The Double Dip Recession (W shape for me)

It´s funny how a month and a half later, Mr. Obama starts to talk about an issue that I mentioned in my twitter and in an article at this blog. Even some of my friends made fun of me when I told them about my “W shape recession” or as Mr. Obama calls it “Double-Dip”. But it also makes me proud because the signs that I saw in the past months were indicative that this recovery was partial.

For someone that doesn’t know what a double dip recession is I will say that it´s a problem after the GDP growth back again to negative numbers after a period (usually 1 or 2 quarters) of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession. The effect that the economy will move back again into a second recession makes the new recovery even more difficult because you have to add the loss of confidence.

Here are the probes of what I said in the pass…

In the Financial Raindrops at Facebook

In Financial Raindrops´s blog.
Even on Financial Raindrops´s Twitter:


The words of Mr. Obama during his nine day trip to Asia were collected in a interview in Beijing by most of the media cover. I took the two best ones.


The FT article is well structured, it starts with the problem using Obama´s quotes, and then it gives some data about the deficit situation. To end the article, the FT concludes with some coverage about China, the “biggest foreign holder of US Treasury bonds”, it's worrying about their investment and makes a comparison of Obama´s trip “as that of a debtor visiting his banker.”


For the Times, they give more information about the debt problem of the US administration “The National Debt has increased about $1.6 trillion on Mr. Obama's watch, and has now topped the $12 trillion mark, bringing it dangerous close to the $12.1 trillion statutory limit”. It also uses an external source, Société Générale, to alert from a future recession in 2010 putting the worse scenario with some previsions “public debt would explode within two years to 105 per cent of GDP in the UK, 125 per cent in the US” and the article ends up with a very pessimistic comparison…”The underlying debt burden is greater than it was after the Second World War”

So if they don´t change the financial system and the pillars on where to support the growth we will end up again in a longer recession. We have seen that during the past US and other countries have been laying their economy in a huge deficit, passing the problem between generations as a “hot potato”, but it´s good signal that Mr. Obama recognize this big problem as the FT article says “It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a double-dip recession”.

I hope governments and economic institutions starts to approach such a huge problem such as “the underlying debt burden” when nowadays is even “greater than it was after the Second World War”.

Sources:

http://www.ft.com/cms/s/0/ee761ae2-d443-11de-990c-00144feabdc0.html
http://business.timesonline.co.uk/tol/business/economics/article6922325.ece
http://www.foxnews.com/politics/2009/11/18/obama-warns-double-dip-recession/

Warren Buffett´s Legacy

One of the oldest inventions of the world seems to be one of the pillars on which to support the future of United States economy. Or at least that is the vision that the investment `guru´ Warren Buffet has to make the largest purchase in his career, a $26.3 billion deal to buy Burlington Northern Santa Fe Corp (the largest US railroad operator), he called the acquisition an "all-in wager" on the U.S. economy.

Everybody knows that Mr. Buffet is not a speculator and that he bases his theories in a deep analysis of sectors. That´s why “I´m unsure about the immediate future but an efficient railroad system is vital to U.S. prosperity” Buffet says.

So...what does he see?

As the WSJ mentions in his article (Art.1) “Mr. Buffett is betting that in an era of high fuel costs, railroads will perform better than the trucking industry. More broadly, the investment is a wager on the long-term strength of the U.S. economy as it emerges from a prolonged recession.” This is how Buffett is confident that, after the recession, the world's largest economy will rebuild again and encourage the transportation of commodities and goods within its borders.

What´s behind this purchase?

There are two main reasons, first one is that oil prices will keep increasing and everyone is aware of the shortage of this good. It´s also proven than diesel trains are inherently more efficient than planes, trucks or cars. As we can see in the table below.

Another major reason for this huge investment it’s that the commodities market goes hand by hand with Burlington Northern on the index. We can see in the graph how the shares of Burlington replicate the movement of the commodities.

The coverage on the media about this news was very similar in every newspaper, for the New York Times the story was told in an objective perspective giving support to Buffett´s movement into the railroad industry to carry the U.S. economy “America’s best-known investor, Warren Buffett, is making his biggest bet yet on the nation’s economic future by buying, of all things, a railroad. They also ironically compared the new purchase with his childhood dream to get a train set form his father “His new toy will not come cheap”. Same in the Guardian where they also comment about his new toy “is buying himself an enormous train set by acquiring one of America's largest freight railway operators, Burlington Northern Santa Fe, in a deal worth $44bn (£27bn) that signals confidence in a long-term revival of the US economy.”

Warren Buffett's Legacy

To conclude this last entry it´s amazing how with 79 years and the second largest fortunes in the world, Buffett has no plans to retire, but want to be sure that the business of Berkshire will last for decades after he´s gone. He is betting that any new technology will not outdate the train and I think he may be right.

(Art.1)http://online.wsj.com/article/SB10001424052748703740004574513191915147218.html

(Art.2) http://www.nytimes.com/2009/11/04/business/04deal.html

(Art.3)http://www.guardian.co.uk/business/2009/nov/03/warren-buffett-buys-bnsf-railway

(Art.4)http://www.oilprice.net/en/articles/buffett_buys_railways_because_of_peak_oil.php

Obama´s 1st Year

After one year of Obama´s reach to the power with the slogan “Yes, We Can” I would like to analyze what he has done so far.

Although Obama has proven to be somewhat of a hero this past year, his expectations have not exceeded him. Due to things like 10% unemployment rate, an imminent war in Afghanistan, and many other non transformative ideas, super-star Obama has failed to meet America´s needs.

Even for a left-winged newspaper like the New York Times, “the tears and euphoria of Grant Park feel like a thousand years ago.”(Art.1).The article is one of the best articles I´ve read, very interesting and with a constructive criticism using some formal speakers that comment on Obama´s first year.


With his epics speeches in the rain and the President-elect Obama's Grant Park speech “He has discovered that the oratory that proved so powerful on the campaign trail does not as easily move votes on Capitol Hill,” New York Times says.


I also enjoyed reading a Fox News opinion article completely opposite to the New York Time´s it was very vice. Opinions like “the biggest "change" he can point to is that he's our first black president and he's not President Bush!” proves that they are not very into the Obama phenomenon and the way people think he´s a savior because of his amazing campaign and skin color.

In a recession time I don’t think it’s a good idea to change one of the most important (and expensive) systems in the country. The Health Care reform should wait if they don´t want to collapse the new system with the drowned American citizens. Who is going to pay the icing of Obama´s cake? The last legislation estimated the cost of the plan in more than $1 trillion while Obama “has put the threshold at $900 billion for a suitable plan” (Art.2)

My suggestion is this, WAIT, wait until you pull out the troops of Iraq as you said “By August 31, 2010, our combat mission in Iraq will end” (art. 4) , wait until you solve the biggest financial crisis since the Great Depression and wait until you prove to the world that you have already accomplished something bigger than a better image for the US after Bush hegemony (something relatively easy). The controversy with the imported tires in china were US became protectionism is not the way to solve the crisis that started in the US.

I want to clear my opinion expressed here may seem that I don´t like Obama, that´s not true, what I don´t like it´s to elevate Obama like a savior and the captain of a New America when hasn’t done anything notorious to achieve awards and merits like the Nobel Prize. With some time I hope he does a good job leading the world most powerful economy.

(Art.1) http://www.nytimes.com/2009/11/04/us/politics/04obama.html
(Art. 2) http://abcnews.go.com/Politics/HealthCare/health-care-reform-public-option-employer-mandate-remain/story?id=8881163
(Art.3) http://www.foxnews.com/opinion/2009/11/02/jon-kraushar-obama-year-later/?test=latestnews
(Art.4) http://news.bbc.co.uk/1/hi/7914061.stm

US Little Recovery

After a long year for the world's largest economy, the end of a recession that has cost more than 7 million jobs and prompted the biggest response since the Great Depression. What should be done when the financial system proves that something was going wrong? Where do you sustain the growth?

The answer is consumer spending, residential investment and strong government spending. My point of view is more laissez-faire because it’s better for the economy and the development of a country but when it comes to these times, when the economy is questioned, you need a minimal interference by the government to start building up the system again. With this strategy US has started to get back in the growth shape. The Wall Street analysts forecast that the economy would grow by 3.2 per cent was right and this result has been the most commented news in the business sector.

The FT blames in the policy measures that were put in place in the US economy, for example some measures have been seen, like the cash for clunkers that encouraged the huge car industry in the States. “According to the White House’s Council of Economic Advisers, the stimulus added more than 2 per cent to real GDP growth in the third quarter.” (Art.1)

After you give the spark to reactivate the economy, it’s a natural effect that automobile industry (in this case) is going to start to maintain a reasonable movement of cash flow for the complementary services that it is linked to (exports, imports, Loans, Oil, tires, manufactures...), even though in the beginning the support given to General Motors and Chrysler by the Obama Administration was widely unpopular. An April Washington Post poll found that 41% of Americans approved of the actions. The truth is as Christian Menegatti, head of global economic research at Roubini Global Economics, said ahead of the report, “These types of take-it-or-leave-it incentives are very effective in the short term.” (Art.1)

But if you read in depth the FT (Art.1) coverage of the US revival it is shown that not everything that shines is gold. “Many analysts say the rate of growth will slow after the third-quarter jump, as the initial effect of the stimulus wanes”. This is also mentioned in the Telegraph, “While acknowledging that the economy has rebounded, experts are divided on how strong the recovery will be. Some reckon there is a significant risk that the economy will fall back into recession.”

The Bloomberg article (Art.2) also takes the same data from the Commerce department (same in the FT) and it is also clear that “federal assistance to the housing and auto industries, can be sustained into 2010 and generate jobs”

I think that the US economy is going to go down again, to form a W shaped recovery until issues, like unemployment has been solved. A sign of this REAL recovery will be the appreciation of the Dollar and the increase of the interest rates.

Art.1 http://www.ft.com/cms/s/0/16073bb0-c47f-11de-912e00144feab49a.html?nclick_check=1
Art.2 http://www.bloomberg.com/apps/news?pid=20601103&sid=aL3jHqTqtocU
Art.3 http://business.timesonline.co.uk/tol/business/economics/article6895362.ece
Art.4 http://www.telegraph.co.uk/finance/economics/6459950/US-emerges-from-recession.html