Market News

With traders digesting the latest batch of earnings news, stocks ended Friday's trading modestly higher after a relatively lackluster session. The major averages ended the day just above the unchanged line but still managed close higher for the sixth consecutive week. The major averages moved to the downside going into the close, ending the day modestly higher. The Dow closed up 5.90 points or 0.1 percent at 8,131.33, the Nasdaq closed up 2.63 points or 0.2 percent at 1,673.07 and the S&P 500 closed up 4.30 points or 0.5 percent at 869.60.
Asian stock markets were mostly higher Friday as stronger-than-expected results from bellwether companies gave investors more reasons to hope the worst of the global recession was over. European markets were mixed in early trade. Most Asian markets followed Wall Street's overnight advance, with technology shares like Japan's Sharp and Toshiba among the day's best performers, as the region headed for its sixth straight week of gains. Oil prices and the dollar sank modestly.
Earlier in Asia, Japan's Nikkei 225 stock average added 152.32, or 1.7 percent, to 8,907.58 while Hong Kong's Hang Seng pared gains to close up 18.28 points, or 0.1 percent, at 15,601.27. India's main index advanced 2.8 percent while Australia's benchmark shed its gains to close slightly higher. Shanghai's stock index, which has soared almost 40 percent this year on hopes government spending and other measures can help protect China's economy from the downturn, slipped 1.2 percent. Meanwhile, South Korea's Kospi lost 0.6 percent. Taiwan's main stock measure posted the day's steepest losses, losing about 4 percent, after a spectacular run-up in recent weeks.
The European markets rose for the second day on Friday, as banking stocks rallied after US lender Citigroup reported better-than-expected first quarter results. The FTSEurofirst 300 index of pan-European blue chips closed 1.23% higher at 811.90 points, while the narrower DJ Stoxx 50 index rose 1.21% to 1,996.04 points.
Around Europe, the U.K.'s FTSE 100 index rose 0.98% to 4,092.80, while France's CAC 40 index climbed 1.77% to 3,091.96 and Germany's DAX index surged up 1.46% to 4,676.84.



Market News
Euro Tumbles To 1-month Low Against Dollar
Friday during early deals, the euro plummeted to a 1-month low against the dollar after the European Central Bank President Jean-Claude Trichet said the central bank should do everything possible to restore confidence and support growth, leaving room for further interest-rate reductions.
Speaking at a conference in Tokyo on Friday, Trichet emphasized the need for price stability. He stated that ECB policy was "geared" towards price stability and that such measures would also lead to financial stability as a whole. Nonetheless, he believes that inflation expectations are still firmly anchored.
On April 2, the head of the European Central Bank hinted that policy-makers for the 16-nation currency could announce further non-standard policy measures in the next rate-setting session in May.
In comments following the bank's decision to cut its benchmark interest rate by a quarter percentage point to 1.25% earlier this month, Trichet also signaled that there is still room to cut the benchmark interest rate for Euro zone and said the world economy is undergoing a severe downturn.
Dollar Closes the Week Strong
The dollar strengthened in the broad market once again on Friday led by the euro which dragged the other European currencies with it. ECB President Trichet’s speech was the catalyst after he failed to reassure the market that policy makers are on the same page with respect to interest rates.
The Swiss franc and the pound followed suit by weakening against the greenback, the franc also had the added pressure of disappoint retail sales numbers. Higher equity markets buoyed the Australian and Canadian dollars as well as the Japanese yen.
Preliminary University of Michigan consumer sentiment came in above expectations at 61.9, higher than the 58.4 that was anticipated. The dollar closed the week mixed against the other major currencies but sentiment ending the week is certainly dollar bullish. Of course that can change very quickly.
Next week’s economic calendar is free from any important US releases until later in the week, but there are plenty of red flag releases from all the other regions, which means the greenback may move in response to regional strength/weakness.
Yen Soars Against Franc, Pound
In early European deals on Friday, the yen rose to a 17-day high against the franc and a 2-day high against the pound as Japan's consumer sentiment rose to a five-month high in March, a sign that the recession in the world's second-largest economy is easing. The yen recovered from a 3-day low against the dollar, while it showed modest strength against the euro.
A report from Japan's Department of Economic and Social Research Institute showed on Friday that the consumer confidence index rose to 28.9 in March from 26.7 in the previous month. The improvement in the index was close to the expected level of 29. Consumer confidence increased for the third consecutive month in March after falling to 26.2 in December.
Elsewhere, the latest regional economic report released by the Bank of Japan showed on Friday that economic conditions had been deteriorating significantly in each of the nine regions in Japan, although there were slight regional differences. At the same time, seven of the regions lowered their assessment from the January report.





MARKET-LAST WEEK
The US data releases had a mixed impact over the week while risk appetite was relatively steady and attention switch more towards the Euro-zone over the week as policy uncertainties increased. ECB council member Weber made potentially significant remarks. He stated that inflationary pressures were continuing to ease which suggested the scope for lower interest rates. Very importantly, Weber also suggested that non-standard policy measures would probably be introduced at the May council meeting.
The US consumer spending data was weaker than expected with a headline 1.1% decline in retail sales for March while there was a core 0.9% fall, although there was an upward revision to the February data which offset the impact.
Initial jobless claims fell to 610,000 in the latest week from 663,000 previously which suggests that the rate of layoffs may be slowing slightly, but continuing claims were again above expectations at a record level above 6.0mn. The steep rise in continuing claims will continue to act as a drag on the economy and restrain confidence.
The dollar weakened sharply on Monday, reversing gains seen at the end of the previous week with lows close to 1.34 as liquidity was limited. Over the remainder of the week, the dollar edged firmer and pushed to 1.3050 after breaking important Euro support levels near 1.31. The yen was trapped in narrower ranges over the week with the dollar consolidating around the 99.50 level. The markets looked to challenge technical levels, but moves quickly reversed as there was little confidence in underlying trends.
The UK fiscal conditions were watched closely ahead of next week's annual budget and fears over the debt outlook tended to restrain Sterling. The budget deficit is expected to be over 10% of GDP for the current fiscal year which will certainly limit the scope for any further fiscal measures to support the economy.
Sterling pushed to highs just above 1.5050 against the dollar, the highest level since the beginning of January, but failed to sustain the gains and dipped to lows below 1.4800 on Friday. Sterling also retreated from highs near 0.88 against the Euro.
The dollar found good support close to the 1.13 level against the Swiss franc and strengthened to highs near 1.1680 on Friday. The franc initially proved resilient against the Euro and strengthened to test levels below 1.51 before weakening back to near 1.52. National Bank Chairman Roth stated that intervention would continue as long as needed.


IMPORTANT ECONOMIC DATA (04-21-2009 TO 05-01-2009)
Date Time* Source Description
4/21/2009 01:30 AUS Reserve Bank's Board April MInutes
4/21/2009 03:30 AUS RBA Governor Stevens Speaks in Adelaide
4/21/2009 06:00 GE Producer Prices (YoY)
4/21/2009 08:30 UK CPI (YoY)
4/21/2009 09:00 EU Zew Survey
4/21/2009 12:30 CA Wholesale Sales MoM
4/21/2009 13:00 CA Bank of Canada Rate
4/21/2009 21:00 US ABC Consumer Confidence
4/21/2009 23:50 JPN Merchands Trade Balance Total
4/22/2009 01:00 AUS DEWR Skilled Vacancies MoM
4/22/2009 01:30 AUS Consumer Prices (YoY)
4/22/2009 08:30 UK Bank of England Minutes
4/22/2009 08:30 UK M4 Money Supply (YoY)
4/22/2009 09:00 EU Euro-Zone Govt Debt/GDP Ratio
4/22/2009 11:00 US MBA Mortgage Applications
4/22/2009 11:30 UK U.K. Chancellor of the Excequer Makes Budget Statement
4/22/2009 12:30 CA Leading Indicators MoM
4/22/2009 14:00 US House Price Index MoM
4/22/2009 23:50 JPN Foreign Buying Japan Bonds
4/23/2009 01:30 AUS New Motor Vehicle Sales YoY
4/23/2009 03:00 NZ Credit Card Spending (YoY)
4/23/2009 08:00 EU Euro-Zone Current Account nsa
4/23/2009 09:00 EU Industrial New Orders YoY
4/23/2009 10:00 UK U.K. CBI Quaterly Industrial Trends Total Orders
4/23/2009 12:30 CA Retail Sales MoM
4/23/2009 12:30 US Initial Jobless Claims
4/23/2009 12:30 US Continuing Claims
4/23/2009 14:00 US Existing Home Sales MoM
4/23/2009 14:30 CA Bank of Canada Monetary Policy Report
4/23/2009 23:50 JPN All Industry Activity Index (MoM)
4/24/2009 08:00 GE IFO-Expectations
4/24/2009 08:30 UK GDP (YoY)
4/24/2009 08:30 UK Retail Sales (YoY)
4/24/2009 12:30 US Durable Goods Orders
4/24/2009 14:00 US New Home Sales MoM
4/26/2009 23:01 UK Hometrack Housing Survey (YoY)
4/27/2009 06:10 GE GfK Consumer Confidence Survey
4/27/2009 08:30 UK BBA Loans for House Purchase
4/27/2009 14:30 US Dallas Fed Manf. Activity
4/27/2009 23:50 JPN Retail Trade YoY
4/28/2009 01:30 AUS NAB Business Confidence
4/28/2009 05:00 JPN Small Business Confidence
4/28/2009 10:00 UK U.K. CBI April Distributive Trades
4/28/2009 13:00 US S&P/CS Composite-20 YoY
4/28/2009 14:00 US Richmond Fed Manufact. Index
4/28/2009 21:00 US ABC Consumer Confidence
4/28/2009 22:45 NZ Trade Balance
4/28/2009 23:01 UK GfK Consumer Confidence Survey
4/29/2009 03:00 NZ Money Supply M3 YoY
4/29/2009 04:00 JPN BOJ Traget Rate
4/29/2009 08:00 GE Bloomberg Germany Retail PMI
4/29/2009 08:00 EU Bloomberg Eurozone Retail PMI
4/29/2009 09:00 EU Euro-Zone Consumer Confidence
4/29/2009 11:00 US MBA Mortgage Applications
4/29/2009 12:30 US GDP QqQ (Annualized)
4/29/2009 18:15 US FOMC Rate Decision
4/29/2009 21:00 NZ RBNZ Official Cash Rate
4/29/2009 22:45 NZ Building Permits MoM
4/29/2009 23:15 JPN Nomura/JMMA Manufacturing PMI
4/29/2009 23:50 JPN Industrial Production (YoY)
4/30/2009 00:00 AUS Conference Board Leading Index
4/30/2009 01:00 AUS HIA New Home Sales (MoM)
4/30/2009 01:30 AUS Private Sector Credit YoY%
4/30/2009 05:00 JPN Housing Starts (YoY)
4/30/2009 07:55 EU Unemployment Change (000's)
4/30/2009 09:00 EU Euro-Zone CPI Estimate (YoY)
4/30/2009 12:30 CA Gross Domestic Product MoM
4/30/2009 12:30 US Initial Jobless Claims
4/30/2009 12:30 US Continuing Claims
4/30/2009 13:45 US Chicago Purchasing Manager
4/30/2009 14:00 US NAPM - Milwaukee
4/30/2009 20:15 US Bloomberg FCI Monthly
4/30/2009 23:30 JPN Natl CPI YoY
4/30/2009 23:30 AUS AiG Performance of Mfg Index
5/1/2009 01:30 JPN Labor Cash Earnings YoY
5/1/2009 05:00 JPN Vehicle Sales (YoY)
5/1/2009 09:30 UK M4 Money Supply (YoY)
5/1/2009 14:00 US U. of Michigan Confidence
*Time listed are GMT

Introduction

Stock markets declined the first two days of this week, beset by a spate of bearish remarks from various commentators. The declines came after five weeks of gains, which have led investors to speculate that the markets’ recovery is really the beginning of a new bull market.

Various market prognosticators, however, have posited that the increases were only a bear-market rally, that enough bad news still lay ahead to prevent any sustainable recovery.

On Wednesday, the markets bounced back and finished the shortened trading week with a strong performance, with the major indices (the Dow and the S&P 500) each gaining close to four percent on Thursday. Since March 9, the most recent low point for the averages, the Dow has gained more than 23 percent, while the S&P 500 is up over 26 percent.

S&P 500 Index - One Year Chart

The question faced by investors is: who is right? The gloom-and-doom merchants or the bulls?

The Bad News

The markets received their first jolt on Monday, when Mike Mayo, an analyst now with Calyon Securities (and most recently with Deutschebank) initiated coverage at his new firm on eleven bank stocks. Mayo had made a name for himself back in 1999, when he took a bearish stance, correctly it turned out, on banking stocks while most analysts were still overwhelmingly bullish.

On Monday, Mayo assigned an "underweight" rating to the banking sector with "underperform" labels on Bank of America and JP Morgan Chase.

Mayo said that loan losses at banks might exceed levels achieved during the Great Depression. He also maintained that the government may be forced to take over a number of large banks. According to Mayo, bad loans have so far only been marked down to 98 cents on the dollar, on average, much less than they should have been.

Mayo expects loan losses at US banks to increase to 3.5 percent of all loans (and could increase to 5.5 percent should the economy further deteriorate) by the end of 2010. During the Great Depression, loans losses reached a high of 3.4 percent in 1934.

He feels that nationalization of banks remains a real possibility because government policy remains unclear.

As a result of Mayo’s comments, bank stocks fell across the board Monday, led by Bank of America, which was down 1.6 percent, and JP Morgan Chase, down 3.7 percent. The decline in bank stocks dragged the whole market lower.

On Tuesday, George Soros added fuel to the fire when he maintained that the current market rally was only a "bear-market rally," because the economy was still shrinking. Soros said that "this isn’t a financial crisis like all the other financial crises we have experienced in our lifetime." Soros argues that the housing market hasn’t bottomed yet and added that the recent change to fair value accounting (removing the requirement to mark troubled assets to the market) will only serve to keep troubled banks in business.

The third bear to weigh in on the markets was Nouriel Roubini, chairman of economic research firm RGE Monitor and a professor at New York University’s Stern School of Business. Nicknamed "Dr. Doom" for his bearish outlook on the markets, Roubini predicted that the bear market would continue. "There is a light at the end of the tunnel somewhere down the line, later rather than sooner." He expects macro news, earnings news and financial shocks to all be worse than expected.

A report in the Times of London that the International Monetary Fund (IMF) would soon raise its forecast of the level of toxic assets on financial institutions’ balance sheets to $4,000 billion, worldwide ($3.1 trillion on the books of US banks and another $900 million on the balance sheets of foreign banks), added to the bearish outlook.

Finally, the Federal Reserve, in releasing the minutes of its last FOMC meeting, revealed that it had lowered its own GDP estimates for the second half of 2009. According to the Fed, "Real GDP is expected to flatten out gradually over the second half of this year and then to expand slowly next year."

The Good News

The markets’ rally later in the week came on speculation that government measures so far enacted to revive economies and rescue financial firms are working. The rally was also triggered by an earnings surprise from Wells Fargo. Wells, which was the largest recipient of TARP funds from the Treasury, said it expected net income of $3 billion in the first quarter, and earnings of 55 cents a share. The earnings exceeded analysts’ expectations. Last year, Wells earned 60 cents a share in the first quarter. Wells’ stock jumped 27 percent Thursday and led the rest of the banking sector higher.

A second factor pushing stocks higher was a report that all nineteen banks, tested by the Treasury, would pass their stress tests (although banks have been warned by Treasury to remain mum on their test results).

Finally, a smattering of bullish comments also lifted markets. Robert Doll, chief investment officer at BlackRock Inc. said his firm felt the "worst of the recession was in the rearview mirror" and analysts at JP Morgan Chase said "seeds of recovery are beginning to sprout." The analysts at JPM said they believed the global consumer was continuing to spend. This, they felt, would induce producers to start restocking by summer. They pointed to mid-summer when both the US and world economies would stop contracting.

The Outlook

We believe there are three areas that are key to economic recovery: corporate earnings, the housing market, and the improvement in bank balance sheets.

The earnings outlook is not bright. Three months ago, the consensus of analysts was that earnings were expected to fall 13 percent, year-on-year, in the first quarter. The consensus now, as earnings begin to be reported for the quarter, is for earnings to be 40 percent lower. Corporate earnings are down 82 percent from their June 2007 peak, worse than the collapse in earnings that occurred during the Great Depression. The good news is that first quarter earnings will be up when compared to their fourth quarter counterparts, but only because fourth quarter results were so bad.

Some analysts argue that the market bottoms out, on average (going back to1949) six months before earnings bottom out. So, if earnings do in fact bottom out this summer, then the bottom achieved in stocks in March may have been the turning point in the market.

The housing market is also showing signs of a bottom (although the outlook, at this point, is not exactly robust). All the most recent housing indicators (with the exception of the Case-Shiller Index of Home Prices in 20 US Cities) showed improvement in February. Housing starts rose 22 percent in February, an annual rate of 583,000 (analysts had expected an increase to 450,000), new home sales gained 4.7 percent, to 337,000 (expectations were for 300,000), and pending home sales were up 2.1 percent (analysts had expected February’s numbers to be the same as January’s). The Case-Shiller Index fell 19 percent in January (February’s figures had not been released yet). In addition, mortgage applications rose 4.7 percent in the week ending April 3.

A recovery in housing is one of the factors that will be required for a recovery in consumer spending. A one-month improvement in figures does not constitute a trend, but one can keep one’s fingers crossed.

The recovery in financial institutions’ balance sheets remains a question mark. Two weeks ago, we pointed out the potential problems with Treasury Secretary Geithner’s toxic asset plan. As far as we are concerned, the jury is still out.

There are other factors that will contribute to the recovery. Some economists (and bears) point to the fact that unemployment numbers will continue to rise for a few months more. This will occur because firms will continue to lay off workers. However, we believe the numbers of jobs lost per-month will begin to decline in the second quarter. We believe the November-January numbers will have been the worst that we will see.

On balance, while we remain cautious, we feel the worst of the recession is behind us. We look for the economy to bottom sometime in the next two quarters. We feel that a recovery, however, will not be that robust, because households continue to de-leverage and consumer spending will be less than hoped-for. Nevertheless, we think there will be an economic recovery of sorts and, therefore, think the current market rally could be the real McCoy.

Legal Disclaimer: Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary and does not constitute investment advice.

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The G20 Meeting: Was it a Success?

Introduction

Leaders of the Group of 20 met in London Thursday to discuss and, hopefully, move toward solving the world’s economic problems. The Group’s meeting-ending communiqué was optimistic. The summit was hailed as the day the world "fought back against the recession." 

Gordon Brown, UK prime minister and host of the meeting used glowing rhetoric in describing the meeting as marking the emergence of a "new world order." Brown described a package that would provide $1,100 billion worth of measures to tackle the global recession.

Markets around the world rallied sharply in response to the G20 announcement, in the hope that the world economy was beginning to stabilize. The Dow Jones industrial Average rose 216 points Thursday, a gain of 2.8 percent, while the S&P 500 gained almost 2.9 percent. (Part of the markets’ gain, however, could also be ascribed to the announcement that the Financial Accounting Standards Board would relax its fair value rules for banks - the so-called "mark-to-market" rules that have been raising havoc with banks’ capital requirements. Bank stocks were leaders in Thursday’s rally.)

Despite the enthusiasm generated in the markets, closer examination of the summit’s results reveals that little of what many observers had hoped for had been achieved (although the final communiqué did fall in line with expectations).

The Communique

Participants had gone into the G20 meeting with widely-varying agendas. The US delegation was looking for a commitment to a coordinated, expanded fiscal stimulus program, under which each nation would spend up to two percent of GDP to kick-start their economies. European nations, on the other hand, generally believed existing stimulus packages were sufficient; instead, they wanted enhanced international regulation of the financial system. Others (mostly outsiders) were hoping for a restructuring of the entire system, with the deficit countries becoming less deficit and the surplus countries reducing their surpluses. Most participants, supposedly, were hoping for new solutions that would deal with toxic assets on the books of the world’s banks. Most were also committed to the expansion of trade. On just about all of these points, practically everyone would be disappointed. Regarding the state of the global economy, the consensus seemed to be that recession was in the process of bottoming out. Tell that to the 5.1 million US workers that have lost their jobs since the recession began and are having trouble finding new jobs, or to the 25 million workers who will lose jobs in the advanced-economy nations before the recession finally ends.

In delivering the communiqué, Brown claimed the G20 had provided the largest fiscal stimulus -- $5,000 billion - "the world has ever seen". The final communiqué also trumpeted $1,100 billion in other measures designed to help the global economy. On closer examination, however, both these numbers proved to be exaggerations. There were no new stimulus measures announced during the conference. The $5,000 billion, it turns out, was the International Monetary Fund’s estimate of the sum total of the G20 countries’ cumulative deficit, as a share of national income, between 2007 and 2010, divided by 2010 GDP.

The $1,100 in new measures was also a chimera. It included $500 billion in new funding for the IMF. However, of this total, Japan had given $100 billion to the IMF last November. Europe had pledged another $101 billion in March. The remainder was made up in a generalized pledge for a new financing plan of $500 billion into which all existing commitments and new money would be placed. The group said, "We aim to make substantial progress by the spring meetings" of the IMF.

The IMF would also create $250 billion of new money in Special Drawing Rights, the IMF’s own currency, which would then be allocated to IMF members in line with their voting shares at the IMF. (The SDR, is a currency basket based on the US Dollar, Euro, Japanese Yen and British Pound.) 44 percent of the SDRs would go to the G7 largest economies. The increase would be the IMF’s version of quantitative easing on a global scale.

Another $250 billion would come in the form of increased trade finance. It has been estimated that 90 percent of world trade is facilitated by trade finance. Because of the global credit crunch, there is a current shortfall of $100 billion in existing trade finance. Global trade had been running about $14,000 billion a year. Based on that number, the G20 leaders believe that trade finance could be increased by some $250 billion over a two-year period. Only $25 billion in new finance commitments have been received, however.

The remaining $100 billion would come from lending by multi-lateral development banks. Some of this money is being brought forward from future budgets, but most will come from increased borrowing in international financial markets.

Since the leaders generally agreed that the recession was bottoming, there was little call for additional fiscal stimulus, especially among the Europeans. The G20 also made a vague commitment to work toward improved international regulation. Little also was said about toxic assets. Apparently, the leaders were content that the individual countries seemed to be moving in the right direction. Or, they still had no credible plans to deal with those assets.

Shortcomings

Two areas where the G20 meeting seems to have missed the boat were in the meeting’s failure to deal with the issues of protectionism and restructuring.

Between 1990 and 2006, world trade volumes grew at a rate of more than 6 percent a year. The growth of global trade was a major contributor, in fact, probably the major contributor to global economic growth over that period. World GDP during that period averaged growth of three percent a year.

With the global economy heading toward recession, trade volume is falling at an even faster pace. The World Trade Organization (WTO) estimates that the volume of global merchandise trade will decline by 9 percent in 2009. According to the World Bank, 37 of 45 countries for which they have records saw exports decline by more than a quarter in January from a year earlier. The main reason for this decline has been the collapse of global demand. The world needs a trade recovery to grow out of its current malaise. It also needs a recovery in demand to fuel the trade recovery.

In 1930, at the outset of the Great Depression, in an attempt to protect US companies, the US Congress passed the Smoot-Hawley Act, raising tariffs on over 900 items. The passage of the Act triggered a tariff war as countries around the world retaliated against the US. The resulting destruction of trade was widely believed to have been one of the main reasons for the length and depth of the Depression (and, probably, one of the causes of the Second World War).

Policy makers are aware of the significance of Smoot-Hawley and a repeat of that Act is improbable. In addition, the nature of trade has changed. While the rules of the WTO do allow some tariff increases, their magnitude is generally restricted.

Nevertheless there are numerous other forms of protectionism that are being used by a large number of countries today: tariff increases, tighter licensing requirements, import bans, anti-dumping provisions, and discriminatory procurement provisions.

One reason for concern is the fact that the nature of international trade has been changed by globalization. In the 1930s, trade was confined to the import and export of finished goods. Today international trade is characterized by vertical specialization, the development of global supply chains. Components of manufactured goods may cross international borders several times before they make their final trip as finished goods. Consequently, the effect of any act of protectionism is multiplied many times over.

Secondly, because of vertical specialization, when protectionism remains below a certain threshold, trade volumes expand rapidly. But crossing that threshold can quickly choke off trade.

In November, at the last G20 meeting, the leaders pledged not to raise new barriers to either investment or trade. They also agreed to complete the Doha round of trade talks by the end of 2009. The Doha agreement, when agreed to, would reduce the present level of tariff ceilings, making it even harder for countries to raise tariffs; it would ban export subsidies in agriculture, and it would foster a general commitment to open trade. The Doha talks have been stalled since last summer. The pledges made in November appear to have been quickly forgotten.

The World Bank estimates that, since last November, 17 G20 countries have instigated 47 policies that were restrictive to trade. Two-thirds of the non-tariff restrictive measures are from developing countries. Indonesia, for example, restricts imports of certain categories of goods (clothes, shoes, toys) to five ports. (This was a tactic also used by France in the 1980s against Japanese electronic imports.) Argentina has imposed discretionary licensing requirements (licensing used to be automatic) on car parts, textiles, televisions, toys, shoes and leather goods. A number of countries have instituted outright bans on various goods due to safety considerations. And anti-dumping complaints have increased by 31 percent (India is the biggest instigator).

The richer countries prefer explicit subsidies to troubled industries (car manufacturers, for example). The US, Argentina, Australia, Brazil, Britain, Canada China, France, Germany, Italy and Sweden have provided either direct or indirect subsidies to their car manufacturers. 

The World Bank estimates that subsidies to the car industry total $48 billion, 90 percent of which are in developed countries.

Finally, to ensure that their fiscal stimulus packages don’t seep abroad and benefit foreign firms, countries have inserted discriminatory conditions into their packages. The prime example of this, of course, is the "Buy American" provision inserted into the US stimulus program.

While the world does not face the threat of a repeat of the Smoot-Hawley fiasco, the present trends toward protectionism could certainly prolong any recovery from the current recession.

The second area in which this week’s G20 meeting may have failed is in the need to restructure the current international balance of payments structure. We have pointed out several times that a number of respected economists have called for rebalancing between the current-account deficit countries and those that that maintain current account surpluses. The surplus countries are heavily dependent on exports, the greatest majority of which go to the deficit countries, especially the United States. Surplus countries need to stimulate domestic demand. Deficit countries need to save more and reduce their current account deficits. The economists believe that, by failing to address this situation today, the leaders are only setting themselves up for a greater economic failure.

The leaders, however, seem to be only concerned with restoring the status quo. Angela Merkel, the German chancellor, for example, has said that "The German economy is very reliant on exports, and this is not something you can change in two years." Moreover, "It is not something we even want to change."

Legal Disclaimer: Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary and does not constitute investment advice.