In their attempts to stimulate economic growth, more countries are looking at the possibility of devaluing their currencies. The latest to fall into this pattern is Venezuela, which has just devalued its currency, the bolivar, by 32%.
No one should be surprised by the latest move from the Venezuelan government, since this is the fifth currency devaluation in nine years. The net result has been stagnant economic growth and a very high inflation rate.
The annual inflation rate in Venezuela was approximately 22% in January, and it’s certainly set to move above 30% following this latest devaluation. (Source: Devereux, C. and Pons, C., “Chavez Devaluation Puts Venezuelans to Queue on Price Raise,” Bloomberg BusinessWeek, February 11, 2013.)
Considering 70% of the goods consumed in Venezuela are imported, this will have a huge negative impact on its citizens.
Unless the government is willing to tighten monetary policy to prevent a runaway inflation rate, which is unlikely, look for a significant decrease in consumption of foreign goods within the country.
While the official exchange rate has now moved from 4.3 bolivars per U.S. dollar to 6.3 bolivars per U.S. dollar, the unofficial exchange rate is even weaker at more than 20 bolivars per U.S. dollar.
Venezuela’s repeated attempts at trying to stimulate economic growth while increasing the amount of U.S. dollars available for foreign purchases has led to a decline in purchasing power by the average citizen and a pathetic economic growth rate.
Foreign companies selling into that market will be hurt by the higher inflation rate, since the government imposes some price controls. Venezuela’s President, Hugo Chavez, previously seized retail stores … Read More
With the outlook for the U.S. and global economies looking more encouraging, we have seen a corresponding upward push by oil prices on the chart.
An issue for us is that oil prices continue to be largely dictated by the folks in the Middle East, namely the 11-member oil cartel Organization of the Petroleum Exporting Companies (OPEC). At this time, OPEC feels oil prices of $100.00 a barrel are reasonable, and $80.00 is viewed as the low point that is acceptable for oil prices. This might be fine with OPEC, as it adds to their rich coffers; but with the average price of gasoline at $3.54 a gallon, consumers aren’t happy with these high oil prices. (Source: U.S. Energy Information Administration web site, last accessed February 8, 2013.)
But unless we see a massive flow of new oil from the controversial tar sands in Alberta, Canada, and a move back to offshore drilling in the post-BP era, oil prices will continue to be dictated by OPEC. I think it’s wrong to be held hostage by a group of oil-rich countries.
The U.S. has agreed to allow oil from the tar sands to be delivered to refineries in Texas, but the process to retrieve the oil from the tar sands is not considered environmentally friendly. Europe, at this time, is looking at placing the tar oil on the “no-go” list.
The government must continue to look at ways to reduce the country’s insatiable appetite for oil and reduce the impact of high oil prices on the U.S. economy.
Oil magnate T. Boone Pickens continues to push his view to cut the … Read More
When it comes to looking for a long-term investment opportunity, sometimes it pays to look at a market sector that might not initially seem bullish. While I have pointed out several structural impediments to economic growth in America, there are a few areas that do provide a long-term investment opportunity.
One of the strengths in America is the growth in resurgence of the energy market sector. This is clearly not the result of any government initiative; rather it is due to private enterprises realizing the long-term investment opportunity in the energy market sector by creating revolutionary technologies in extracting natural gas.
New techniques for hydraulic fracturing have enabled the American energy market sector to become a global leader. This has sent prices plummeting when compared to not only domestic but also global history.
The investment opportunity for many firms is to use this abundance and cheap input for production, attracting numerous firms to set up facilities in America. While the U.S. economy is still sluggish, many might seem surprised to find such a strong investment opportunity that’s attracting firms worldwide to our shores.
There are copious areas of the economy that benefit from low natural gas prices, including the chemical market sector, the steel market sector, and the fertilizer market sector, just to name a few.
Companies see a long-term investment opportunity in building multi-million-dollar facilities to benefit from the comparative advantage of a low-priced input. As an example, Nucor Corporation (NYSE/NUE), a U.S.-based steelmaker, is about to construct a $750-million facility in America. Voestalpine AG, a steelmaker based in Austria, stated that it is looking at building a $661-million … Read More
When it comes to making an economic forecast for the U.S. economy in 2013, a huge stumbling block was the uncertainty prior to the deal to avert the fiscal cliff. The just-announced new deal to avert the fiscal cliff is absolutely pathetic and will not accomplish what many were hoping for; a comprehensive long-term deal to lower the U.S. budget deficit and create an environment that will foster long-term gross domestic product (GDP) growth.
The level of uncertainty has recently started to impact consumers. The impact on consumer confidence was noted during the latest Conference Board Index in which consumer confidence fell six percent to 65.1 in December from November, the lowest since August 2012. (Source: “The Conference Board Consumer Confidence Index® Declines,” The Conference Board, December 27, 2012.)
GDP growth is heavily dependent on consumer confidence. Since the majority of the U.S. GDP growth is based on consumer spending, any pullback in consumer confidence is a worrying sign, with its potential for lowering an economic forecast for 2013.
An interesting dynamic was that consumers assessed that current conditions improved in December from the previous month. Business conditions rose to 17.1% from 14.6% the previous month; however, expectations for business conditions over the next six months declined to 17.6% from 21.3%.
This might seem contradictory, but it really shows that while the current economy is somewhat improving, the political grandstanding and ineptitude to avert the fiscal cliff have been increasing concerns for the future GDP growth of the American economy. This type of uncertainty will certainly put a damper on any economic forecast.
This new compromised deal has plenty of … Read More
China continues to show evidence of economic slowing with stalled consumer spending, lower imports, and stagnant exports in August. Industrial Production is also weak and suggests weak foreign demand and domestic consumer spending.
At the heart of China’s slowing is the spending crunch involving Europe and the U.S., which is impacting the Chinese economy and threatening a possible “hard landing.”
The superlative growth of China’s GDP growth over the last decade has largely been fueled by export demand for cheaper Chinese-made goods. The country built thousands of manufacturing plants and added significant capacity to handle the substantial influx of foreign business.
While this strategy works when global economies are strong, the problem arises when export demand declines, as we are seeing now in China. There are many plants operating well below capacity, and it could get worse if the financial crisis in Europe doesn’t improve soon. For instance, the country’s aluminum-producing plants are cutting production. We are seeing the same in other sectors across China as the country’s economy slows.
To drive the economy, we are seeing hundreds of millions in new government spending. Most recently, China announced 30 new infrastructure projects worth about $157 billion.
But while fiscal spending will help, the responsibility for China’s success will fall squarely on the shoulders of its consumer spending. The current structure of the country’s growth is largely dependent on foreign demand for goods, but China realizes that it also needs to drive consumer spending higher in order to help minimize the negative impact of any global slowing moving forward and create a more balanced economy powered by both export demand and … Read More
Money is flowing out of China, according to the People’s Bank of China, which, in a report, indicated that banks in China were net sellers of 3.8 billion yuan, equal to US$597 million, in July. The significance of this is that the data suggest China’s exporters and investors may be exiting the yuan; whereas, Chinese banks have been net purchasers of yuan in the past years.
The news indicates China may face hurdles trying to pump up the economy, given that with the outflow of capital, the country will need to ramp up its government spending.
Yet, instead of following the capital flow and in spite of the fact the country is slowing, China remains a resource-hungry country that’s hunting the world for resources to help fuel its expected GDP growth in the decades ahead.
For this to happen, ample raw materials are needed.
In the oil patch, Chinese energy firms made about $48.0 billion in acquisitions in North America in 2009 and 2010, according to the International Energy Agency. China is investing in the oil-rich Canadian tar sands, and I expect to see more Chinese capital flowing in.
In July, CNOOC Limited (NYSE/CEO), one of the three major state-owned oil stocks in China, announced it would acquire Canada-based Nexen Inc. (NYSE/NXY) for $15.1 billion in cash or $27.50 per share, representing a whopping 60% above the close of July 20. I believe the deal may not be accepted by the Canadian regulators, who in the past axed deals from China when pressured by the country’s conservative government. In 2005, CNOOC attempted to buy U.S. oil play Unocal, but the … Read More
When France’s socialist government was elected, it proposed a different avenue to solving the country’s budget deficit. It targeted government spending on lowering the retirement age and hiring more government workers, with the money to offset this government spending coming from higher taxes on the rich, so that the budget deficit would not worsen.
That is great in theory, but in practice, it doesn’t work. The proposed higher tax for those earning more than one million euros in France is 75%.
Sotheby’s Realty is reporting that in the last few months, it sold more than 100 homes that were valued in excess of 1.7 million euros in France. Wealthy French families have been selling their homes to foreigners, who are, of course, not subject to the 75% tax rate.
The two countries that have some of the lowest tax rates in Europe—Switzerland and Britain—are where these French families have decided to immigrate, taking with them any hope of closing France’s budget deficit.
One agency in Switzerland said the calls received from rich French families over the last few months have just been crazy. In the meantime, another British real estate agency reported that high-end home demand soared by at least 30% over the last few months.
So this attempt by the socialist government to close the budget deficit will backfire. The wealthy have greater mobility than other classes within society, and instead of paying a tax rate of 75%, they are simply going to move, which will ensure that the government’s projections on the tax revenue they were going to receive to close the budget deficit will not materialize. In … Read More