Saturday was the tenth anniversary of the 9/11 attacks by al Qaeda on America. We’ve been inundated with reminders of that awful day. Likely everyone can remember where they were and what they were doing when those planes went into those buildings. That was then, this is now.
In those ten years we have seen our lives largely return to normal. The US has not become a terrorist battleground as some feared. We did not turn violently on our neighbors with Middle-Eastern roots. By and large, the world we live in today is unaffected by the events of 9/11. But, there are subtle differences.
We have a new generation of young men returning home after experiencing war in a far-off land. They have many of the same problems that many young men had who returned from Viet Nam 40 years ago. More Americans can find Iraq on a map now than 10 years ago. More Americans are aware of the differences between Arabs, Iranians, Indians and Turks, though still our ignorance of the area is absurd given the blood we have spilled there. We are still mostly rich and fat and carefree.
Ten years ago, we wrote about visiting a battlefield in Virginia. The war then was the Civil War, another largely misunderstood war. The nation had set aside the field in Virginia as a memorial to the men who fought and died there now more than 100 years ago. We argued that those acres of Virginia countryside should have been farms. The entire area around there was farms. The land was well suited to farming. Ground zero in lower Manhattan should not be set aside as a memorial to either the victims of that atrocity or as a reminder that violent men will go to extreme lengths. That area ought to be office buildings. Take a few feet and put up a plaque, but use the land to benefit the living.
There were a lot of victims of 9/11. There were a lot of heroes from 9/11 too. The whole episode showed how good and strong and even heroic people can be when called upon. It also showed how craven people can be too.
Issue of the Week
Collapse of the Euro – Has it been a noble experiment or exercise in hubris? It could be either depending on how you look at it. The noble idea was to create a large, open market within Europe that would rival America, providing European companies the economies of scale to rival their US competitors. The hubris was the idea that political union would inextricably follow economic union, leading to a united states of Europe.
The problems with the monetary union are all too apparent these days. The stronger, more fiscally conservative states of northern Europe are not happy supporting their less fiscally responsible southern neighbors. Neither are the southerners happy with the forced austerity that their budget problems have required. Nobody seems all that happy with the Euro these days. The Swiss had been gloating for rejecting the Euro out of hand a decade or more ago. The Brits have been breathing a sigh of relief of having dodged this bullet.
In Germany, the conservative Christian Democrats and their coalition partners the Free Democrats have supported the Euro and pledged to devote resources to bailing-out the Greeks and if need be the Portuguese and Irish. That is a politically unpopular position. If Chancellor Merkel should lose her parliamentary majority or even the Chancellorship itself, it would be bad for the Euro.
What would happen if Germany elected to leave the Euro? All of a sudden, the goose laying golden eggs would disappear. The German economy creates most of the surpluses in Europe. The Dutch and Austrian and Belgian economies help, but mostly its Germany. The Germans are among the richest Europeans and there are a lot of them. Their consumption, production and exports dominate the Euro-zone’s economic statistics. Most importantly, the Germans are the only nation in the Euro-zone that can afford to bail-out the weaker economies. Without German economic clout, there is no way to support Greece and the other PIIGS.
Alternatively, if Greece were to leave the Euro there would be a sudden change in outlook. Greece would have their own currency, which they could debase to shift the burden of their excesses onto their creditors. They would welcome inflation to help pay-off their creditors with deflated drachmas. That is still the most likely outcome to this whole affair.
Institute of Supply Management non-Manufacturing index yielded surprising good news. However, it came out on Tuesday when no one was in the mood for good news and it was largely ignored. The actual number, 53.3 in August, was not only above expectations; it was higher than the 52.7 from July. Since the service sector employs 75% of the workforce, this was really good news.
The US Trade Deficit for July fell by 13% to $44.8 billion according to the Commerce Department. Oil was the biggest reason for the shift (pardon us if we’re not surprised). US oil imports fell by 4%. The number could have been even better, but we imported a record volume of automobiles and parts after supply disruptions caused by the Japanese earthquake and tsunami. We also had a record volume of exports, led by automobiles and parts.
Job Openings were reported as 3.2 million as of July 31, 2011 by the Bureau of Labor Statistics. You’d think that in an economy with 12 million or maybe 22 million unemployed people, there would be very few open jobs. But, we have 3.2 million open positions. This report also mentions that just short of 4 million people were hired last month while 3.9 million people lost their jobs. What this really shows is the bigger picture on jobs in America today, yet few mainstream media pick-up these numbers. Maybe that is because we’re accustomed to the other jobs reports, which have been going on a lot longer and are built into the regular flow of news reports. This data series only goes back to 2002.
We are somewhat disturbed by some of the deviations between this report and the Employment Report (ER) last Friday, though the Job Openings (JO) data comes from the same Establishment Survey that supplies data for the ER. The ER reports zero net new jobs, while this data shows 64,000 hires. Both show government jobs disappearing at a rate of 35,000 in the ER and 36,000 in the JO. One big difference here is that we don’t see any small business impact, or self-employed persons.
The implication from this data is that the employment picture is not as bleak as we might otherwise think. The jobs market is more dynamic than displayed by the ER. With millions of people jumping into and out of the job market on a monthly basis, it looks like the odds of getting a job aren’t as bad as implied by zero new jobs across the whole economy.
We have much the same dilemma this week we had last week. Which week should we comment on? The week that is reflected in the Weekly Review is the one that starts on September 1 and runs through last Friday. That week was pretty terrible. Losses on equities around the world were to the tune of 5% or worse, with most of the worse happening overseas. Most of the troubles the market faced were in Europe, though some were of our own making. The trials and travails of the Euro-zone are elaborated upon above. But, that is where most of the weakness started. There are other stories that are layered atop the Euro-zone issues, but the Euro was the focus of the market last week. We had one risk-off trade after another with only one really big risk-on sandwiched in-between.
Losses were on the order of 5-plus% in US markets with small caps down over 7%. Developed markets were also down 7%, with Europe down generally more (down 10% in Germany, nearly 9% in France) and Asia doing much better (Japan down 2.4%). In developing markets, the losses were even more diverse, with India actually up, China down modestly, Korea down 3.5%, and Brazil down 1.25%. The results look a lot worse once you recognize that the dollar was up a lot versus most other currencies on a safe haven trade.
Bond markets were generally better off than stocks, with gains in most developed markets before accounting for currency impacts. US Treasuries were leading the pack with 10-year bonds setting new, all-time lows below 2%. With trailing 12-month inflation at 3.5% give or take, that gives us very low real yields. Corporate bonds tended to follow Treasuries but high yields kind of split the difference between lower stocks and higher bonds by being about unchanged.
Real estate securities trended lower with recent losses essentially reversing the year-to-date gains in the asset class. This still leaves real estate with a huge lead versus stocks, but has reversed their performance advantage versus bonds.
Commodities were their usual diverse selves. Precious metals were broadly higher and near new highs. Energy prices were broadly lower, especially unleaded gasoline, though you’d never know it at the pump. Grains were lower but livestock were higher. Industrial metals were generally lower.
Have a great week.
Karl Schroeder, RFC, CSA
Investment Advisor Representative
Schroeder Financial Services, Inc.