The Global Economic Reporter
July 11, 2014
Is It 1775 Again?
Scott B. MacDonald
Head of Research
(203) 487-6705
Scott.MacDonald@mcasset.com
Heidi Constantine
Senior Associate
(203) 326-6893
Heidi.Constantine@mcasset.com
MC Asset Management
Holdings, LLC
Executive Summary: In 1775, Lisbon was hit by a devastating earthquake,
which was followed by a tsunami and city-wide fires in which some 100,000
people perished. The ripples of the Great Lisbon Earthquake were felt as far away
as Ireland, Finland and North Africa. Fast-forward to July 2014, where global
markets are now shaking from the problems of Portugal’s “Banco Espirito
Santo,” the country’s second-largest bank. Although the concerns over the bank
probably resemble more of a tremor than 1775’s earthquake, they point to the
unwelcome fact that risk still exists despite the recent lowpoints in the VIX Index
(10.32 on July 3rd), the rise of U.S equity markets to record highs and steady
tightening of corporate bond spreads. The issue for Espirito Santo is that its
parent company missed debt payments to “a few clients,” casting doubts over the
bank’s creditworthiness. Although it does not appear that the bank will collapse,
it is not a good thing for one of the country’s major financial institutions to have
questions of this sort hanging over it, especially as they translate into questions
over the value of credit lines to local businesses, both big and small. Anyone
looking for an immediate ripple effect need only check the plummeting values of
some of Portugal’s companies on stock exchanges, not to mention how ripples
from Lisbon pulled European stock exchanges down on July 9th-10th. In the bond
markets, it is peripheral sovereign debt and banks that took the hit. Take Espirito
Santo’s problems, disappointing Chinese export data (for June 2014), an uptick in
Israeli-Hamas hostilities and Puerto Rico’s debt woes into the picture, as well as a
more sharply bifurcated debate over U.S Federal Reserve policy and inflation,
and the world is not such a safe place for investors – at least not in the way bulls
are calling it. What we are seeing now is a lot of tremors, which signal that
tectonic plates are grinding away beneath the surface. There are more tremors to
come and this mid-July scare should remind investors that there is risk associated
with reaching for yield. Money can still be made in these markets, but the
entwining of macroeconomics, geopolitics and specific company performance
requires a more 360° view than earlier in the year. There are positive forces to
keep markets moving – a flood of M&A activity, probably a solid earnings
season and positive U.S. economic data. It is not 1775 again, but if you are in the
wrong bonds, equities or real assets, it certainly can feel that way.

The MC Asset Management Holdings, LLC Risk Monitor (Page 2)

Bi-Weekly Risk Update (Page 3)

The Fed Minutes – Finding Direction? (Page 4)


Puerto Rico – Another Detroit? (Page 5)
Economic Charts and Commentary (Page 7)
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MC Asset Management Holdings, LLC
The Global Economic Reporter
July 11, 2014
The MC Asset Management Holdings, LLC Risk Monitor
Direction*
Previous
Ranking
Factor
1.
2
Changing
Interest Rate
Regime
Commentary
Fed Policy is front and center for investors in the months ahead as QE is set to end, inflationary
pressures are expected to rise, and the debate (both with the FOMC and economist circles)
intensifies as to when the central bank will raise rates. The closer the Fed moves to actual raising
rates the more likely market uncertainty, despite the faith put in “forward guidance”. We are
concerned that Fed policy could be a few steps behind upward inflationary moves and remained
more focused on employment lags.
China’s economy is a major concern for investors and economic policymakers. The world’s
second-largest economy has substantial challenges, including bringing credit under control, a
cooling property sector, dealing with a pipeline of corporate debt defaults and maintaining
economic growth. We also have questions over the stability of the banking system. The shift to a
more market-driven economy is in motion, which will not be without bumps along the way. For
some analysts, this means a hard landing; for others, this translates into a challenging path that will
have downturns, but will create an economy less dependent on top-down investment-led growth.
We do not see a hard landing in 2014 but do not rule one out in 2015.
According to the International Monetary Fund, economic growth in the Euro-area is forecast to
reach only 1.2% in 2014 and 1.5% in 2015. The words “anemic” and “fragile” are sadly accurate
pertaining to Europe’s recovery, leaving the region a potential, albeit declining risk factor.
Extended low inflation only adds to economic concerns. July’s market tremors coming out of
Portugal demonstrated this.
2.
China’s
Economic
Challenges
3.
6
Europe’s
Fragile
Recovery
3
Middle East risk has returned with a vengeance when ISIS took Mosul, Iraq’s second-largest city,
and continued to march south toward Baghdad. The risk represented by ISIS is that it could spark a
Middle Eastern
civil war between the country’s Sunni and Shia populations, disrupt Iraq’s ability to export oil and
Political
drag external forces into the conflict. ISIS’ plan to redraw the map of the Middle East by creating a
Instability
Sunni state out of Syria and the north and center of Iraq (to start with) is potentially a major
geopolitical gamechanger. Israeli-Hamas tensions only add to the region’s volatility.
1
4.
4
5.
Emerging
Markets Drag
Commodity-based economies are vulnerable to the potential of a sustained downturn in the
Chinese economy. Growth has slowed in a number of countries and structural problems are
hindering a return to a stronger economic expansion. An active period of elections ahead, including
Brazil and Turkey, adds to the potential for volatility.
6.
Ukraine’s
Political
Upheaval
Ukraine’s new president is seeking to bring the country’s rebellious areas under control by military
means. There has been a steady increase in deaths and fighting. We expect this to continue, a slowmoving and deadly game of escalation, falling short of outright conflict between Ukrainian and
Russian forces.
Washington’s
Dysfunction
The last several years have been marked by considerable dysfunctional political behavior in
Washington D.C. in what resembles more of an extended freshman food fight. U.S. political parties
have left many key matters on hold- immigration policy, renewing the Exim Bank’s mandate, a
highway bill, and further efforts at fiscal reform. In the absence of adults in the Congress and
White House economic policy had ended up by default at the Federal Reserve. Mid-term elections
loom in November. Look for a more dysfunctional Washington in the months ahead.
5
7.
9
7
8
10
8.
Japan’s Debt
9.
Asian
Geopolitical
Risk
10. U.S. Inflation
*
Abenomics is seeking to generate enough economic growth to help the world’s third-largest
economy to move out of deflation and into a position where it can stabilize and start to reduce its
massive debt burden. We expect data will reflect ongoing forward momentum, but keeping the
Japanese economy headed in the right direction is not an easy process. Considering the need to
raise inflation, push up wages (still lagging) and reduce public sector debt, Abenomics has some
challenging days ahead.
Asia has a number of potential geopolitical flashpoints that could result in a major international
crisis, including disputes over maritime boundaries (like the South China Sea and East China Sea),
overlapping land claims and North-South Korean tensions. To this, we would add disputed
elections in Indonesia and Thailand’s contested political situation.
While, in the short-term, inflation in the U.S. is not a major worry, stronger-than-expected growth
in the U.S. economy could change this. The Fed is geared for low inflation, but if pressures build
in areas such as wages and food as well as housing, the dynamic could start to change in the second
half of 2014. If so, Fed policy will have to be reassessed, something most likely to be played out in
markets before any changes in Fed policy.
means moving up as a risk,
means moving down as a risk,
means staying the same.
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MC Asset Management Holdings, LLC
The Global Economic Reporter
July 11, 2014
Bi-Weekly Risk Update
Portugal and All That
A couple of weeks ago we sounded a cautious note,
probably too cautious considering that U.S. stock
markets headed into record territory and U.S. corporate
bond spreads ground tighter. One reader of our
newsletter wrote: “Thanks Dad. So far, precisely wrong
strategy. As the great Chuck Prince said, ‘while the
music is going you need to dance’ or whatever.
Party!!!!!” At the time, it was precisely the message that
most investors did not want to hear and most certainly
did not follow. Our point was that risks had not gone
away, they still are very much a part of the market
landscape and are likely to have some impact on
macroeconomic trends. We also said that risk was on and
would probably play out that way for the short-term. We
still stick to our key tenets concerning risks for 2014 –
they remain largely manageable, we will end the year
ahead in debt and equity markets and that – somewhere
along the way – there will be a significant re-pricing. As
for global economic growth, the pace will be a little
lower than initially forecast by the World Bank,
International
Monetary
Fund
(IMF)
and
Organisation for Economic Co-operation and
Development (OECD), but it will not be recessionary
and 2015 appears set to be stronger. Equally
important, trade will continue to be a major
component of global economic growth despite the
spread of geopolitical risks.
As for risks – clear and present dangers exist – the trials
and tribulations for Portugal’s Banco Espirito Santo in
July served to be a proverbial shot across the bow of the
ship. Three things can be taken from Portugal’s tremors:
(1) Europe’s economic recovery remains anemic,
especially in the southern European countries; (2) links
between banking systems and sovereigns remain in place
(and as such function as risk); and (3) much of the
European banking system remains anchored on complex
(and not necessarily transparent) relationships.
Considering the still-anemic economic recovery, low
inflation and heavy debt burden in many European
countries, the ramp-up in sovereign debt prices was too
quick and discounted any potential slippage. Public
sector debt burdens in Belgium, Cyprus, Italy, Greece
and Ireland remain above 100% of GDP, a heavy burden
under any circumstances. Looking ahead, the Euro-zone
remains vulnerable to shocks, whether financial,
economic or geopolitical. Europe still has not safely
reached the shore. The Portuguese tremors remind of us
of this and were a key consideration in moving Europe’s
anemic recovery up as a risk factor.
Exhibit 1: The 100+ Club (General Gov’t Debt/GDP)
2010
2011
2012
2013
96.6%
99.2%
101.1%
101.5%
Ireland
91.2%
104.1%
117.4%
123.7%
Greece
148.3%
170.3%
157.2%
175.1%
Italy
119.3%
120.7%
127.0%
132.6%
Cyprus
61.3%
71.5%
86.6%
111.7%
Belgium
Source: Eurostat.
We changed the name of another key risk factor from
“U.S. fiscal consolidation” to “Washington’s
dyfunctionalism.” While Washington’s politics have
moved away from functioning like a wrecking play for
financial markets and the general economy, the potential
for returning to that role as a risk factor is mounting. The
issue of fiscal reform has never really left policymaking
circles and other issues – immigration reform and a
plethora of infrastructure needs – remain undone. With
elections looming in November and the possibility of a
Republican takeover of the Senate, the American
political landscape is going to get a little more
challenging. Our main concern is that fiscal policy
continues to be that awkward subject that the political
class dances around, finding posturing and blaming the
other side easier than turning to the hard work of finding
a working compromise that includes tough long-term
decisions. The fact is that debt in the United States is
larger than in the past (making reducing fiscal deficits
more important), while costs are likely to increase over
the longer-term due to the larger fiscal outlays needed to
match the expected obligations of a large, retiring Baby
Boomer generation. Add to this the expansion of health
care coverage under the Affordable Care Act.
What is worth watching in the months ahead and could
function as a catalyst for another round of nasty politics
in Washington is what happens to the Disability Trust
Fund within the Social Security program, currently on
track to run out of money by 2017 (according to the
Congressional Budget Office, 2014). Wells Fargo Chief
Economist John Silva observed (July 7, 2014): “Thus,
without any action on the part of policymakers, the result
will be an automatic reduction in disability payments, an
unlikely political outcome. Thus, the need to put the
Disability Insurance program on a sustainable path will
force policymakers to act in the near future. The earlier
the needed reforms are enacted, the lower the likelihood
that abrupt changes in policy, that could lead to an
economic shock, will be enacted.” While we fully concur
with Silva’s view of the necessity to act to avoid
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MC Asset Management Holdings, LLC
economic shock, we have concerns that, unless a crisis is
truly looming, Congress will be slow to act unless clear
political gain is evident. Moreover, if the Senate falls to
the Republicans, leaving President Obama as a lame
duck, Washington could face a deadlock with little
legislation passing. Policymakers should also fully
understand that hoping for strong economic growth to
bail out the U.S. fiscal situation is not going to be the
solution (though it would help).
The 1775 Lisbon earthquake left a lasting impression.
Indeed, the French philosopher Voltaire used it in his
Candide, to question the optimistic worldview of “all is
for the best” (due to a benevolent deity) and instead
proposed that “we must cultivate our garden” (i.e. take a
more pragmatic approach in how we deal with the good
and bad). As we hit mid-2014, the “all for the best”
approach is likely to fade and it appears it is time to start
cultivating our garden.
The Fed Minutes– Finding Direction?
The discussion over when the Federal Reserve moves to
raise short-term interest rates is intensifying, with an
increasing number of economists thinking that the U.S.
central bank is more likely to move earlier in 2015 than
wait until later in the year. What is likely to change the
currently dovish Yellen Federal Reserve to a more
hawkish stance is stronger economic growth and
improvement in labor markets. Although unemployment
is still high, it has dropped at a faster rate than expected
and is likely to drop further over the next several
months. At the same time, there could actually be some
traction on the wage front. Despite what appears to be a
changing macroeconomic landscape, the FOMC’s midJune meeting indicated that Fed officials were not
worried by the evidence of an increase in inflation. This
could become problematic as the U.S. economy moves
into faster gear in the second half of the year.
What to take from the mid-June FOMC meeting:

Fed officials were not worried by either Q1’s
GDP contraction or the evidence of an increase in
inflation.

They expect to terminate the monthly asset
purchases with a final $15 billion reduction at
October's FOMC meeting.

The first rate hike’s timing is contingent on
economic performance, with Fed officials
currently expecting the first rate hike to occur
around mid-2015.
The Global Economic Reporter
July 11, 2014

The committee discussed how to normalize
monetary policy when appropriate.

In the discussion on its exit strategy, the Fed
looks more likely to continue to invest the
proceeds of its maturing asset holdings until
sometime after the first rate hike. As Capital
Economics’ Paul Ashworth observed: “Asset
sales were not even discussed in the minutes,
which adds to the impression that, if sales even
took place, it could be 2016 or 2017 before they
begin.” The Fed balance sheet is currently around
$4 trillion.

The Fed also intends to use its fixed-rate reverse
repo facility, with the rate on that facility set 20
bps below the rate payable on excess reserves.
This will be done to tighten its control of the Fed
Funds rate.
While the FOMC tentatively points to a mid-2015 rate
hike, there is a growing tilt to the chance it may be
earlier. Capital Economics’ Ashworth stated: “We
anticipate a slightly earlier rate hike, largely because we
anticipate that wage growth will pick-up more quickly
than the Fed expects in the second half of this year.
Assuming that productivity growth remains very weak,
that would add to the upward pressure on price
inflation.” He is not alone: Janney Capital Market’s
Chief Fixed Income Strategist, Guy LeBas, noted:
“Inflation is a growing risk, and the core dovish view is
that this can be ignored as long as lower wage earners
don’t see inflation.” Bank of Tokyo-Mitsubishi UFJ’s
New York economist Chris Rupkey in early July
changed his outlook of a rate increase occurring in
March 2015 rather than June.
Even some central bankers believe in a quicker move on
Fed rates. St. Louis Federal Reserve President and CEO
James Bullard noted on June 9th, 2014: “The FOMC is
much closer to its macroeconomic goals than it has been
in the past five years. The Committee now faces a classic
challenge concerning the appropriate pace of monetary
policy normalization.” Bullard’s views are no doubt
strengthened by his view that inflation is rising faster
than expected. Those views are consistent with a St.
Louis Fed paper that suggests much of the slack in the
labor market is concentrated in the construction sector,
which could be a structural factor (considering the
absence of a housing boom like that which fueled the last
bubble leading into the Great Recession).
We expect that the discussion over inflation, wages and
Fed action will intensify in the months ahead. Indeed,
the summer months should be closely watched from the
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MC Asset Management Holdings, LLC
standpoint of prices (including food and energy), wage
traction (if anything meaningful) and economic growth
(how much of a bounce will there be from Q1’s -2.9%).
Although we regard 6.1% unemployment as still high
(not to mention underemployment over 10%), further
employment gains are likely to trigger higher wages. As
LeBas made the case (July 10, 2014), the Phillips Curve
might rise again – lower unemployment triggers higher
wages and then the price of everything rises due to
greater demand. 2014 may retest the Phillips Curve’s
validity, but it could also prove the New Neutral (low
but stable top speeds of economic growth and central
bank interest rates remaining stuck below their pre-crisis
equilibrium) to be more short-lived than expected. All of
this plays back to yields, which are likely to see a move
from their current low range in the ten-year to something
closer to 3.0% by year-end. As long as the rise in rates is
gradual, this could help fixed income markets and not be
too disruptive to equities.
The Global Economic Reporter
July 11, 2014
restructuring will not be far behind. A restructuring of
debt is painful and time consuming, but something
eventually needs to be done. Raising rates apparently is
not an option as rates are already high. The new law,
signed by Puerto Rico’s Governor, Alejandro García
Padilla, enables the island’s utilities to negotiate
repayments to bondholders for a period of several
months.
Exhibit 2: Annual GDP Growth (%)
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
Puerto Rico – Another Detroit?
The passage of a new law on June 28th allowing Puerto
Rico’s state-owned public utilities the option to
restructure debt outside of bankruptcy set off a firestorm
for holders of Puerto Rican public debt. The reason this
matters is that Puerto Rico’s debt is estimated at $73
billion and the high-yielding bonds are widely held by
mutual funds. Indeed, it is estimated that Puerto Rican
debt is held in 66% of U.S. municipal mutual funds. A
substantial haircut or default in Puerto Rican bonds will
have a sting for investors and municipal bond issuers.
Between the Legislative Assembly’s passage of the
enabling bill and the rapidly ensuing downgrading of
Puerto Rican public sector debt, to some of the lowestratings available, this island territory quickly became
compared to Argentina and Detroit with serious
questions rising over both the ability and willingness of
the government and its agencies to meet their
obligations. The drama is most likely just starting as
the validity of the new law is being challenged in the
courts and investors are waiting for the agencies to
miss a payment.
The most likely candidate for a debt restructuring is the
Puerto Rico Electric Power Authority (Prepa), which has
$8.6 billion in debt. Prepa has two main credit lines, one
with Citigroup for roughly $250 million (of which $146
million is due over the next two months) and a $550
million line with a syndicate of banks. The power
company’s creditors sit in an awkward position – if they
force the issue and demand prompt payment, Prepa’s
2009
2010
2011
2012
2013
Source: Statistical Institute of Puerto Rico.
The governor’s view is that the legislation is meant to
allow public companies to address their financial
difficulties, an action that does not reflect the
Commonwealth’s intention to restructure or stop
payments on its general obligations. Sadly for Governor
García Padilla, neither investors nor rating agencies
shared that interpretation. Many of the former sold off
their Puerto Rican bonds, pushing prices down,
indicating that their perception was that the territory had
made a fundamental departure from its commitment to
bondholders. Simply stated, the new law eroded investor
confidence.
As for the rating agencies, Puerto Rico and its agencies
were promptly downgraded by Moody’s and Fitch.
Moody’s warned that the law provided “a clear path to
default” for public companies. As the agency stated: “By
providing for defaults by certain issuers that the central
government has long supported Puerto Rico’s new law
marks the end of the commonwealth’s long history of
taking actions needed to support its debt. It signals a
depleted capacity for revenue increases and austerity
measures and a new preference for shifting fiscal
pressures to creditors, which, in our view, has
implications for all of Puerto Rico’s debt, including that
of the central government.” Moody’s also indicated that
Cofina (Puerto Rico Sales Tax Financing Corporation)
debt could be vulnerable if the Puerto Rican government
“invokes its police powers” and impairs bondholder
claims on sales-tax revenues. Moody’s cut its rating on
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The Global Economic Reporter
July 11, 2014
Puerto Rico’s GOs to B2 from Ba2, and Cofina to Ba3
from Baa1.
Significantly, the Moody’s action included the main
government issuer Cofina, which has long been
perceived as the premier credit in Puerto Rico due to lien
on sales-tax receipts. This points to a rating agency view
that the situation is close to a full sovereign
restructuring. Standard & Poor’s took a little longer to
act, but on July 9th it cut the rating on Prepa’s debt four
notches from BB to B-. The rating agency apparently
was waiting for the outcome of Prepa’s negotiations to
renew a revolving credit facility. The effort was not
successful, with only a temporary extension to the end of
July being achieved. The rating agency noted of this:
“We believe this increases the risk that the authority will
attempt to restructure long-term debt, as a law passed in
June allows.”
Exhibit 3: Development Indicators
School Enrollment,
Primary (%)
Live Expectancy at
Birth (years)
GNI per capita (Atlas
method, current U.S.$)
Improved water source,
rural (% of population
with access)
Puerto
Rico
United
States
Dominican
Republic
87%
98
103%
79
79
73
$18,080
$53,670
$5,620
94%
98%
98%
prohibit government-owned corporations in Puerto Rico
from filing under Chapter 9. The other trend to watch is
the rumor that vulture funds are quietly buying Puerto
Rican debt, which now trades at a considerable discount.
If so, it would underscore that somebody believes that
Puerto Rican debt is likely to return something in terms
of value.
Despite periodic efforts to reform Puerto Rico’s
economy and spurts of growth, it has been difficult to
maintain the momentum to make lasting changes. Puerto
Rico still has a large informal economy, its public
finances are fragile and it relies on foreign transfers. The
island faces critical challenges, the resolving of which
are likely to shape the local economy and society for
decades to come. The debt level is simply beyond what
the Puerto Rican economy can maintain- and probably
pay back – at least the way the debt is currently
structured – just like Detroit. The sad fact is that the last
round of reforms was too late and not far-reaching
enough. Unemployment is 13.8%, many of the young
and talented are leaving and questions exist as to
whether the authorities will be able to keep the lights on.
Puerto Rico has no access to markets – the new law
killed that. The end-game is likely to be a hair-cut for
investors, a stint in non-investment grade ratings and an
even longer period of economic contraction and
stagnation. Even with a modicum of assistance from the
U.S. government (in the form of “technical help”),
Puerto Rico faces a challenging road ahead.
Source: World Bank
While Puerto Rico is being compared to Argentina and
Detroit, the latter shares greater similarities in that both
are small territorial units with limited resources and have
no options to devalue the currency to boost exports, and
have significant social concerns in terms of poverty
levels. While Puerto Rico is more developed than other
Caribbean nations, it is below U.S. standards. Detroit’s
path to recovery has begun by declaring bankruptcy and
negotiations with creditors of its $18 billion debt are
resulting in haircuts on bonds, with investors sharing the
pain.
What next for Puerto Rico? In the short-term attention
will obviously focus on what happens to Prepa’s credit
facility at the end of July. We expect the headlines are
likely to remain negative. Prepa did make its most recent
payment (in early July), but prospects for future
payments are questionable. Two other things to watch –
Puerto Rico’s Resident Commissioner in Washington,
D.C. announced that he was seeking to explore the
option of changing federal legislation to eliminate the
clause in the U.S. Bankruptcy Code that appears to
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The Global Economic Reporter
July 11, 2014
Economic Charts and Commentary
Table 1. Economic Snapshot
GDP – 2014E
(%)
U.S.
China
Japan
Germany
UK
France
Canada
Italy
2.2
7.2
1.2
2.0
3.0
0.8
2.3
0.2
Industrial
Production
(Latest)
4.3% May
8.8% May
0.8% May
1.2% May
2.2% May
-2.0% Apr
3.9% Apr
1.5% Apr
CPI
(Latest)
Unemployment
Rate
Foreign Exchange
Reserves (U.S. $bn)**
2.1% May
2.3% June
3.7% May
1.0% June
1.5% May
0.7% May
2.3% May
0.3% June
6.1% June
4.1% Q1
3.5% May
6.7% June
6.6% Mar
10.1% May
7.0% May
12.6% May
152
3,300
1,190
256
134
190
68
187
Sources: U.S. Department of the Treasury, U.S. Department of Commerce, Federal Reserve Board, Bureau of Labor Statistics, Banca d’Italia, Istat, People’s Bank of China, Asian Development
Bank, European Central Bank, Bank of England, EuroStat, Ireland Central Statistics Office, Bank of Canada, Bank of Japan, Japan Ministry of Finance, Banque de France, International
Monetary Fund, World Bank, Organization for Economic Co-Operation and Development, Deutsche Bundesbank, Statistisches Bundesamt (Germany).

China on the Mind: China remains a factor for international markets. That is a fact that cannot be denied, as
reflected by the negative reaction that accompanied China’s June export numbers, which rose 7.2% year-onyear, up marginally from May’s 7.2%. Export growth was disappointing as most economists expected a weak
base for comparison to push it into double digit territory (the Bloomberg median was 10.4%). Import growth
was stronger month-on-month, up from -1.6% in May to +5.5% in June. Consequently, export growth
remains stronger than import growth, which continues to be affected by the slowdown in the property sector.
This also meant that although the trade surplus declined from $35.9 billion in May to $31.6 billion last month,
it remains large. Significantly, the trade surplus for Q2 was the third largest on record. What next for Chinese
trade? In July we expect headline export and import growth are likely to decline again, but the general
direction in trade is constructive. We concur with Julian Evans-Pritchard, Capital Economics’ China
economist, who notes: “More broadly though, improving conditions in developed markets mean that we
expect the export growth to remain healthy going forward, despite today's disappointing data. In contrast, we
expect import growth to drop further, given our view that cooling investment growth will weigh on
commodity imports over the next couple of years. As a result, China is likely to continue to post large trade
surpluses.” The bottom line is that China’s economy will remain under pressure as it undergoes
important structural changes, but on the trade front – as long as advanced economies continue to grow
– Asia’s largest economy will be able to maintain healthy trade surpluses.

Portugal on Fire, Spain Turns the Corner: In 2014 the Portuguese economy is still struggling, fiscal
deficits function as a drag on economic growth and debt remains high. Additionally the problems with
Espirito Santo point to renewed worries over the safety and soundness of the Portuguese banking system. The
OECD notes: “The unemployment rate is expected to continue to slowly decline throughout the forecasting
horizon. An economic slack is and will remain sizeable, inflation is set to remain very low, with a risk of
deflation, which would make debt reduction more difficult.” While Portugal will struggle to grow in 2014,
Spain’s prospects are relatively better. In late June, the International Monetary Fund released its Article IV
report of the Iberian country’s economy, declaring “Spain has turned the corner. Growth has resumed, labor
market trends are improving, the current account is in surplus, banks are healthier, and sovereign yields are at
record lows.” The IMF does admit that unemployment is unacceptably high (24.9% for 2014), incomes have
fallen, and deleveraging is weighting on growth. In contrast to Portugal, the real GDP growth is expected to
be 1.2% in 2014, 1.6% in 2015 and 1.7% in 2016. Exports are expected to rise and keep a pace above 5%
from 2014-2017. While unemployment gradually trends down. Although Spain still has major
vulnerabilities, its economy benefits from its larger size and greater diversification. Portugal looks like
a potential candidate for slippage back into crisis mode.
7
MC Asset Management Holdings, LLC
The Global Economic Reporter
July 11, 2014
Table 2. Real GDP for Selected Countries (%)
Real GDP
2009
2010
2011
2012
2013E
2014F
2015F
Global
U.S.
Canada
-0.6
-3.1
-2.8
5.2
2.4
3.2
3.9
1.8
2.6
3.1
2.2
1.7
3.1
1.9
1.7
3.3
2.2
2.2
3.7
2.8
2.4
Japan
UK
Switzerland
Sweden
-5.5
-4.0
-1.9
-5.0
4.6
1.8
3.0
6.6
-0.6
1.0
1.8
2.9
1.4
0.3
1.0
1.0
1.7
1.7
1.7
0.9
1.7
2.7
1.8
2.3
1.0
2.3
1.9
2.3
Euro Area
Germany
France
Greece
-4.4
-5.1
-3.1
-3.1
2.0
4.0
1.7
-4.9
1.4
3.1
1.7
-7.1
-0.6
0.9
0.0
-6.4
-0.4
0.4
0.0
-4.2
1.0
1.6
0.8
0.0
1.4
1.4
1.5
2.5
Ireland
Spain
Italy
Portugal
-6.4
-3.7
-5.5
-2.9
-1.1
-0.3
1.7
1.9
2.2
0.4
0.4
-1.3
0.2
-1.5
-2.5
-3.2
0.6
-1.3
-1.8
-1.8
1.8
1.2
0.4
0.5
2.5
1.6
1.0
1.5
Angola
Argentina
Brazil
Chile
2.4
0.9
-0.3
-0.9
3.4
9.2
7.5
5.7
3.9
8.9
2.7
5.8
5.2
1.9
1.0
5.6
5.6
3.5
2.3
4.4
6.3
2.8
2.3
4.5
6.4
2.8
2.8
4.5
China
Colombia
Egypt
Ghana
India
Indonesia
Iran
Kenya
Mexico
Mongolia
Nigeria
Peru
9.2
1.7
4.7
4.0
5.0
4.6
4.0
2.7
-6.0
-1.3
7.0
0.9
10.4
4.0
5.1
8.0
11.2
6.2
5.9
5.8
5.3
6.4
8.0
8.8
9.3
6.6
1.8
15.0
7.7
6.5
3.0
4.4
3.9
17.5
7.4
6.9
7.8
4.0
2.2
7.9
4.0
6.2
-1.9
4.6
3.9
12.3
6.6
6.3
7.7
3.7
1.8
7.9
5.6
5.6
-1.5
5.9
2.9
11.8
6.2
5.4
7.2
4.2
2.8
6.1
5.4
5.3
1.3
6.2
3.0
11.7
7.4
5.7
7.0
4.5
4.0
5.5
6.4
5.8
2.0
6.3
3.5
5.8
6.9
5.8
Philippines
Russia
Saudi Arabia
Singapore
South Africa
South Korea
Thailand
Turkey
Ukraine
Venezuela
1.1
-7.8
1.8
-0.8
-1.5
0.3
-2.3
-4.8
-14.8
-3.2
7.6
4.5
7.4
14.8
3.1
6.3
7.8
9.2
4.1
-1.5
3.6
4.3
8.6
5.2
3.5
3.7
0.1
8.8
5.2
4.2
6.8
3.4
5.8
1.3
2.5
2.0
6.5
2.2
0.2
5.6
6.8
1.5
3.8
3.5
1.8
2.8
3.1
3.8
0.4
1.0
6.0
0.5
4.4
3.4
2.8
3.7
5.2
3.5
1.5
1.7
5.5
1.5
4.2
3.6
3.3
3.8
5.0
4.3
1.5
2.2
Sources: MC Asset Management Holdings, LLC Research and International Monetary Fund.
8
MC Asset Management Holdings, LLC
The Global Economic Reporter
July 11, 2014
Table 3. Inflation for Selected Countries (%)
2009
2010
2011
2012
2013E
2014F
2015F
U.S.
-0.3
1.6
3.1
2.1
1.4
2.0
2.5
China
-0.7
3.3
5.4
2.7
2.7
3.0
3.0
Japan
-1.3
-0.7
-0.3
0.0
0.0
2.9
1.9
Germany
0.2
1.2
2.5
2.1
1.6
1.8
1.8
France
0.1
1.5
2.3
2.2
1.0
1.5
1.5
UK
2.1
3.3
4.5
2.8
2.7
2.3
2.0
Italy
0.8
1.6
2.9
3.3
1.6
1.3
1.2
Euro area
0.3
1.6
2.7
2.5
1.5
1.5
1.4
Brazil
4.9
5.0
6.6
5.4
6.3
5.8
5.3
India
10.9
12.0
8.4
10.4
10.9
8.9
7.5
Russia
11.7
6.9
8.4
5.1
6.7
5.7
5.4
Turkey
6.3
8.7
6.5
8.9
7.7
6.5
6.0
Sources: MC Asset Management Holdings, LLC Research and International Monetary Fund, April 2014.
Table 4. Budget Balance (Fiscal Indicators as a % of GDP)
2009
2010
2011
2012
2013E
2014F
2015F
U.S.
-12.9
-10.8
-9.7
-8.3
-5.8
-4.6
-3.9
Japan
-10.4
-9.3
-9.9
-10.1
-9.5
-6.8
-6.0
Germany
-3.1
-4.2
-0.8
0.1
-0.4
-0.1
0.0
France
-7.6
-7.1
-5.3
-4.9
-4.0
-3.5
-2.8
UK
-11.3
-10.0
-7.8
-7.9
-6.1
-5.8
-4.9
Ireland
-13.8
-30.5
-13.1
-7.6
-7.6
-5.0
-3.0
Italy
-5.4
-4.3
-3.7
-2.9
-3.2
-2.1
-1.8
Portugal
-10.2
-9.9
-4.4
-6.4
-5.5
-4.0
-2.5
Spain
-11.2
-9.7
-9.6
-10.8
-6.7
-5.8
-5.0
Greece
-15.6
-10.8
-9.6
-6.3
-4.1
-3.3
-2.1
Brazil
-3.1
-2.7
-2.5
-2.7
-3.0
-3.2
-3.5
China
-0.7
-3.1
-1.5
-1.3
-2.2
-2.5
-2.1
India
-10.0
-9.8
-8.4
-8.0
-8.5
-8.5
-8.5
Russia
-6.3
-3.4
-1.5
0.4
-0.7
-0.8
-1.0
Turkey
-6.0
-3.0
-0.7
-1.6
-2.3
-2.3
-2.5
Sources: International Monetary Fund, April 2014.
9
MC Asset Management Holdings, LLC
The Global Economic Reporter
July 11, 2014
Table 5. Gross General Government Debt (% of GDP)
Belgium
Canada
France
Germany
Greece
Ireland
Italy
Japan
Korea
Netherlands
Portugal
Spain
Advanced Economies
UK
U.S.
Emerging Markets
Brazil
China
India
Russia
South Africa
Turkey
2008
2009
2010
2011
2012E
2013F
2014F
89.2
71.3
68.2
66.8
112.9
44.2
106.1
191.8
30.1
58.5
71.7
40.2
80.4
51.9
73.3
33.5
63.5
17.0
74.5
7.9
27.8
40.0
95.7
83.7
79.2
74.5
129.7
64.4
116.4
210.2
33.8
60.8
83.7
54.0
93.7
67.1
86.3
36.0
66.8
17.7
72.5
11.0
31.3
46.1
95.6
94.0
82.4
82.4
148.3
91.2
119.3
216.0
33.4
63.4
94.0
61.7
100.3
78.5
95.2
40.3
65.0
33.5
67.0
11.0
35.8
42.3
97.8
108.4
85.8
80.4
170.3
104.1
120.8
230.3
34.2
65.7
108.4
70.4
104.4
84.3
99.4
37.8
64.7
28.7
66.4
11.7
39.6
39.1
99.8
123.8
90.2
81.9
156.9
117.4
127.0
238.0
35.0
71.3
123.8
85.9
108.7
88.8
102.7
36.5
68.0
26.1
66.7
12.5
42.3
36.2
100.9
123.6
93.5
80.4
175.7
123.3
132.3
243.5
35.7
74.4
123.6
93.7
108.5
92.1
106.0
35.5
68.3
22.9
67.2
14.1
43.0
36.0
101.2
125.3
94.8
78.1
174.0
121.0
133.1
242.3
35.3
75.6
125.3
99.1
109.2
95.3
107.3
34.1
69.0
20.9
68.1
14.6
44.7
34.9
Sources: MC Asset Management Holdings, LLC Research and International Monetary Fund.
Table 6. Unemployment (%)
Belgium
Brazil
Canada
China
France
Germany
Greece
Ireland
Italy
Japan
Netherlands
Portugal
Russia
South Africa
Spain
Turkey
United Kingdom
United States
2014
2015
2016
2017
9.1
5.6
7.0
4.1
11.0
5.2
26.3
11.2
12.4
3.9
7.3
15.7
6.2
24.7
24.9
10.2
6.9
6.4
8.9
5.8
6.9
4.1
10.7
5.2
24.4
10.5
11.9
3.9
7.1
15.1
6.2
24.7
23.8
10.6
6.6
6.2
8.8
6.0
6.8
4.1
10.3
5.2
21.4
10.1
11.1
3.9
6.6
14.5
6.0
24.4
22.6
10.6
6.3
6.1
8.6
6.0
6.7
4.1
10.0
5.2
19.1
9.6
10.3
3.9
6.2
14.0
6.0
24.0
21.4
10.6
6.1
5.8
Sources: MC Asset Management Holdings, LLC Research and International Monetary Fund.
10