On April 11th, Euler Hermes held an event at the Westin Bonaventure with its Chief Economist Daniel C. North who manages a risk portfolio of over $150 Billion. Mr. North’s general outlook for the 2012 economy was “Cautious Optimism”
He has appeared on CNBC, Fox Business News, ABC News Now, France 24, and Bloomberg Radio and Television. He has been quoted by USA Today, Barron’s, Business Week, Washington Post, Paris Le Monde, AP, Reuters and the Wall Street Journal. He was ranked fourth on Bloomberg’s list of 65 top economic forecasters in 2010.
He feels the economy is positive but weak. The projected growth for 2012 is 2.7% compared to 3% in 2011. His projected growth for the U.S. in 2012 is 2%.These projections will be affected by various factors, mainly the European recession (unofficial) with its debt uncertainty and its 5 changes in government and 9 downgrades. Even though Europe is quiet now it will most probably come back. Mr. North feels that Spain will rear its head again. The presentation was around an hour and he had multiple graphs with all the figures to support his claims.
Here are his key points:
- Although there is a risk of a default in Europe, Mr. North feels that that is unlikely. Also, he feels that the U.S. will never default as we continue to print dollars…
- The U.S. government has no plan to reduce debt and Mr. North feels that this is a crucial part of things getting better faster.
- According to Mr. North, the 4 major problems that started this great recession are:
Oil – Housing – Fed Policies – Fear
GDP is $15T 3.3%
- Oil prices shock the economy, in 2008 there was a 36% hike in oil prices; this caused housing to go into a double dip in prices. Due to the tax incentive they recovered but then re-fell again.
- Traditionally, we have followed the Treasury yield curve vs. the GDP. Right now it is positive and reasonably high which helps lead the recovery. The credit/lending market is resuming and also helping the recovery. The GDP is recovering but still weak and anemic.
- Consumption is OK but not great due to so much Fuels spending. Manufacturing has improved around 10% which is very good, and bankruptcy filings are down for the 10th consecutive quarter.
There is still an elevated perception of a risk of default and the unemployment rate is at 8.2% and that is still too high. The U.S. government is causing 2 problems: Debt and Potential Inflation.
Mr. North feels the government budget math in Washington is based on complete fantasy (really?) so when at the end of his presentation, at the Q & A, I asked him what his thoughts of a solution were he smiled and said “A plan, any plan will help” He also commented on Energy and Entitlements, feeling there needs to be a change in both. “This is not hopeless! The math is simple” he said.
“We need clarity and certainty as we are headed for a fiscal cliff this year” Mr. North feels that the fact that this is an election year will help as well. He does not agree with the Fed’s plan to leave the Interest rate at 0% until 2014 and he believes that they will raise it before then. He feels the Fed made this statement to convey the message that they are willing to do whatever it takes to help the recovery of the economy.
Another negative from the government according to Mr. North is Quantitative Easing. QE2 did not accomplish what it was supposed to, as rates jumped instead of dropping at first. They dropped due to World issues such as the Arab Spring and the Japan catastrophe.
As we all know, printing money devalues the dollar. The Dollar is down as much as 20% against the Swiss Franc, 7% against the British Pound, and 6% against the Euro. The U.S. government is OK with this devaluation because we have $14 Trillion in debt, so as the dollar devalues so does the debt…
One of the major points I took away from Mr. North’s presentation was the fact that the Oil industry affects are economy in a huge way, Oil is up currently not due to supply and demand but due to fear of supply disruption from this looming conflict with Iran and their threat to shut down the Strait of Hormuz, which 20% of the World’s oil goes through.
We have the Bakken Oil field in North Dakota that has some claiming 500 million barrels of oil will come out of there but it is slow moving to transport all over the country as the U.S. does not have the proper pipelines. Mr. North feels that we need to use other forms of energy such as Nuclear power plants as they are the safest and plentiful when compared to Coal mines etc.
In summary, Mr. North feels that we need to be less dependent on oil as it is so volatile, and that Europe is still a problem but his main message was that the economy IS improving and that it is not hopeless.