Con-tango

Fortune telling I

In an attempt to complete the weather map with the salient storms which will most likely assail investments next year, I did the rounds visiting some of the better respected and informed minds to hear what they had to say…

Of course, I’ll shine the cristal ball, and give it a try too.

Richard Fischer, Dallas Fed President
Source: USA Today

I’ll start with Richard Fischer, the Texas Fed don, and his… merry… Christmas tainted remarks:

Here is the bottom line. The economy is sending mixed signals. The bad news is that the housing industry is undergoing a sharp correction that may not have run its full course and auto production is more anemic than desirable. The not-so-good news is that expansion of manufacturing activity and things made in factories has shown signs of slowing, but—and this is important—from high levels of activity. As one of my friends in manufacturing and industrial production likes to put it, "We are not stepping on the brakes, just lightening our foot from the accelerator."

The good news is that the dampening effect of the housing and auto sectors and the slowdown in manufacturing activity have been offset by continued growth in the service sector.

…and continues to make the case for a better outlook of the economy, due to the unrecognized importance of the service sector contribution:

In contemplating the course of the economy, we need to look beyond manufacturing and consider where the other five-sixths of our workers work. Where do we produce over three quarters of our $13 trillion in output?

The answer is in the service sector…
… we have moved up the value-added ladder toward what Winston Churchill once called the “superfine processes” where the greatest profit is reaped and the quality of life is best; where we work more with our brains than with our backs.

…this is where America enjoys its comparative advantage. We have created a system that harnesses the greatest brain power in the world and the most nimble and flexible business culture on the planet. Our comparative advantage is at the nano and bio and techno and financial end of the economic spectrum, not at the part of the spectrum where we till fields or bend metal. As we have moved up to these higher rungs on the value-added ladder and positioned ourselves to master the “superfine processes,” others have taken our old place on the lower rungs of the ladder.

Recognizing the service sector’s enormous contribution (and its difficulty to measure), I’ve got to say that… I’m not buying Fischer’s rosy prospect of the US economy.

On the one hand, it sounds a lot like the Haussman & Sturzenegger dark matter arguments we heard some time ago —hidden sources of income missing from the US current account, but somehow justifying the CA deficit. In the case of H&S the answer which explains away dark matter is simply that US outflows into foreign investments are fundamentally… global investments, which have a good chance of staying abroad —as well as their returns, lured by the original higher foreign ROIs. In other words, investors have (virtually) moved abroad to greener pastures: i.e. Pepsi to Ireland.

If only 1/6 of the US economy is based on the non-service sectors, then somebody is doing this work for the US… which is satisfactorily explained through US imports growth. If we accept the US as largely dependent on service incomes, then we must infer that the US is also servicing foreign markets; and as in the case of the H&S dark matter, service sector investments and returns must be getting lured back into these higher return investment areas —leaving the US, which is confirmed by their non presence in the current account computations. In other words, the US service sector is also finding attractive to move abroad, mostly in the form of banks and trading operations to India, China, Japan and elsewhere.

On the other hand, I’m worried that we are slowly but surely approaching an Orwellian society, where gradually we are falling under the control of banks and the war (defense) industry.

Contrary to Fischer, I smell a festering economy further debilitating the US political foundations. If we look at the service sector, we clearly see that bankers and market traders are the players that are coming ahead, and in the manufacturing sector, the war industrial machine seems to be growing to a $1.5 trillion USD a year industry.

Could it be possible that the US Congress and the presidency are… improperly influenced by outsiders lobbying through well-conceived deceiving think tanks?

In sum, could the unintended, but nevertheless, unfettered bank growth —and their control over the economy— have dire consequences for average Joe’s assets, as Jefferson warned; and/or has the war industrial machine grown so powerful to make it impossible to… oppose and avoid unnecessary wars?

To be continued…