Business Groups Split on Keystone XL Pipeline

A proposed pipeline from Alberta, Canada to the Gulf of Mexico has drawn both the ire and admiration of business groups.

The controversial Keystone XL Pipeline has risen to national prominence following the passage of a payroll tax cut extension, which included a stipulation that President Barack Obama must make a decision in favor of, or against the project within 60 days. Proponents, like the U.S. Chamber of Commerce, claim that the $7 billion pipeline would be a jobs machine. The opposition, on the other hand, claims that the project will generate only modest job increases, and could end up costing more than it creates.

“If the president is serious about job creation and energy security, now is the time to act on the Keystone XL pipeline,” said U.S. Chamber President and CEO Tom Donohue. “This is the perfect example of a shovel-ready project that makes sense for our economy. The strong, bipartisan support for a provision requiring a prompt decision indicates that the Congress understood that there is simply no reason to delay a decision on Keystone until after the election.”

According to the Chamber, the pipeline will create 20,000 immediate jobs and an additional 500,000 barrels of oil from Canada, contributing both to job creation and presumably more affordable oil prices. “We strongly urge the president to move swiftly to approve the permit and move forward with this project, which is clearly in our national interest,” said Donohue.

However, environmentally-minded business groups, like the Green Business Network, have argued just the opposite; that the pipeline will divert oil, and jobs, from Midwestern oil refineries to their counterparts in the Gulf of Mexico. Citing a study conducted by Cornell University’s Global Labor Institute, the opposition has noted that consumers in the Midwest could end up paying 10-20 cents more per gallon once the pipeline is completed, ultimately suppressing spending and costing jobs. Furthermore, the environmental risks associated with the pipeline could create significant health and economic costs, thereby eliminating jobs as well.

The Keystone pipeline was originally proposed in September 2008, when TransCanada Keystone Pipeline, LP filed an application for a presidential permit with the State Department to build it. Under Executive Order 13337, the State Department must review the application when it would cross an international border with the U.S. The same executive order also directs Secretary of State Hillary Clinton to consult with federal agencies before issuing a decision as to whether or not the project is in the national interest. So far, no determination has been made.

Jacob Barron, CICP, NACM staff writer

CMI Preview: Index Surges on Holiday Retail Boom



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NACM’s monthly Credit Manager’s Index for December, to be unveiled in full Thursday afternoon at www.nacm.org, will illustrate solid games for the final month of the year. But, like most months, the service and manufacturing sectors aren’t exactly on the same page.


“Throughout the year, the manufacturing and service sectors exchanged positions with one another, and it was a rare month when both sectors were on the same track,” said NACM Economist Chris Kuehl, PhD. “December was no exception. The service sector grew much faster than manufacturing due to the strength of the retail segments of the index.”

The latter observation was to be expected, as sales usually surge on holiday gift shopping and manufacturing typically peters out late in the fourth-quarter. To wit, the service side of the CMI should show the highest readings since May though not quite to levels reached at the end of 2010. And favorable factors levels for the service sector remain high, with hope that anything that even closely resembles stability between 4Q2011 and 1Q2012 will be taken as a sign for much better economic growth in 2012. A key is avoiding some type of unforeseen catastrophe to shake confidence, like last year.

“This was the expectation at the end of 2010, but that was before the appearance of problems that beset the economy as a result of the supply chain disruption from the Japanese earthquake and tsunami as well as the impact on oil pricing from the Arab Spring and the violence that took Libya out of the oil markets for the foreseeable future,” Kuehl said.

However, favorable factors for the manufacturing sector going forward may be increasingly difficult to find.

(Editor’s Note: For the full data and analysis of the December CMI, check on www.nacm.org Thursday afternoon).

Brian Shappell, NACM staff writer

China Hinting at New Challenges to Dollar, Ratings Agencies

During what is a traditionally slow news period within the United States because of preoccupation with the holiday season, China lobbed a few thinly veiled barbs and hinted at challenges they would mount both in use of currency and U.S.-based credit ratings agencies.

Chinese banking official Zhou Xiaochuan announced that China, unsatisfied with the quality and accuracy of ratings coming out of the dominant U.S.-based credit ratings agencies (Moody’s Investment Services, Standard & Poor’s, Fitch Ratings) was seriously considering launching its own ratings agency. Additionally, he encouraged China’s largest financial institutions to consider launching their own competitors to the U.S.-based big-three or at least to add more researchers analysts to rely less on the existing services. The agencies have grown increasingly unpopular with what some characterize as trigger-happy downgrades of sovereign credit ratings of late, perceived conflicts of interest between its actual ratings and product offerings as well as its shaky performance in the lead-up to the global economic freefall.

Granted, there would be a lot of obstacles to overcome in either Chinese scenario as international trust of its government and banking system still lags far behind its status as a manufacturing hub. And that doesn’t even take into account the large cost to get anything competitive up and running to which potential clients, stuck in an ongoing tepid economic recovery, would be unlikely to pay a premium.

In a perceivably unrelated move, the Chinese and Japan announced new currency/trade partnership designed to boost both the renminbi and the yen in the area of trade, among others. Though largely symbolic and shrouded in a lack of finite details to date, the move appears to be a message that both are trying to gradually reduce reliance on the dollar as the dominant currency. While a statement not to be ignored, it’s not likely to push the Chinese currency ahead of the dollar on the world stage at any faster pace. As the Federal Reserve’s Matthew Higgins told NACM in an interview as well as attendees at FCIB’s New York International Roundtable in September, it could still take decades for the dollar to be replaced as the world’s go-to currency.

Brian Shappell, NACM staff writer


Updated Stats Confirm Busiest Year to Date for Exporting Support Outfit



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The Export-Import Bank of the United States’ (Ex-Im’s) annual report unveiled this week backs up its claims based off of preliminary numbers in October that the group financed more projects, in dollar value, in 2011 than any previous year.

Ex-Im financed $32 billion in projects through the calendar year, marking the third consecutive campaign in which it broke a previous record. In addition, Ex-Im noted small business financing surged again in 2011 and is up by more than 70% over the last three years. Ex-Im’s activity in 2011 was highest in Mexico and India, and is gaining ground quickly thanks in part to massive needs in the energy sector, said Ex-Im sources.

 The organization, an independent federal agency pairing U.S. companies and product manufacturers with companies abroad, also considers the following nations as high-opportunity ares going forward for U.S. businesses: Colombia, Turkey, Vietnam, Indonesia, Brazil, Nigeria and South Africa.

During an NACM interview with Ex-Im President and Chairman Fred Hochberg in September, he said, “If you’re not exporting to places like these, you need to get in that game...there’s not a company that exports [properly] that isn’t doing well.”


Brian Shappell, NACM staff writer

Uncertainty In Asia Following Kim Jong Il's Death

While its economy has been easy to ignore for the last several decades, North Korea still holds sway in Asia. And although the region’s markets are currently strong enough to take a few knocks in stride, the death of North Korea’s “dear leader” Kim Jong Il this week could potentially bring a lasting new layer of risk to the area.

Asia has been a bright spot through the global recession and the economy’s underwhelming recovery, but it remains far from immune to danger. Stock markets in the region fell on the news that Kim had died yesterday, none more notably than the Korea Composite Stock Price (KOSPI) Index, which fell 4.2%. “The Korean stock market has reflected the sign of public concern and fear as to national insecurity,” said Kyle Choi, Esq. of Bluestone Law, Ltd. “Furthermore, the value of the Korean currency has, at least temporarily, depreciated right after the news.”

While these indicators are expected to recover quickly, the question mark in the area now becomes Kim’s son and successor, Kim Jong Un.

The younger Kim remains untested and inexperienced, and could face considerable difficulty in his attempts to take the same level of control that his father once wielded over nearly every aspect of the country. These difficulties could exacerbate the tortured relationship North Korea has with the world, and with its own people, creating bigger problems in the form of the nation's chronic food shortages, political challenges and military security.

“It all depends on the new North Korean leadership’s position,” said Choi. “If the new leadership decides to maintain the hostile attitude towards South Korea that the previous regime did, it can very much affect the economy adversely, either in the short-term or in the long run.” Security threats could very easily become an issue as well, as the new leader seeks to assert himself militarily, possibly in the form of another nuclear test, which would disrupt regional and market stability even further.

Investors and exporters are never excited about uncertainty, and while North Korea has been, economically speaking, a non-entity in the region, how the questions surrounding the country’s young new leader are answered could determine much of the continent’s future as an economic powerhouse.

Jacob Barron, CICP, NACM staff writer

France Gets Thumbs Up, For Now, From Fitch Ratings; Others Not So Lucky



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On the heels of negative press for France and the possibility of a downgrade from its top-notch credit rating, the third of the big three ratings agencies has weighed in with a favorable outlook for the European power…at least for now.

Fitch affirmed France’s long-term foreign and local currency issuer default ratings and its senior debt at “AAA” status. Additionally, its outlook was upgraded from negative to stable. From Fitch:

“The affirmation of France's 'AAA' status is underpinned by its wealthy and diversified economy, effective political, civil and social institutions and its financing flexibility reflecting its status as a large benchmark euro area sovereign issuer. In addition, the French government has adopted several measures to strengthen the creditability of its fiscal consolidation effort.” However, based on problems in other European Union nations, Fitch predicted the chance of a French credit rating downgrade within the next two years at about 50%.

Fitch wasn’t so kind to everyone in Europe on Friday as six – "PIIGS nations" members Italy, Spain and Ireland as well as Belgium, Slovenia and Cyprus – were put on a new downgrade watch on debt and growth concerns.  

In recent weeks, Moody’s Investment Services had placed France on notice that it is in danger of losing its long-held AAA sovereign credit rating on concerns that aren’t so much based on its own situation, but those of rising borrowing costs/bond yield activity tied to collateral damage from problems in other high debt European nations. It is the second time this year Moody’s has released a public warning about France, which along with Germany has been forced to carry the load for a cluster of debtor nations. Standard & Poor’s later put both France and German on warning on a day when 15 European Union members simultaneously were placed on its negative watch. The rational was over “systemic stresses in the euro zone that have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole.”

Brian Shappell, NACM staff writer

Economist: Inventory Numbers Show Caution

The expectation of the retail community as the holiday season advanced was that they would go into this year as they have in the past couple of years—inventory light. That is exactly what has transpired, and there is no sign that strong sales from the last few weeks are going to provoke any last-minute additions to their stock.

There has been no change in retail, but that is not the story in wholesale or in manufacturing. The inventory levels in these sectors have gained dramatically. Manufacturers saw a 0.9% jump in inventory -- in wholesale, the hike was 1.6%. The differing strategies of the sectors are interesting.
 
Overall, there has been a consistent hike in the inventory level for manufacturers in reaction to the big supply chain disruptions that took place this year. It has not been just one or two incidents but a series of them, and they still affect major sectors around the world. The crisis in Japan damaged the ability of the auto sector to keep pace with production schedules all summer and, now, the tech world is suffering from the impact of flooding in Thailand. The factories that produce everything from hard drives to peripherals remain under water post-flooding. These disruptions are creating a new need to have inventory on hand.

Beyond that, there is concern that prices will start to rise in the coming year and many companies are seeking to beef up inventory of raw materials to beat that expected price hike. Wholesalers have been doing some of that advance purchasing as well in order to avoid what they anticipate in the coming months. There is increasing activity that suggests that companies are expecting to see better times in 2012. If things don't work out in such a manner, there will be some long faces by the second quarter.

Source: Chris Kuehl, NACM economist

Law & Order: Bankruptcy a Hot Topic from Courts Local to Supreme

The Supreme Court announced that, in light of a ruling that conflicts with two previous ones from other bankruptcy courts, it will consider the following situation: “whether a debtor may pursue a chapter 11 plan that proposes to sell assets free of liens without allowing the secured creditor to credit bid, but instead providing it with the indubitable equivalent of its claim under Section 1129(b)(2),” likely this Spring. In essence, it will decide whether or not creditors can use what is owed to them instead of cash in the bidding process for assets. A final ruling on credit bidding would likely follow by about three months.

The Supreme Court noted that a Seventh Circuit Court of Appeals in Chicago case (RadLAX Gateway Hotel LLC v. Amalgamated Bank, 11-166) allowed a secured creditor to bid its claim in lieu of a cash bid. That directly conflicts with a pair of other cases including a Third Circuit decision in Delaware was in the bankruptcy case of Philadelphia Newspapers LLC.

Meanwhile, on the municipal bankrupcty front, the Harrisburg, PA Chapter 9 saga started increasingly resemble "Keystone Cops" as the city council's attorney missed a deadline to appeal a judge's dismissal of its bankruptcy filing.  U.S. Bankruptcy Judge Mary France rejected an appeal by the city council’s attorney, over her previous decision to disallow a municipal/Chapter 9 bankruptcy filing coming from the state’s capital city.  France rejected the infamous Chapter 9 filing, done largely because of runaway debt tied to a trash incinerator project, last month on grounds that the city council was not legally authorized to file it.

And, in Jefferson County, creditors tied to its Chapter 9 filing from the Fall have asked to have the case dismissed, similarly to Harrisburg, on the argument that its county commissioners were not authorized to do so. U.S. Bankruptcy Judge Thomas Bennett is charged with considering the motion to dismiss on what amounts to technicalities in the filing’s legitimacy. 

(Editor's Note: more on these and more bankruptcy stories in this week's eNews, being released late Thursday afternoon).

Brian Shappell, NACM staff writer


Amid Improving Growth Fed Still Continues Course on Rates, Treasuries



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Some in the mainstream media tripped over themselves early Tuesday to predict the Federal Reserve would emerge from its latest policy meeting with dampened talk of an extended period of low rates and Treasury purchases as the U.S. economy appears to be back on track for somewhat improved growth levels. While the improving economy was noted, the Fed did not take anything that resembled a step back from its rates or Treasury policies.

The Fed’s Federal Open Market Committee unsurprisingly opted to hold the federal funds rate at a range between 0% and 1/4% and reiterated that conditions “likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” The announcement indicated the Fed expects moderate growth through 2012 despite problems in global markets, notably high-debt “PIIGS nations” and those in the European Union affected by their struggles. The Fed admitted such global strains remain the largest threat to an improved 2012. Meanwhile, once again, it downplayed the threat of inflation on the U.S. economy:

“The committee anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate [to foster maximum employment and price stability].”

Part of fighting off inflation as well as continuing a “stronger economic recovery,” than found over the last couple of years,  the committee intimated, is part of the reasoning between continuing its policy of reinvesting principal payments from its Treasury holdings (debt and mortgage-backed securities) back into more securities holdings.

Brian Shappell, NACM staff writer

Global 2012 Economic Outlook Hinges On Europe

Economists seem to agree that global growth in 2012 hangs on the fate of one particular continent.

What happens in Europe will determine much of the world economy’s health, according to economists from the Wells Fargo Economics Group, and NACM Economist Chris Kuehl, PhD. Both Wells Fargo and Kuehl presented their predictions in separate teleconferences last week, and while issues with Asia, inflation and elections were also hot topics, the biggest threat to growth was the euro zone.

“It’s not a 2009 unless Europe blows up,” said Wells Fargo Global Economist Jay Bryson, PhD. “Everything is predicated on Europe not blowing up.”

Wells Fargo Chief Economist John Silvia, PhD agreed with his colleague, noting that “the primary risk to forecast will be the question on European sovereign debt, and what it entails for borrowing around the world.” Kuehl, in his FCIB teleconference, noted that the crisis has already caused a second round of tightening among European banks and businesses. “The credit crisis has begun again in Europe,” said Kuehl. “It’s not as nasty as it was in 2008, but you’re seeing a slowdown. It’s gone back to a period where no one really has a good sense of where this conversation is going to go, and probably won’t have until the middle of next year.”

How much this lingering uncertainty and possible collapse will affect the U.S., however, remains to be seen. “We don’t have a lot of exposure to Greek debt,” said Kuehl, referring to the euro zone country closest to the brink of collapse. “France is probably the most exposed when it comes to the private sector. Germany is the most exposed when it comes to the government. Once you get past Germany and France the exposure begins to deteriorate quickly and as far as the U.S. is concerned, it’s relatively small,” noted, cautioning still that, “we are exposed indirectly because U.S. institutions are tightly connected to those in France and Germany.”

This being the case, growth in the U.S. is expected to be positive, but still on the small side.  “We do expect the U.S. economy to expand by 2%,” said Silvia. “With this subpar economic level, we have modest inflation levels, and I think the Fed funds rate will stay the same until 2013.” Bryson agreed, noting that “It’s an average sort of year. Then, in 2013, we come back.”

For more information on FCIB’s international educational offerings, click here.

Jacob Barron, CICP, NACM staff writer

Commentary: Germany Wins in EU Debt BattleĆ¢€”What Does this Mean?

For months the contest has been between the Germans and most of the rest of the European Union over the debt situation and potential influences on one-another's budgets. The deal is finally in place, and it's notable that Germany’s chancellor held her ground despite the near panic that set in throughout the euro zone.

The Germans were (and are) the only nation that has the resources to pull Europe out of the mire, and they were not going to lift a finger until getting what they wanted. Some concessions were made in the end, but the core structure of the German plan is intact and will be the strategy pursued going forward.

The plan as it stands is based on four key elements and, at the moment, it does not look as if these are all that negotiable.
  • The first is that there will be strict limits on a nation’s budget deficit as well as their spending-to-GDP ratio.
  • The second point is that there will be a system imposed to reduce the existing debts and deficits to no more than 60% of GDP. This is the imposition of some strong austerity plans on those nations that have run up the highest debts.
  • The third part of the plan is the enforcement part—severe and inescapable sanctions if nations fail to adhere to the new rules. Germany wants a club with which to beat the members into financial submission, especially the 'PIIGS Nations.'
  • The fourth element is a common language and strategy as far as budgets are concerned. The consolidation of national budgets will make the task of coordinating policy far easier.
 
Analysis:
There is a very long path between the creation of this plan and its fruition, and there will be many battles ahead. The point is that Germany refused to waver on key points and, now, it becomes a matter of bringing the other nations in the euro zone on board. Germany, which will have to start ponying up the money needed to bail out the southern EU economies, will retain the upper hand on the issue as long as its economy is the only one that has the ability to rescue the others.

Source: Chris Kuehl, NACM economist

Attorney: Lehman Resolution "Bankruptcy at its Finest."

Judge James Peck of the U.S. Bankruptcy Court for the Southern District appeared almost relieved as he approved the latest plan by Lehman Brothers, which filed the largest Chapter 11 bankruptcy filing in U.S. history about three and a half years ago. Marked by its size, drastically different plans and legal wrangling between creditors, Peck characterized the bankruptcy proceeding as the most difficult ever seen in U.S. courts.

Lowenstein Sandler PD attorneys Bruce Nathan, Esq. told NACM the case represented “Chapter 11 at its best -- Bankruptcy is at its best not when there is litigation, but when there is resolution, and this case was very difficult.” However, he also noted that, just because the plan has been approved and stakeholders have stopped fighting, doesn’t mean the Lehman situation is coming to a neat and tidy end in 2011. He warned there are still significant amounts of assets that need to be liquidated over a three-year period, which is being drawn out to maximize value as opposed to most of the rapid-fire liquidations that occurred as well as  partnerships/ventures Lehman needs to get out of and a two-year window for stakeholders to file objections to claims to what may end up as a pool of money estimated at $65 billion.

“This is the end of the beginning, but there’s really a lot more to go here,” Nathan implored. “What they’ve done is extrordinary, but there’s a lot of bull work to do to finish this case out.”
That said, there has been an active trade claims market for Lehman creditors to consider. The question now is how many creditors sold their claims, and who should consider doing so at this point. “Selling might make sense given how much longer there is to go,” said Nathan.

(Note: More on this story in this week’s eNews, which will be available at www.nacm.org late Thursday afternoon).

Brian Shappell, NACM staff writer

S&P Downgrade Warning Has Little Impact...FOR NOW

As reaction continues following Standard and Poor’s (S&P) placement 15 European Union members on its negative watch list this week just as markets were starting to have faith in the German- and French-led measure to clean up the EU’s ongoing debt and monetary problems, it seems the markets haven’t had much of a reaction. That could change following a two-day EU summit that ends Friday.

Still, what is the actual impact of all this? It’s not much, for now, says Hans Belsak, president of S.J. Rundt & Associates. However, the key words are “for now.”

 “For now, the decision of S&P does not have much of an impact, as it merely recognizes what the markets and investors are well aware of,” he told NACM. “But it does highlight the importance of this week’s European summit meeting and of the ongoing efforts by both Germany and France to move Europe toward greater fiscal integration. If they fail, and if the nervousness in the markets gets worse, the consequences could be calamitous.”

Belsak noted that dissolution, should that worst case scenario arrive in the near future of the Euro zone, would result in “an incredible mess” both in Europe and abroad.

The U.S. would suffer extensive collateral damage, given the exposure of many U.S. financial firms,” Belsak said. “There would be a run into U.S. Treasuries as a ‘safe bet’ but, even so, U.S. financial firms would be forced to scramble for liquidity as European markets freeze up.”

Brian Shappell, NACM staff writer

S&P Issues Downgrade Warning For EU, Just About All of It

Despite image problems from shaky predications in the run-up to the recession, perceived conflicts of interest and a U.S. rating downgrade widely regarded as premature if not unnecessary, Standard & Poor’s has continued to not shy away from controversy with its ratings moves and warnings. But perhaps its most incendiary moment came this week when it put 15 European Union members on blast.

Just as markets were starting to have faith in the German- and French-led measure to clean up the EU’s ongoing debt and monetary problems, S&P swooped in to undue all of that positive by putting the long-term sovereign credit ratings on its negative watch list. Among those receiving the dubious distinction were Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands. The following nations were noted as negative both in the long and short term: Estonia, Ireland, Italy, Malta, Portugal, Slovak Republic, Slovenia and Spain. S&P’s now maligned release explaining its position included the following:

“Today's CreditWatch placements are prompted by our belief that systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole. We believe that these systemic stresses stem from five interrelated factors:
  1. Tightening credit conditions across the euro zone;
  2. Markedly higher risk premiums on a growing number of euro zone sovereigns, including some that are currently rated 'AAA';
  3. Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among euro zone members;
  4. High levels of government and household indebtedness across a large area of the euro zone; and
  5. The rising risk of economic recession in the euro zone as a whole in 2012.
Currently, we expect output to decline next year in countries such as Spain,
Portugal and Greece, but we now assign a 40% probability of a fall in output
for the euro zone as a whole.”

S&P noted that it’s waiting to make any decisions on rating moves until after the Dec. 8-9 EU Summit, but intimate some downgrades could occur very soon after. Stay tuned…

Brian Shappell, NACM staff writer

Commentary: Japan is in Worse Shape than Europe ”So Why isn't it Suffering as Much?

It’s not as if Japan has not been hearing warning bells, but there is always a sense that somehow those clever Japanese will pull something out of their hat and stave off the worst of it. The United States is near panic over a debt that is roughly equal to its GDP, a little less actually. The Greeks are looking at debt that is roughly 150% of their GDP, and they have been written off by some until the next millennium. Meanwhile, Japan is looking at a debt that is close to 220% of its GDP, and it has been there for years.

The latest IMF assessment of Japan is a true gloom-fest, with warnings coming from all directions. The conclusion is that almost nothing in Japan’s economy is sustainable—even in the relatively short-term:
  • The GDP numbers are not improving.
  • Much of the Japanese manufacturing community has already decamped for greener pastures in either lower-cost production nations or in the countries.
  • The population is old already and getting much older.
  • The pension system is not capable of handling the situation much longer.
  • The government spends far too much on white elephants and show projects.
  • The population is resistant to future taxation.

But, evidentally, the big difference is that investors in Japanese bonds are mostly Japanese, and they really lack the ability to invest easily elsewhere. In Europe, the spooky investor can stash their cash in some nearby haven, but the more insular Japanese lack that option. In Europe, bond buyers are institutional and therefore flighty. At the first sign of trouble, they split and take their money elsewhere. Japanese bonds are sold to the general public, and these are investors that typically just sit and wait. Even the corporate bond sellers are facing far less volatility and, as a result, there is far less pressure on bond issuers to do anything dramatic to contend with the vagaries of the market. The nation is insular and that can be a blessing and curse.

Analysis: Thus far, the isolation in Japan continues to offer protection but, at some point, even this will not be enough to cushion the system from the pressure of the outside world. The problem is that financial change in Japan is a lot like earthquakes. Everyone knows the next big one is coming, but nobody has any idea when. They all know that at some point the bottom will fall out of the bond market and Japan will suddenly be facing the same kind of crisis that is bringing Europe to its knees.

Source: Chris Kuehl, NACM economist

Economists React to Central Banks Liquidity Push

Reaction to the efforts of central banks from around the world, notably spearheaded by the U.S. Federal Reserve, have been mixed. Some of NACM's top sources on the global economy weighed in as follows:

Freddy van den Spiegel, of BNP Paribas Fortis
: "It will certainly reduce somewhat the threatening shortage of dollars in the EU banking system. But it is not a solution to the fundamental challenges --deleverage, compliance to Basel III, digesting of the souvereign crisis, strengthening the political framework of the union and preparation. In other words it is welcome but not enough.

Ken Goldstein, The Conference Board: "Markets love it, until tomorrow. This week’s solution solves this week’s crisis. Next week? The real issues are with the euro:
  • Does everybody stay
  • Will there be a split, essentially euro A and euro B
  • Will they go to euro bonds
  • Will they tighten and unify fiscal policy
  • Can they get everyone over there to buy in

And, until there are answers to these questions, this Perils of Pauline will continue to deliver riveting episodes."

Chris Kuehl, PhD, NACM and Armada Corporate Intelligence: "By itself, this action does not really change all that much. The banks are still facing the limitations that come with central banking. All that really can be done to boost the economy with the tools at their disposal is to encourage behavior by making loans cheaper and making money more fluid. It has been referred to as “pushing a string” in the sense that these actions only make doing something easier. It doesn’t mean that business will borrow or that consumers will spend."

Compiled by: Brian Shappell, NACM staff writer

Commentary: Chinese PMI Declines, Other Nations to Feel Pain for It

For the first time in three years the Chinese have seen a decline in their PMI numbers sufficient to slide into contraction territory. It is now sitting at 49, and that has set off some alarm bells all over the world.

The Chinese have been in the process of deliberately slowing their economy, which makes this number a little harder to interpret. If this was the US or Europe, such a decline would have analysts predicting the imminent return of recession. In China, the situation is much harder to interpret. This is a deliberate policy response more than a trend within the manufacturing community itself,  and that suggests that China can reverse course and start to grow again at any point it chooses to. It is obviously not quite that simple.
 
Analysis: China is trying to contend with dual problems that require actions that work in opposition to one another—a situation shared by the US and Europe. On the one hand the country has been grappling with a growing and serious inflation issue. The food inflation rate has been almost 10% and overall inflation has been almost 6% in the past few months. The only way to reduce the inflation threat has been to clamp down on credit and to restrict bank activity. For several months, these efforts had been largely unsuccessful but, since the end of the summer, there have been signs that China is going to pull off that soft landing.

At the same time the country still faces the monthly burden of providing 1.3 million new jobs
a month just to keep pace with normal population growth. This kind of demand for increased employment is contrary to the trends favored for inflation control. The assumption is that China will have to start turning its attention back to job growth sooner than later and, when that happens, the country will see growth in its industrial sector again. Until then, the Chinese are not providing the kind of demand that many other nations have grown dependent upon. For example, the slowdown in the Australian economy over the last six months is attributable almost entirely to the slower Chinese economy.

Source: Chris Kuehl, PhD, NACM economist

Fed Beige Book: Economic Back on Right, But Slow, Path

From the Federal Reserve:

"Overall economic activity increased at a slow to moderate pace since the previous report across all Federal Reserve Districts except St. Louis, which reported a decline in economic activity. District reports indicated that consumer spending rose modestly during the reporting period. Motor vehicle sales increased in a number of Districts, and tourism showed signs of strength. Business service activity was flat to higher since the previous report. Manufacturing activity expanded at a steady pace across most of the country. Overall bank lending increased slightly since the previous report, and home refinancing grew at a more rapid pace. Changes in credit standards and credit quality varied across Districts. Residential real estate activity generally remained sluggish, and commercial real estate activity remained lackluster across most of the nation. Single family home construction was weak and commercial construction was slow. Districts mostly reported favorable agricultural conditions. Activity in the energy and mining sectors increased since the previous report.

Hiring was generally subdued, although some firms with open positions reported difficulty finding qualified applicants. Wages and salaries remained stable across Districts. Overall price increases remained subdued, and some cost pressures were reported to have eased."

See Full Federal Reserve Beige Book analysis here.