Highlights of the week of September 30, 2013

Govt-ShutdownThe USA Sinking

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of September 30, 2013.

  • The USA Government Shutdown, which started on October 1st 2013, midnight.
  • Credit rating agency, “Moody’s” upgraded the Philippines to investment grade, on Thursday October 3rd 2013.
  • Moody’s Lowers Outlook for Brazil, from positive to stable on Thursday, October 3rd 2013.

The USA Government Shutdown, which started on October 1st 2013, midnight:
With the US financial year to end on September 30, and politicians on the Capitol Hill failing to agree on a new budget for the 2013-2014 financial year, the Federal government had no choice but to shut down, because without a budget deal approved by both parties in the House of Representative and the Senate, there’s no legal agreement to pay non-essential staff.

President Obama and Rep. John Boehner

It’s the first shutdown since 1995-1996, when former president, Bill Clinton and the House of Representatives (and its speaker, Newt Gingrich) also failed to agree on a budget to fund federal services.

In total, the US government has partially shut down on 17 occasions before.

A USA government shutdown, combined with a looming debt ceiling crisis, has the potential for hurting the country’s Q4-2013 GDP and companies profit.

Moody’s Upgrade the Philippines to investment grade:
On Thursday, October 3rd, Moody’s rating agency raised the rating on Philippine government debt one level to the investment grade level of. Baa3. In a statement Moody’s said, citing “robust economic performance,” ongoing fiscal and debt consolidation, political stability and improved governance. The outlook on the rating is positive.

On the news, the Philippine peso strengthened the most in two weeks while stocks and bonds rose after the country won a debt rating upgrade from Moody’s Investors Service, completing the nation’s ascent to investment rank and put the nation on a par with India and Uruguay.

The Philippine economy expanded in the second quarter at the fastest pace in Southeast Asia as President Benigno Aquino, who took office on june 30, 2010, raised state spending while narrowing the budget deficit and the central bank cut benchmark interest rates to a record low.

Below chart shows the positive development in the exchange rate of the Philippine peso (PHP) against the US-Dollar over the last 10 years.

PHP-USD 10 year chart

Moody’s Lowers Outlook for Brazil, from positive to stable:
In an other statement on Thursday, October 3rd, Moody’s Investors Service lowered its outlook on Brazil’s sovereign rating rated Baa2, from positive to stable, citing deteriorating debt and investment ratios and evidence that the economy is going through a low-growth period.

The agency maintained the Baa2 notation but said it could lower the outlook to negative, or even downgrade the rating, if the economy looked like growing by less than 3.0 percent after 2014.

Other considerations would be if the central bank’s key interest rate rose to 10.0 percent or more from its current level of 9.0 percent, and if the treasury increased lending to public sector banks, thereby raising government debt.

But Moody’s said it could raise the outlook and even the notation if the burden of debt fell, if the economy achieved growth of close to 3.5 percent and if investment increased, notably on infrastructure.

PGM Capital comments:
This week legislators decided to shut down a swath of the federal government rather than allow an enacted health law go into operation at the agreed moment. They may go further; if they do not vote to raise the so-called “debt ceiling”, they risk triggering default on US government debt – a fate far worse than the shutdown or fiscal sequestration.

If the opposition is prepared to inflict such damage on their own country, the restraint that makes democracy work has gone. The Questions most investors are asking themselves are:

  • Why has this happened?
    The answer to this question is mind boggling. Republicans are doing all this in order to impede a modest improvement in the worst healthcare system of any high-income country. Below chart shows how the USA health care costs compare with other countries.US_spends_much_more_on_health_than_what_might_be_expected_1_slideshow
  • Above figure shows that the USA spends US$ 8,233 per year per citizen, which is two-and-a-half times more than most developed nations in the world, including relatively rich European countries like France, Sweden and the United Kingdom.
  • On a more global scale, it means that the USA spends approx. 18 percent of its gross domestic product on Healthcare.
  • How does this compare with other high-income countries, like UK, Japan, Canada, Germany, France and Italy?
    Below chart shows that the US public sector spends a higher share of GDP than those of Italy, the UK, Japan and Canada, though many people are left uncovered. US spending per head is almost 100 per cent more than in Canada and 150 percent more than in the UK.
    OECD Health Spending
  •  What does the USA get in return?
    • Above chart shows that, the USA life expectancy at birth is the lowest of these high-income countries,
    • Infant mortality is the highest.
    • Potential years of life lost by people under the age of 70 are also far higher.

Regarding the USA-Debt Ceiling to be reached around October 17, it is worth mentioning, that without an increase in the ceiling, the USA Treasury department will no longer be able to issue debt from October 17 and will deplete its cash by the end of this month.

If no timely compromise can be reached between the two parties, regarding fiscal budget 2014, Obamacare and the debt-ceiling, this crisis has the potential of sending the USA and the rest of the world into a recession in 2014.

Due to this, Christine Lagarde, the IMF’s managing director, urged America’s politicians to settle their differences before the dispute harms the entire global economy.

Mario Draghi, the president of the European Central Bank, has also warned of the risks from a protracted federal shutdown.

Regarding the FED, if the shutdown continues up until the Fed meeting, the Fed will have another excuse not to taper this year; because due to the government shut down, important employment data from the Bureau of Labor Statistics and the Department of Labor won’t be compiled and released for the Fed to analyze.

Also, investor confidence in the full faith and credit of the USA, will be undermined” if  the government shutdown, continues and Congress does not raise the government’s debt ceiling “in a timely manner.

We believe that regarding the “Debt Ceiling” the USA is checkmate, for which any of the two possible scenario’s is suicidal.

  • At best, a failure to raise the debt ceiling, requires the USA to balance its budget at once, by cutting spending with approx. 20 percent, or 4 per cent of GDP. This will bring the USA into an other recession.
  • At worst, the US would default, which will lead to a downgrade of USA credit rating, sending bond yields through the roof.

Any investor who truly fears such a thing won’t wait for it to happen. And if enough investors start moving, they will deliver a self-fulfilling prophesy, bringing on the dreaded dollar crisis.

We hope that USA politicians understand the seriousness of the situation and before it is too late do the right thing in the end.

Until next time.

Eric Panneflek

Leave a Reply

Your email address will not be published.