Economic and Market Update with Prof. Spellman

I've started working with Dr. Lewis Spellman (LewSpellman.com) in a variety of capacities. One thing we're doing is putting together general market updates for various presentations of Dr. Spellman. Here is what we came up with for the beginning of March 2010:

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Perspectives on Chinese Currency Manipulation

Recent actions by members of Congress attempting to force Obama to tax Chinese imports if China does not revalue its currency have re-ignited the debate on Chinese currency manipulation. A few clearly opposing stances have emerged:

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Valuation Matters

It's common sense that equity returns depend on the starting valuation. In other words, mean returns from an asset class mean little for an asset where returns are mostly dependent on capital gains. When capital gains are a significant proportion of total returns, starting valuation should be more important than historical performance. It seems simple and obvious, but most investors who are allocating a long-term portfolio still don't pay enough attention on valuation.

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The Political Importance of Financial Reform

Today at 2:00pm ET, exactly 2 years after the collapse of Bear Stearns in March 2008, Senate Banking Committee Chairman Chris Dodd will unveil his financial reform bill. This bill promises to bring sweeping change to all major US banks. Even Morgan Stanley and Goldman Sachs will not be spared as the bill is said to contain a provision that hinders these firms from revoking their bank holding company charter they adopted during the financial crisis.

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Netanyahu's Political Attack on Obama

I firmly believe the Obama administration cannot react strongly enough to right-wing Israelis' recent "insult" against American leadership in the Middle East. I am referring, of course, to Israel's settlements announcement during Biden's visit last week. This is not the first time Netanyahu has pulled something like this:

Right-wing governments in Israel have regularly embarrassed high-level U.S. officials by making announcements about new settlement activity during or just after their visits. But it usually happens to secretaries of state. It infuriated James Baker, confounded Condoleezza Rice, and appalled Madeleine Albright. When I [Martin Indyk, former Ambassador to Israel] served as Albright's ambassador in Israel, during Bibi Netanyahu's first term as Prime Minister, he announced a major extension to an existing West Bank settlement as she departed Israel after one of her efforts to move the peace process forward. When she heard the news, she called me on an open line and shouted: "You tell Bibi that he needs to stop worrying about his right wing and start worrying about the United States."

But this time is more significant than when Albright was Secretary of State during the Clinton years. This announcement directly attacks Obama's basic foreign policy -- that engaging diplomatically is more fruitful than the unilateralism of the Bush years. By undercutting Obama's pending diplomatic achievements and fueling domestic criticism of Obama as a weak leader, Netanyahu's actions are much more damaging to Obama today than they were to Clinton in the 1990s.

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The CBO's Analysis of Obama's Budget

The CBO has released its analysis of Obama's 2011 budget. The CBO estimates Obama's budget will significantly raise fiscal deficits over the next 10 years. In 2011, Obama's deficit is only $140B greater than the CBO status-quo. Over the next decade, however, the difference between Obama's budget and the CBO baseline scenario is expected to reach up to $500B.

The stark difference between Obama's budget and the CBO baseline gives fodder to Obama's critics, particularly the tea-party movement. But a closer look reveals that the source of the disparities between the status-quo and Obama's budget is not what one would expect and has little to do with Healthcare reform or increased government spending.

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A New Carry Trade

4 days ago, the Reserve Bank of Australia raised rates to 4%. This move wasn't a big surprise and didn't get the same press as when the RBA was the first central bank to raise rates after the financial crisis in 2009. 2/3 of economists polled by Dow Jones expected the move. The RBA had stated before it would continue to raise rates as the economic recovery continued.

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Average US Deficit Over Last 25 Years Was 10%

Rob Arnott from Research Affiliates wrote recently that one of the greatest problems with the US debt statistics is government accounting. In his words, "off-balance sheet spending is what got Enron executives thrown in jail, but I suppose if you write the laws while you're doing the off-balance sheet spending you can make it legal. That takes the average deficit to 4.5% of GDP over the last quarter century. 2% deficit is not a problem because GDP grows at 2% a year. 4.5% can grow out of sight...If you add-in the GSEs, the average deficit is 8% of GDP over the last quarter century. If you include unfunded entitlements, social security and medicare, you're up to a 10% average over the last quarter century."

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