BUSINESS INTELLIGENCE BRIEF

January 13, 2010

Low Interest Rates – How Much of a Factor?

The debate over what really caused the recession continues to rage and there is considerable disagreement
over the role of very low interest rates in the beginning of this decade. The majority of economists assert that
the low interest rate policy pursued by the Fed under Alan Greenspan was mostly to blame for the housing
bubble whose collapse led to the economic crisis. But that is not the position of Ben Bernanke and a
substantial number of economists who believe that there was far more going on in the economy than just low
interest rates. There are also many who point out that the economy in 2001 was not in very good shape and
needed the boost that was provided by these low rates. This is more than just an academic exercise in assigning
blame as there is now debate over how long the current low interest rate policy should go on.
The argument against the low rate policy is pretty basic. The low rates encouraged banks to take bigger
risks and encouraged home buyers to get into mortgages they would later be hard pressed to service. The loose
monetary policy made it easier for institutions and people to make bad choices and get in too deep. It also
fueled speculation in the housing market that created huge bubbles in some of the most popular housing
regions in the US. The argument is that rates should have been rising to counter all this speculative activity.
The counterargument holds that there were many other factors involved and that low interest rates were
either not that important or were at least only one factor. The Bernanke position is that the economy was in
trouble in the early part of the decade and low rates were needed to contend with the dot.com crash as well as Details on page 4.
the fallout from the 9/11 attacks. He cites the fact that banks had developed exotic and untested risk
management systems that led to bad decisions and he also pointed out that there were considerable levels of
foreign investment that interfered with monetary policy in the US.

Analysis: This discussion is relevant today as there are considerable differences of opinion over when the Fed
should start ratcheting up rates again. There are already some signs that a bubble mentality has formed as
the stock market has become overvalued again. The housing sector has certainly not gone back into boom
but there are other asset bubbles starting to form and the Fed is being pressured to keep an eye on this. If
the low interest rate policy is reversed, the economy will lose a significant amount of the fuel that has been
propelling the recovery and if these rates are not really the issue, the asset bubbles will not deflate anyway.
This is Bernanke’s position at the moment. He asserts that rates should remain low until there is solid
economic recovery and then they should only rise by increments. The other factors that drove the last bubble
period remain in place – namely flows of foreign money. If rates were to be hiked at this point there would
be more foreign money coming to the US. As it is, the low rates have weakened the dollar and thus reduced
the motivation for foreign cash to migrate into the US economy. The Fed will doubtless start to raise rates
this year but thus far nothing suggests that they will spike rapidly and aggressively.

Trade Deficit Grows – Good Thing or Bad Thing?

The trade deficit is a simple enough measure but the interpretation can get pretty complex. It is simply the difference between what the
US buys in the world and what it sells but that means that some businesses are finding success in selling to the global market while others
are facing competition from companies in other markets. There are those who would assert that the US should avoid imports as much as
possible and allow domestic business to have the US market to itself while others point out that access to cheaper imports allows the US
consumer to enjoy a lifestyle that would not be available without them. For much of this year the trade deficit had started to shrink due to
the recession and the reduced activity in the US consumer market. In November the deficit widened again as the import levels in the US
increased while export levels remained fairly flat.
The trade deficit rose to 9.7% over the previous month, The level of exports hit the highest level for the year, rising by 0.9% but the
levels of imports rose even higher and faster – up by 2.6%. The weak dollar continued to help US exporters sell their goods overseas but
the US economy had started to show some signs of life by the end of the year and that meant more imported goods. It also has to be noted
that a big part of the import increase was attributable to the expanded demand for oil and the higher per barrel oil price. Oil purchases
routinely make up between 30% and 40% of US overall imports. This becomes something of a good news/bad news scenario. The
demand for oil has risen and that means that the economy is starting to mend. But that very demand means that oil prices start to rise in
response. From the days when oil was languishing in the $40 to $50 range the markets are now pricing it at between $70 and $80.

(Continued)

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 Analysis: The mood in the US has become stridently populist and isolationist in the last year – a development that is expected in the
midst of financial stress. There are over 7 million people looking for work and there have been millions of people affected by
foreclosures, bankruptcies and all the other elements that go along with a recession. The frustration in the population has been
palpable and almost everyone is seeking someone to blame. Banker’s bonuses have become the hottest topic in Congress and in the
press and the notion of doing international business has become anathema to many. There have always been a percentage of the
population that feels the brunt of foreign competition and they have long argued against doing business with other nations at the
expense of US operations. But in the past, these voices have been countered by those who make their money from that foreign trade
and by consumers who enjoy much lower prices for the goods and services they buy.
That dynamic is under assault today. The focus of the average person is on the immediate issue of the recession and recovery. The
paramount concern is job growth and the perception is that imports hurt the US job market. There is some truth to this notion as there
is less for US manufacturers to produce when those items are purchased from overseas but the equation is more complex than this. The
US exported $138 billion worth of goods last month, making the US one of the top exporting nations in the world. There are millions of
jobs and companies that depend on these overseas markets if they are going to grow and hire more people. The US can’t afford to lose
these markets. Those countries that buy from the US also want to sell to the US. If there are efforts to reduce the amount we buy from
others we will end up selling less as well. Some of the reduction in export activity will simply be because the buyer nations have less
money to spend if they can’t also sell. There is also the political side of the debate. If the US elects to discriminate against a given
nation’s exports they are quite likely to return the favor and in a way that is designed to hurt the most.
Take the case of the US decision to place huge tariffs on Chinese made tires. This is a case that China is taking before the World Trade
Organization and this may make the price paid by the US even steeper. But even without the intervention of the WTO the US has been
affected by the Chinese reaction to the tariffs. At the behest of the Steelworkers union the US imposed tariffs on these tires that made
them wholly uncompetitive in the US. This was in reaction to the fact that Chinese tire makers had been making serious inroads into the
US market and several US tire makers had been forced to close. The threat to US tire making capacity was very real and there had been
job losses that numbered in the thousands. The problem is that any reaction always evokes an opposite reaction. China imposed
restrictions on US auto sales into China in retaliation. Given that the future of General Motors and Chrysler are tied to their ability to
access the fast growing Chinese car market, these restrictions could prove deadly. If Chrysler or GM fail and are forced to close there
will be many factors to blame but the loss of the China market would be a major one. Thus the US is left with the question – what is
more important? Protecting the remaining jobs in tire making or protecting the struggling car companies that have already gobbled up
billions in US taxpayer aid.
There is also the issue of the consumer. At the moment the focus is on the person as an employee. The story in the press is the job
losses that have taken place in the recession thus far – over 7 million people, 10% unemployment. Many more are underemployed and
even more have simply given up the search. It is a major problem but the average person is also a consumer and that side of them
wants to maximize their earning power. The recession has also meant that wages and salaries have become stagnant and earning power
has eroded. If the imports were not available from nations that can produce at a lower cost the average person would see their
expenses rise drastically. The very existence of Wal-Mart and its low pricing model saves the average consumer close to $6,000 a year.
Consider what would happen to millions of households today if they had to pay an additional $6,000 for the goods they normally buy.
The impact would be severe and more universal than unemployment as absolutely everybody is affected by higher prices. Imports
reduce the impact of inflation, it is just that simple. This is not to say that the US business community should strive to sell more and that
US consumers should not be considering US made options whenever they can but it does mean that policies that drastically affect trade
are destructive to the US economy in profound ways.

Tragedy in Haiti
The earthquake that has devastated Haiti will be in the news for a few more days. The devastation is fresh and the images are
heartbreaking but in many ways the real tragedy is yet to come. The cruel fact is that Haiti has been a political and economic disaster for
generations. It is the poorest nation in the Caribbean and has had a vicious string of despots and maniacs as leaders. The country barely
hangs together in the best of times and it is now contending with a disaster that has left the capitol city in utter ruin. There will be relief
efforts and there will be some emergency money provided but nothing close to what would be needed to rebuild a nation that was
shattered well before the earthquake. There is a very real possibility that Haiti will deteriorate into utter anarchy in fairly short order and it
is unlikely that anybody will do very much about it.

Analysis: In the coming weeks and months the support to Haiti will ebb and the concern that people express will fade. Millions of
Haitians will find they have no option but to escape the devastation and they will try to enter the US and other nations in the region.
They will be repelled and concern will turn to frustration and anger. Haiti was teetering on the edge of utter chaos before the
earthquake sent it into the abyss and few have any idea how to rescue it now.

Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.

2
 STRATEGIC GLOBAL INTELLIGENCE
January 13, 2010

China Takes Steps to Cool Economy and Markets Start to Panic

For most of the last few quarters the mood in China has been ebullient. The economy managed to shrug off the recession that gripped the
rest of the world and the downturn in China seemed to last a few weeks at most. Growth was back to normal rates within a quarter or two
and the latest data showed that China had bounced back to pre-recession levels in almost everything. Industrial production has been up,
export trade was up by over 17% and the consumer in China had come alive in ways never seen before. Demand has been spiking in almost
every category. But with all this growth came asset bubbles and evidence of economic overheating. Steps were taken at intervals but they
have been mostly ineffective. Interest rates were hiked several times but this was not enough to slow down the banks and the borrowers
that wanted to keep riding the waves of expansion. It appeared that the government was willing to let this expansion continue unabated but
it now turns out there is more concern than many had anticipated.
The edict that was issued by the central bank has thrown some cold water on the economy as banks are now required to hold
considerably larger reserves than had been the case earlier. Te reserve requirement has been raised by 0.5% and interest rates were hiked
again – albeit modestly. The actual amount of the reserve demand is not as important as the decision to raise it at all. For most of the last
couple of years it has seemed that the government was clearly under the influence of the growth advocates in the Politburo. It was deemed
unlikely that China would take steps to really bring the economy down as there has been far too much pressure on the government to keep
expanding. China needs to generate tens of millions of jobs each year just to keep up with population growth and there has been a mindset
in place for years that holds that growth is favored under any and all circumstances. This has informed Chinese policy on its currency and
on trade relations. It has certainly informed policy on the banking system.

Analysis: There is now a sense that China is starting to consider what rampant growth can do to their economy. The hawks in the
government seemed to have found their voice at last and are gaining ground. If China starts to take the issue of overheating seriously
there could well be more policy shifts coming and that seems to be what has driven the market reactions in Asia. China is the engine of
Asian trade at the moment and if they really start to try to bring the economy to a slower pace that will mean less demand for the
products, raw materials and services provided by the other Asian states. It has been noted that almost every country in the region has
seen exports to China double and triple in the last year. Now it seems they can’t necessarily count on that trend continuing.
There are also those who assert that this latest move is not as important as some would hold. This feels to some like the Chinese
decision to slightly adjust currency values a year or so ago. It seems to be more symbolic than real and these analysts are not prepared to
believe that Chinese leaders are willing to slow the growth engine that much.

German GDP Declines Dramatically in 2009

The numbers did not come as a great shock given where the German economy has been throughout the last year and there was not much
of a reaction in the markets either. The last couple of months have shown a better trend and there is more optimism in Germany these days
than pessimism but the fact that Germany has now made it official is still sobering. The 5% decline for the year is the worst performance
for the economy since the end of World War II. The signs of progress are encouraging to be sure but this level of economic decline will not
be reversed in short order. The mood in the business community can best be described as chastened and cautiously optimistic. The worst
news from the data was that German GDP stagnated in the fourth quarter. It had been assumed that there was a mild recovery underway
given the levels of business and consumer confidence but now it seems that this is still in the future.

Analysis: The German economy remains the engine of European growth and until there is a real and observable recovery there will be
gloom in the Eurozone. It had been hoped that the latest GDP numbers would be telling that story but now the view is that German and
European recovery will be put off for another quarter or more. The Germans have lost their export crown to the Chinese as well and that
has further accelerated levels of concern. Analysts hold that German export data will improve as Europe’s economy rebounds.

Chavez Goes on Offensive Against Merchants

The idiocy continues in Venezuela. In the last few days the military in that nation has shut down over 200 shops and businesses on the
grounds that they have been profiteering. These are the merchants who have reacted to the radical devaluation of the Bolivar by seeking to
regain some measure of profitability. There are massive shortages showing up in the country already as many suppliers have just quit in the
face of these economic conditions. The fact is that only a deluded leader like Chaves can believe that people will produce something when
they lose money on every item. The nation will soon be facing shortages the likes of which they have never seen before and this often
creates the kind of conditions that provokes governmental overthrows.
Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.

3
 Adventures in Customer Service
Many analysts and observers expected to see some radical changes in the level of service rendered when the economy started to tip into
recession. It seemed logical to assume that when consumers became more cautious that business would seek to hold on to them with better
treatment. It was assumed that the beleaguered customer would finally see the world turning in their favor. It hasn’t turned out that way.
Poll after poll has suggested that customer service is far worse now than ever. Part of these reactions can be attributed to the fact that
everybody is more stressed than usual these days and part of the problem may also stem from the fact that business has reduced staff and
there aren’t as many people to handle the customer as there used to be. But much of the frustration is more systemic than that. There seem
to be deliberate attempts to infuriate and alienate customers and there is also an obvious problem in training people to deal with consumer
complaints.

Analysis: Just a personal example with an industry that has become notorious for its disregard for consumers – the glorious world of the
credit card. The selection of Christmas gifts for relatives can be exasperating so this year the decision was made to buy gift cards from
Visa. Unfortunately three were stolen and this sent me off into the infuriating never land of Visa “customer service”. The fee to replace a
lost card is hefty to begin with ($10 per card) so now I am out $30. The best is yet to come. It seems that one must pay $1.50 per card to
talk to a human being and that is required as the on-line system is not equipped to handle a three card issue. The “helpful” people at Visa
manage to screw up the replacement cards twice and that requires more calls and I am billed for each and every one. What a novel
business concept. If they keep messing up and I keep calling they will eventually empty the card’s value completely. Result of all this is
that I am out close to $70 and have received no satisfaction. Not that Visa cares much but I will never buy a gift card again and I would
urge readers to give Cousin Fred a wad of actual cash next time a holiday approaches.

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Business Intelligence Brief is an online information service, published electronically by Armada Corporate Intelligence. It is prepared by
Armada CI. The publisher has taken all reasonable steps to verify the accuracy of the content of this information. Armada Corporate
Intelligence shall not be responsible for any errors or omissions.