North America

  • The very weak US employment report, last week, poured cold water over hopes for a fast-reviving economy. It is unusual to see back-to-back monthly job losses - - in November and December - - at this stage of the cycle, and emphasises the reluctance of the corporate sector to increase hiring until they are sure that conditions are improving. Currently, firms are more than willing to put the squeeze on their cost base - - including material inputs, labour and, not least, hapless suppliers.
  • So, what does a fragile labour market portend for consumer spending? Optimists will say that even with a 6% unemployment rate it still leaves 94% of the labour force employed. True, but the employed are going to find that income growth this year is likely to be more modest than they had initially expected. Certainly, the President wants to give them more disposable income via tax breaks, but in an uncertain economic and geopolitical environment households may want to save part of any extras that they are going to receive.
  • With his eyes fixed firmly on the next presidential elections, Bush is absolutely determined to puff up the stock market and snuff out Saddam Hussein. The stimulus package, announced last week, is sure to get watered down in Congress but may still have enough of a kick to fire up the economy in 2004. However, its impact on activity, this year, is likely to be more muted. Note that there is no attempt to fine-tune fiscal policy, which, in truth, can’t be delicately manoeuvred anyway. Same goes for the Fed, which is free from all the stodgy morality holding back the Bank of Japan. Short of throwing out money from helicopters, Greenspan is willing to do whatever it takes to avoid the slightest threat of deflation.
  • Everybody was getting dressed up for the Iraqi theatre of war and, suddenly, the main event is being upstaged by a show put on by the North Koreans. What looked like a countdown to fireworks in Iraq now seems a bit up in the air - - at least in the eyes of the international media, though the Pentagon war machine is proceeding at full speed. Seeing their chance, every amateur theatre director on earth is now busy writing different scenarios for the Iraqi denouement. Anything goes: from a staged palace coup in Baghdad, with Saddam playing dead while lying low, to a sudden Saddamite conversion to truth, honesty and justice.
  • So, are the Bushmen ready to do a deal with the Evil One - - or even a substituted strongman to their liking? Well, in the past several decades, American policymakers have been willing to strike a deal with every kind of dictator and Islamic fanatic in the Middle East. The arrangements never lasted long, as both sides were inclined to engage in backstabbing and acts of duplicity. Maybe, just maybe, the Bush administration has finally decided that it is a far better bet to back democratic, secular, modernising governments. The benefits are many: no megalomaniacs, no religious fanatics and no lunatic desperados. Meanwhile, in a statement straight out of the theatre of the absurd the Saudi government is calling for more openness and reform in Arab countries! Let’s just recall that Saudi Arabia hosts a regime that can be classified as obscurantist and reactionary, even on a charitable interpretation.

Europe

  • The state of government finances in the core Eurozone countries is pretty dismal and, given the constraints imposed by the Stability Pact, there is not much room for providing stimulus to slow economies. So expectations are rising for the European Central Bank to lower rates. However, we may have to wait for further euro strength and an actual dip in inflation before they deign to act.

Asia/Pacific

  • Foreign direct investment has been pouring into China and is transforming the economy into a global powerhouse. A large number of businesses are being set up there, and it is not always because of cheap and efficient labour. They are often engaged in producing higher-level technological products. Japanese and Taiwanese firms have been particularly active in relocating or outsourcing to China. In the years ahead any competitiveness strategy will have to take account of the Chinese factor.

Bonds

  • European government bonds, in the Eurozone, continue to attract investor interest. The inflation outlook is favourable and there is room for interest rates to move lower. In addition, there is potential for further currency gains.

Currencies

  • There is continued bearish sentiment regarding the greenback, as foreign investors try to diversify their assets away from the dollar. This applies particularly to large Asian surpluses looking for an investment home. Unfortunately, the Bush stimulus package failed to elicit much foreign interest, in terms of its potential impact on the US economy. And, of course, the proposed elimination of the tax on corporate dividends affects primarily United States residents and not foreigners. Separately, geopolitical tensions are working against the dollar.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.