picture of the unravelling of globalisation since the financial crash of 2008. They testify to a profound reversal in US attitudes. Washington’s steady retreat from global engagement reaches beyond Barack Obama’s ordinance that the US stop doing “stupid stuff”.

The architect of the present era of globalisation is no longer willing to be its guarantor. The US does not see a vital national interest in upholding an order that redistributes power to rivals. Much as they might cavil at this, China, India and the rest are unwilling to step up as guardians of multilateralism. Without a champion, globalisation cannot but fall into disrepair.

Not so long ago, finance and the internet were at once the most powerful channels, and visible symbols, of the interconnected world. Footloose capital and digital communications had no respect for national borders. Financial innovation (and downright chicanery) recycled the huge surpluses of the rising world to penurious homebuyers in Middle America and dodgy speculators on the Costa del Sol. The masters of the banking universe spun their roulette wheels in the name of something called the Washington consensus.

Then came the crash. Finance has been renationalised. Banks have retreated in the face of new regulatory controls. European financial integration has gone into reverse. Global capital flows are still only about half their pre-crisis peak.

As for the digitalised world, the idea that everyone, everywhere should have access to the same information has fallen foul of authoritarian politics and concerns about privacy. China, Russia, Turkey and others have thrown roadblocks across the digital highway to stifle dissent. Europeans want to protect themselves from US intelligence agencies and the monopoly capitalism of the digital giants. The web is heading for Balkanisation.

The open trading system is fragmenting. The collapse of the Doha round spoke to the demise of global free-trade agreements. The advanced economies are looking instead to regional coalitions and deals – the Trans-Pacific Partnership and the Transatlantic Trade and Investment Pact. The emerging economies are building south-south relationships. Frustrated by a failure to rebalance the International Monetary Fund, the Brics nations are setting up their own financial institutions.

Domestic politics, north and south, reinforces these trends. If western leaders have grown wary of globalisation, many of their electorates have turned positively hostile. Globalisation was sold in the US and Europe as an exercise in enlightened self-interest – everyone would be a winner in a world that pulled down national frontiers. It scarcely seems like that to the squeezed middle classes, as the top 1 per cent scoop up the gains of economic integration.

Much as the south has prospered within the old rules – China’s admission to the World Trade Organisation has been the biggest geopolitical event so far of the present century – yet the new powers show scant enthusiasm for multilateralism. The old order is widely seen as an instrument of US hegemony. India scuppered the latest attempt to reinvigorate the WTO.

Globalisation needs an enforcer – a hegemon, a concert of powers or global governance arrangements sufficient to make sure the rules are fairly applied. Without a political architecture that locates national interests in mutual endeavours, the economic framework is destined to fracture and fragment.

Narrow nationalisms elbow aside global commitments. Sanctions are part of this story, but Russia’s contempt for the international order is a bigger one. Sad to say, we learnt in 1914 that economic interdependence is a feeble bulwark against great power rivalry.

Guess Who’s Back? The Middle Class

My Comments: There is lots of handwringing about last Tuesdays election results. And lots of people looking for someone to blame if it didn’t meet hopes and expectations.

One of my long time concerns has been the growing inbalance between the haves and the have-nots. Statistically it’s very real with the middle class that evolved and grew after WW2 now faltering and fading. That has huge implications for all of us and the quality of our lives going forward.

This article has been on my post-it-someday list since this past summer. It suggests the middle class is making a comeback. What is so perverse for me about the election results is that while I understand why the “haves” are naturally Republican, I find it difficult to understand why so many of the “have-nots” vote Republican. They are the ones most likely to fall down the economic rabbit hole and yet they seem happy to do so.

posted by Jeffrey Dow Jones July 31,2014 in Cognitive Concord

This has been a very important week for economic data. I know everybody saw yesterday’s GDP report coming, but it’s great news nonetheless. It was a blowout, a 4% real increase in the second quarter.

There is no negative way to spin this one. Even personal consumption expenditures rose at a 2.5% rate. Housing bounced back in a big way, with a 7% increase in residential investment. The consumer is alive and well, and given the fact that inventories, durable goods, and other investment all shot much higher, the business world is betting he’ll stay healthy for a while longer.

What’s interesting is what happens when we marry that data to what we saw in the July consumer confidence report. Consumer confidence surged to yet another post-crisis high and is now officially back in the range that, before 2008, we would have called “normal”.
CONTINUE-READING

4 Lessons For Us From a Century Ago

My Comments: As a nation we are on the horns of a dilemma regarding our role as the sole surviving superpower from the last century. I embraced Obama’s assertion that our national focus should revert to what is in our best interest domestically. At the time we were embroiled in Iraq and other places and I was sick and tired of the cost in terms of lives and dollars.

This article, which appeared recently in The Financial Times, tells us this is not a new dilemma. That roughly 100 years ago Britain was caught in the same issues as we face today. The comment about “spending money and men to try and civilize those who don’t want to be civilized” rings a bell with me.

However, if I want to leave this planet with some assurance it will be a better and safer place for my grandchildren, I don’t want us to hide in the shadows and hope for a better outcome. Hope is NOT a global strategy for success.

America, Britain and The Perils of Empire, By Gideon Rachman / October 13, 2014 / The Financial Times / Middle East turmoil of 1919 offers important lessons for today

General Sir Philip Chetwode, deputy chief of Britain’s Imperial General Staff, warned in 1919: “The habit of interfering with other people’s business and making what is euphoniously called ‘peace’ is like buggery; once you take to it, you cannot stop.”

It is difficult to imagine any member of the Obama administration making such an eyebrow-raising comparison. But, as the US struggles to cope with turmoil across the Middle East, Sir Philip’s complaint – quoted in David Reynolds’s recent book, The Long Shadow – has a contemporary ring to it. Even more so the lament of his boss, Sir Henry Wilson, the chief of Britain’s Imperial General Staff, who complained in 1919 that -”we have between 20 and 30 wars raging in the world” and blamed the chaotic international situation on political leaders who were “totally unfit and unable to govern”.

Britain was directly or indirectly involved in the fighting in many of these wars during the years 1919-1920. Their locations sound familiar: Afghanistan, Waziristan, Iraq, Ukraine, the Baltic states. Only Britain’s involvement in a war in Ireland would ring no bells in the modern White House. The British debates, and recriminations of the time are also strongly reminiscent of the arguments that are taking place in modern America. And how events panned out holds some important lessons for today’s policy makers.

The British military effort in Iraq in 1920, like the allied effort today, was conducted largely through aerial bombing. Then, as now, there was strong scepticism about the long-term chances of achieving political stability in such an unpromising environment. AJ Balfour, the British foreign secretary complained – “We are not going to spend all our money and men in civilising a few people who do not want to be civilised.” In an echo of America’s current Middle East confusion, even British policy makers knew that they were pursuing contradictory goals. As Professor Reynolds points out – “The British had got themselves into a monumental mess in the Middle East, signing agreements that, as Balfour later admitted, were ‘not consistent with each other’.”

Then, as now, even the people making policy seemed confused about the motives for military intervention in the Middle East – was it “making peace” as Gen Chetwode suggested, was it the rich oil reserves of the area, was it the protection of another territory (India for the British, Israel for the Americans), or was it simply a vague sense that imperial prestige was at stake? The debates in London, almost a century ago, as in Washington today, suggested that all these motives were mixed together in ways that no one could completely disentangle.

Military leaders’ complaints about incompetent politicians also echo down the ages. Sir Henry’s lament about British political leaders who are “unable to govern” is matched by the increasing rumble of complaint about the leadership of Barack Obama. Even Mr Obama’s former defence secretary, Leon Panetta, has just complained that the US president “too often relies on the logic of a law professor rather than the passion of a leader”.

These comparisons between the British and American dilemmas, almost a century apart, are intriguing – but do they offer lessons? I would point to four.

First, while it is always tempting to blame political leaders, the problems often run far deeper than that. The British prime minister in 1919 was David Lloyd George, who most historians now regard as a decisive and dynamic leader. That did not prevent the imperial staff from complaining about the torpor and confusion of his administration. The real problem, however, was the intractable nature of the problems that Britain was facing, and the limits of the resources it could bring to bear.

Second, it is much harder to be a global policeman if your government’s finances are stretched and your country is war-weary. In 1919, after the collapse of the Ottoman Empire, British imperial possessions were more extensive than ever. But the UK was exhausted after the first world war and had little appetite for further conflict. The Iraq and Afghanistan wars of the past decade were small affairs, by comparison. But they left a similar reluctance in the US to get involved in further conflicts.

Third, the uncanny similarity between the trouble spots of a century ago and those of today suggests that there are some parts of the world where geography or culture create a permanent risk of political instability and war: the frontiers between Russia and the West, Afghanistan, Iraq. The idea that ‘twas ever thus’ may comfort contemporary policy makers in Washington, as they struggle to cope with multiple crises.

Yet the fourth lesson derived from Britain’s travails in 1919 is less comforting. Many of the conflicts that the Imperial General Staff were struggling with did get resolved fairly swiftly. The western allies’ involvement in the Russian civil war was over by 1920, as the Bolsheviks moved towards victory. An uneasy peace was also re-established in Iraq. But Britain’s ability to impose its will on the world was waning. The political turmoil of 1919 was, in retrospect, an early sign that the world was entering a new period of instability that – within a generation – would lead to another shattering world war. Once the dominant global power loses its grip, the world can quickly become much less orderly.

Washington’s Hawks Have Usurped the Huntsmen

My Comments: If you are unsure what is meant by the headline above, you are not alone.

However, a reading of the comments that appeared in the Financial Times tends to reinforce in my mind the discomfort all of us should feel about the US Government agency known as NSA or the National Security Agency and others whose responsibility it is to spy, as they say in the movies.

At some point someone has to take responsibility for this crap, put it in context, and then put people in charge that have a fundamental understanding that in this age of instant news and technology, ANYTHING and EVERYTHING you do might have public consequences.

Some of it is probably justified, but to simply say OK to all of it means we are already far down that ubiquitous slippery slope. Time for some new rules.

By Constanze Stelzenmüller / July 9, 2014

The unspeakable in pursuit of the uneatable.” This was Oscar Wilde on fox hunting. Spying is hunting, of sorts. But in the latest instalment of the saga of US spying on the Germans, it is beginning to look more like the irresponsible in pursuit of the incompetent.

First, the prey. A low-level registry clerk at the Bavarian headquarters of the BND, the German federal intelligence service, offers his services to the Americans by mail. He sells them more than 200 documents over several years for a five-figure sum. His handlers are especially interested in the parliamentary committee investigating the US National Security Agency’s efforts to spy on Germany; according to Der Spiegel, a news magazine, they tell him to send everything he can find on the committee.

Then our man in Pullach sends another email, this time to the Russians. Would they be interested in his wares as well? To prove that he is not bogus, he attaches a handful of secret papers.

How could this have happened in a section of the federal intelligence service that has access to information about the Bundestag’s most sensitive committee? Susceptibility to greed or treason may be difficult to test for. But surely this man was either dim, lacking a survival instinct, or both. Who vetted him? Who hired him? Who watched him? Germany can guard the space between its goalposts as though it housed a nuclear bomb. Apparently, however, it cannot guard a parliamentary committee on intelligence.

Next: the pursuers. This was a tempting offer. But did no one in the US embassy say: “Hold it one second, guys. Remember how upset Angela Merkel was when we tapped her cellphone? What if this comes out, and the ambassador has to dine alone with his family for the rest of his tenure?” They might have reflected that, in his speech in Berlin in June last year, President Barack Obama sort of said the US would not resort to such tactics again.

They might have considered that Edward Snowden’s disclosures of NSA documents have made him a folk hero for many Germans. They might have done well to weigh the benefits of espionage against the potential costs. They could even have contemplated telling the German authorities that they had a little problem, in a bid to repair trust.

But evidently they thought none of these things. John Emerson, the US ambassador, was duly summoned to the foreign ministry in Berlin. And not on just any day; he was invited to a “conversation” on July 4, when the American community throws a party for Berliners, who munch on hot dogs while their children bury their noses in ice-cream cones, and gratefully remember the “Luftbrücke”, when the US Air Force flew in food and medicine to sustain the city during the Russian blockade of 1948-49. German displeasure might have been inferred.

All that was missing was news that Germany learnt of the leak through a friendly tipoff from Russian intelligence. This news reached the chancellor during a trip to Beijing (her seventh). Standing next to Premier Li Keqiang, she acknowledged grimly that this incident was “very serious”. Her host’s response was to say that Germany and China are “both victims of hacking”.

The large business contingent in Ms Merkel’s delegation will have taken note. The head of Germany’s domestic intelligence service, Hans Georg Maassen, had despatched them with a public warning that the country’s small and medium-sized Mittelstand firms are the “easy prey” of systematic cyberespionage by Chinese intelligence, which he called an “overpowering foe”. All that was missing was news that German authorities learnt of the leak through a friendly tipoff from Russian intelligence.

Cue wild harrumphing in Berlin, from justice minister Heiko Maas mulling criminal action, via interior minister Thomas de Maizière threatening “360-degree” counter-espionage, to mutterings about expelling US diplomats. The Americans, meanwhile, are issuing limp promises to “work with” the Germans.

Both reactions are off the mark. But they ought to serve as a warning. Just a year after the first revelations about NSA spying in Germany, resentment still runs high in Berlin; a rare case in which elites are in sync with the public mood. And Washington’s feeble response is not so much a sign of guilt – though it is probably that, too – as of helplessness in the face of a secret state that appears to have outgrown political judgment or control.

Yesterday, German media were reporting that a new espionage case was being investigated – this time in the defence ministry. Mr Emerson promptly made another visit to the foreign ministry.

There is no time to lose. A nasty US-German spat on Nato’s role in the Ukraine crisis is brewing. Negotiations on a US-European free- trade agreement face bitter public resistance. Add a breakdown of trust over espionage and you could have a transatlantic trifecta of disaster by the autumn.

The writer is a senior transatlantic fellow with the German Marshall Fund

World Weather Gone Haywire – Effects On… CRB Index and The Economy

My Comments: No, we are not doomed. But I can’t recall this much rain every day, some of it at night, when there wasn’t a hurricane. I’m sure it happened, but I don’t remember.

Does it have an effect on the economy? Experts agree last winters’ storms had an effect. So it’s worth paying attention to from time to time. If you are looking for solace, you won’t find it here. My cousin in England just wrote to tell me their weather is noxious and unpleasant. Have you thought about the price of vegetables and fruit in the coming months, stuff that we normally get from California? No rain there at all.

The people who give us economic data now say that the first quarter of 2014 saw really bad numbers. Early on it was an assumption that the economy was poised to enter another recession. Now, the powers that be say it was largely the weather. That’s a mixed blessing.

If you insist on keeping your head where the sun never shines, sooner or later it won’t matter how hot it is. Regardless of whether this is Gods’ plan, if the oceans continue to rise life is going to be more difficult for my grandchildren. But I guess if God hasn’t yet told you the plan can be changed by paying attention to CO2 levels, you don’t have to worry about consequences. And anyway, I’ll be dead by then and my Tea Party brethren can get all the credit.

James Roemer / Feb. 19, 2014

Cold U.S. Winter Affecting Nation’s Economy

You have heard it on your local news for weeks, read about it in dozens of newspapers around the world and if you live in the deep south, Midwest or Northeast, have “felt” it first hand—the most severe U.S. winter since 1982, at a time when much of the rest of the planet continues to see overall warmer than normal weather.

Look for another potential big storm in the east around February 26th and at the very least, record cold weather next week into early March.

You can hear a broadcast on Bloomberg a while back talking about natural gas prices possibly going over $6.00 and discussing global warming, the Brazilian drought, etc.

The adverse weather is having a multi-billion dollar affect on our nation’s economy. Pipes are bursting in the Northeast, salt companies are running out of supplies to remove snow, and various businesses are running into more economic hardship, as a result of the weather. Florists saw national revenues fall 60% during the Valentine’s Day period, unable to deliver flowers to tens of thousands of loved ones.

Our $16 trillion economy can usually ward off a couple of snowstorms, but NOT the incessant nature of 3 consecutive months of brutal cold and near record snowfall, in which tens of thousands of flights are being cancelled every other week. Other industries such as plastic and rubber products, auto sales, etc. are also being hurt.

The drought in California (one of the top 8 economies in the world), could also have a trillion dollar affect on our nation’s economy as food bills could soar without widespread rains and winter snow cover in the next winter or two. If El Nino forms, this could all change. It’s something I am arduously looking into.

TK – the balance of this article is full of charts and comments that may influence you if you are a short term trader. My primary interest is the long term performance of clients money (and mine) so I tend to ignore short term issues as they are largely noise. But global warming is going to have a long term influence on virtually everything, including our money. To get to the site where you can see the charts and read the rest…

http://seekingalpha.com/article/2032701-world-weather-gone-haywire-effects-on-brazil-natural-gas-crb-index-and-the-economy?source=email_macro_view_edi_pic_2_2&ifp=0

The Outlook for Yields

My Comments: Guggenheim Partners has recently been sending periodic macro insights about investments and opportunities for investors. Good stuff, so if investments interest you, I encourage you to grasp as much of it as you can.

global investingGlobal CIO Commentary by Scott Minerd of Guggenheim Partners – July 03, 2014

As U.S. economic growth gathers pace, yields on 10-year U.S. Treasuries should shift higher over the next two-three years, eventually moving as high as 3.25 – 4 percent.

While a broad-based secular increase in inflation will be a problem that comes most likely in the next decade, a number of technical and cyclical forces, such as healthcare and shelter costs, are working to push consumer prices higher over the next six months or so.

However, these forces are unlikely to spark sustained inflation in the near term, given that the U.S. unemployment rate is still quite high, the labor force participation rate has been on a downward trend for a number of years, and capacity utilization is still significantly lower than the threshold associated with a broad increase in consumer prices. In the medium-term, wage pressure will continue to rise and aggregate demand should improve. Rather than being the harbinger of an inflationary spiral many investors fear, that should be positive for economic activity.

Our research suggests that the yield on the U.S. 10-year Treasury bond should now be 3-3.25 percent, yet yields have been hovering around 2.6 percent. Keeping rates low in the near term are technical factors such as central bank accommodation flooding global markets with liquidity and some form of quantitative easing likely coming in Europe.

This week’s ADP report showing U.S. firms added 281,000 jobs in June, the most since November 2012, is the latest sign that the U.S. economic recovery is picking up steam. Over the next two to three years, given that economic growth is likely to be stronger, unemployment is likely to be lower, and inflation is likely to be higher, we will eventually start seeing fundamentals take over, resulting in higher yields on U.S. Treasuries. Assuming the U.S. Federal Reserve starts raising interest rates mid to late next year, we could see the U.S. 10-year Treasury bond reaching a cyclical high of somewhere around 3.75-4 percent.

U.S. Wage Pressure Approaching, But Not Here Yet

An improving labor market, brighter growth prospects, and higher capacity utilization are pointing to a U.S. economy approaching equilibrium. Historically, once the economy moves past equilibrium, whether defined by unemployment, output, or capacity, significant wage inflation tends to follow. Though we are drawing nearer to these levels, it is likely to take one year or longer before the gap is closed and broad-based wage inflation emerges.

Source: Haver, Guggenheim Investments. Data as of 7/2/2014. Note: We define the output gap using Congressional Budget Office (CBO) data on potential GDP, where the gap is the difference between actual and potential GDP as a percentage of potential GDP. We define the capacity utilization gap in the same way, using 82 percent as the natural rate. We define the unemployment gap using CBO data estimates of the natural rate of unemployment.

U.S. Data Points to Strong Second Quarter

• The ISM manufacturing index cooled slightly in June but remained well in expansion territory, inching down to 55.3 from 55.4.
• Personal Consumption Expenditures (PCE) rose less than expected in May, up 0.2 percent after April’s flat reading.
• The University of Michigan consumer confidence increased in June to the highest level this year, to 82.5 from 81.9.
• Pending home sales increased in May for a third consecutive month, rising by 6.1 percent from a month earlier, making it the best month in over four years.
• Construction spending rose for a second month in May but was below expectations, rising just 0.1 percent from April.
• Initial jobless claims inched down by 2,000 for the week ended June 21, to 314,000.
• Factory orders fell by 0.5 percent in May after rising during the previous three months.
• The core PCE deflator, the Fed’s preferred measure of inflation, rose in May for a third straight month, to 1.5 percent — the highest since January 2013.

China Manufacturing Positive, European Prices Muted

• Euro zone consumer prices rose 0.5 percent year over year in June, equaling May’s gain.
• Euro zone economic confidence unexpectedly declined in June to 102.0 from 102.6.
• Retail sales in Germany unexpectedly fell for a second consecutive month in May, decreasing 0.6 percent.
• Germany’s CPI accelerated to 1.0 percent year over year in June, the highest in four months.
• Spain’s manufacturing PMI rose to 54.6 in June, a seven-year high.
• The manufacturing PMI in the United Kingdom expanded to 57.5 in June, the best level this year.
• China’s official manufacturing PMI showed a faster pace of expansion for a fourth straight month in June, rising to 51.0.
• Japan’s Tankan survey of large manufacturers dropped to 12 from 17 in the second quarter. The outlook index, however, reached its highest level since 2007.
• Japan’s industrial production showed a small rebound in May, rising 0.5 percent after a 2.8 percent drop.
• Japan’s CPI climbed higher in May to 3.7 percent year over year, reflecting the recent sales tax hike. Core prices rose 3.4 percent, the highest since 1982.