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Kass: Current Fears Are Overblown

Political change appears imminent, and the current leaders of the Iranian government even appear to be willing to engage in discussions possibly aimed to negotiate a pullback in its nuclear program. The last thing on Iran's agenda may be a nuclear bomb. Some have even speculated that the country is no closer to being able to produce a nuclear bomb than two years ago.

Meanwhile, the rulers of some of Iran's allies (e.g., Syria) are under siege and are increasingly isolated in the face their own domestic issues.

Global Economies Will Recover

While I am still in the camp that expects subpar global growth, recent indications are that a self-sustaining economic domestic recovery is in place and that the U.S. recessionistas are dead wrong.

The risks of a global economic cliff have receded.

Over the past four weeks, the rate of growth in global economic activity is slightly accelerating, and recent data is mostly exceeding consensus expectations. As I wrote in my first missive today, growth should continue into 2013, dependent upon how meaningfully and quickly the fiscal cliff is addressed. (On this I am more optimistic than most.)

As evidence of my remarks above, the Citigroup Economic Surprise Index points to stabilization/improvement in the three major regions of the globe:

  • The U.S. Citi Surprise Index is at its highest reading in nine months.
  • The Asian Citi Surprise Index is at its best reading since February 2011.
  • The EU Citi Surprise Index, though still weak, has risen from -100 in June 2012 to -27 now.

Indeed, among the developed countries, the U.S. is shining. Here is a list of domestic positives that are accumulating:

  • Jobless claims are declining, and jobs growth is accelerating. October payrolls increased to a net 171,000 jobs (compared to an estimate of only 125,000), private sector hirings were the most since February (helped by an unexpected increase in manufacturing hiring), and the previous two months' hirings were revised much higher.
  • Both the manufacturing and service sector PMIs have risen to above 50.
  • Housing has clearly bottomed and is recovering in price and in activity -- arguably, the U.S. residential real estate market is embarking on a multiyear and durable recovery.
  • The domestic automobile market is exhibiting a stronger recovery than many anticipated, and the 10.5-year age of the cars on the road suggests still-large pent-up demand.
  • Retail sales are humming. October consumer confidence rose to 72.2, up from 68.4 in September -- the best since February 2008. It rose further in November. The University of Michigan confidence figure advanced to 84.9 -- that's the fourth straight monthly increase and the highest reading since mid-2007.
  • Hurricane Sandy was just a terrible tragedy for many, but the rebuilding effort will result in incremental growth in the first half of 2013.
  • Inflation and inflationary expectations are stable.
  • Short-term interest rates are anchored at zero (though longer-term interest rates are likely to rise).

China's economy: The October non-manufacturing index rose from 53.7 in September to 55.5. This strong data follows the October China manufacturing index, which, for the first time in three months, rose above 50. Further, China's industrial production accelerated in September, and retail sales grew at the best pace since April.

October Chinese consumer inflation rose by only +1.7% year over year compared to estimates of +1.9% and +1.9% in September. This was the slowest rise in almost three years, as food inflation slowed dramatically to only +1.8%. (September print was +2.5%.) A low inflation rate is important as it allows the central bank the ability to ease further. That said, retail sales (+14.5%) and industrial production (+9.6%) accelerated in October, so no near-term moves are likely. The low rate of consumer inflation gives the People's Bank of China the leeway to ease further, however, recent data (industrial production/retail sales) accelerated last month, which allows the central bank to watch/wait and see.

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