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Michael Baxter

Bull and bear: US debt crisis, what crisis?

Written by: Michael Baxter on January 25th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: US debt crisis, what crisis? Japan sees biggest trade deficit ever. Samsung’s profits soar, as it warns.  South Korean GDP rises from low point. IKEA moves into India. Companies in the news: ARM, Apple, London Stock Exchange

US debt crisis, what crisis?

As you know, there are those who think the great ship US economy, is laden down with too much debt, and is heading for an iceberg. SS US is due to sink beneath the economic equivalent of the Atlantic, they say.

It is worth bearing in mind, however, that there is an alternative point of view. Such a view was expressed by the ‘FT’s’ Martin Wolf earlier in the week.  Since Mr Wolf is supposed to be the leading economic journalist in the world, it is worth considering what he said. Mr Wolf and Paul Krugman seem to be members of the mutual admiration society such is their tendency to agree with each other. True to form, Krugman was quick to agree.

You could say that Mr Wolf made four key agreements. Krugman added a fifth.

Argument number one: Yes the US does have a short term trade deficit, but – said Martin Wolf – this is because of the costs associated with the financial crisis.

Point number two: Yes, the US government has run up huge debts, but then the private sector is saving more.

Wolf suggested that at a time when the private sector is saving more, there is a risk that “fiscal stringency [will] depress the economy more than it improves the fiscal outcomes.”  Krugman put it more bluntly. He said: “What would have happened, given this attempt by the private sector to move into surplus, if the public sector had tried to stay in balance. Can you say Second Great Depression?”

In the long term Wolf concluded that the US does have a debt problem but looked at two solutions.

Firstly US government spending is rising so fast because of the costs of US healthcare. But, said Wolf: “The US spends a far higher share of GDP on healthcare than other high-income countries.” Mr Wolf’s argument is that the US healthcare spending is highly inefficient.  All the US has to do is ensure its spending is as efficient as spending on healthcare is in Europe.

Finally, Wolf argued that the US has seen a quite staggering switch in the distribution of wealth in recent years. Citing research from CBO, Wolf quoted: “The share of total market income received by the top 1 per cent of the population more than doubled between 1979 and 2007, growing from about 10 per cent to more than 20 per cent.” So the US government can increase revenue by taking more from that 1 per cent.

Krugman’s contribution to this particular debate, was to present a chart showing how US government spending to GDP shot up under George Dubya Bush, and has relatively stayed put under Obama.

See Martin Wolf in the ‘FT’: America’s fiscal policy is not in crisis

And Paul Krugman in the ‘New York Times’: Martin Wolf, Hippie

No doubt Messrs Wolf and Krugman are right. But… Taxing the very richest in the US may seem eminently sensible, but Americans are naturally an optimistic bunch. A lot of them think that one day they will be in that top 1 per cent. Therefore a tax on the super-rich is a tax on their future income. That is why such ideas are unpopular with large swathes of the US electorate.

As for making healthcare more efficient, the first step might be to put an end to the US compensation culture. But doing that is, as it were, easier said than done.

Japan sees biggest trade deficit ever

Japan posted a trade deficit of 69 trillion yen, or US $78 billion in 2012. You would need to rewind the clock back to, well you could keep rewinding all the way back to the Big Bang, because never before has Japan had it so bad.

Japan’s dispute with China over the Senkaku/Diaoyu islands is not helping. The wave of anti-Japanese sentiment in China is killing Japan’s exports to the land behind the Great Wall.

The strength of the yen is not helping either, and Japan, along with just about every other country you can think of, wants to see its own currency fall in value.

So called experts think that 2013 will see a better performance for Japan.

But there is another issue. Japan’s savings ratio has crashed. It has probably crashed because those people who were fretting about retirement and were thus saving more and have now retired are now drawing down savings. The inevitable consequence of this is a rise in demand for foreign goods. In the long term, as the ratio of retired to working population rises, Japan’s demand will rise relative to Japanese production, exports will rise, imports fall, and public debt will become unsustainable.

Short of mass immigration into Japan, it is hard to think of a solution.

Maybe Japan should join the EU and enjoy an influx of European labour, apparently another island kingdom is thinking of leaving, perhaps Japan could replace it.

Samsung’s profits soar, as it warns

As Apple’s shares fall, Samsung’s shares rise.

Last year, Samsung overtook Apple to become the world’s largest smart phone company. Net income at the South Korean company rose from 4.01 trillion won a year ago, to 7.04 trillion won in Q4 2012. Err, so that makes US $5.6 billion. Apple profits in the last quarter were £13.1 billion. So in terms of absolute profits, Apple was the winner, but in terms of growth Samsung, as it were, won in the won stakes.

Here is a thought, however. Do you think smart phones are becoming commodities? Even Samsung put a slight dampener on its results. It stated: “The furious growth spurt seen in the global smart phone market last year is expected to be pacified by intensifying price competition, compounded by a slew of new products.”

So as smart phones become commodities, Apple, Samsung and co will find it harder to make a profit.

The spoils of this war will belong to those companies that innovate the most successfully. So that’s bendy screens, tablets that offer the illusion of touch and taste and Internet TVs. And well, who knows what else?

South Korean GDP rises from low point

Talking of South Korea, the latest stats on its GDP were released this week.  In Q4 South Korea’s quarter on quarter growth was 0.4 per cent, compared to 0.1 per cent in Q3. Year on year growth was 1.5 per cent.

The good news: South Korea does not appear to be heading for recession, which is something that seemed a like real danger not so long ago.

But the country’s quarter on quarter growth has been less than 1 per cent for seven quarters in succession, which is the worst performance in four decades.

Maybe South Korea’s problem is that it is no longer a developing economy with lots of room to catch-up, but a mature one.

Maybe. But right now South Korea stands in 34th place in the charts of GDP per capita across the world. It lags behind Greece and Cyprus, and will no doubt hope for a bit more growth yet, before it joins the slow lane of economic growth occupied by the developed world.

IKEA moves into India

Investors who have been resident on the planet Mars may not realise there is a possibility that India may represent an interesting opportunity, the rest know, but perhaps are not sure how to exploit the opportunity.

IKEA is moving into India, with India’s foreign investment agency approving the Swedish company’s entry into the Indian market.

This all begs the question, who is next?

Some UK retailers may be having torrid time at home, but opportunity away still beckons.

Considering the cultural links between the UK and India, you would have thought UK retailers would be well placed.

Companies in the news

Tempus at the ‘Times’ reviewed ARM. Its big customer Apple has had a bit of a hiccup, but Tempus pointed out that ARM supplies Apple’s rivals too. “The fact that supply constraints meant Apple could not meet demand hardly seems like bad news longer term too, I suppose,” it was stated.

And turning from ARM to Apple itself, Questor at the ‘Telegraph’ saw the recent falls in the Apple shares prices as a buying opportunity, especially as currency markets appear to be working in favour of UK investors.

Returning to Tempus, the London Stock Exchange came under its spotlight. The company has been diversifying and IPOs rising. But Tempus pointed out that flotation levels are still low and the number of companies quoted on LSE’s equity markets are in decline.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: Apple, ARM, IKEA India, Japan trade deficit, London Stock Exchange, Samsung profits, smart phones commodities, South Korean GDP, sustainable US debt, US debt Martin Wolf Paul Krugman, US health care, US top 1 per cent wealth tax

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