Better known as the spiritual capital of the world, for those looking for a new job, Jerusalem may turn into the promised land as well. With the rest of the country suffering through an economic slowdown, the prospects for the Israeli capital look a bit brighter. After years of worsening economic conditions, the city of Jerusalem may be emerging from the bad situation. According to a report in Globes: “A breakdown of Employment Service figures by region showed that demand for workers in Jerusalem was 14.5% higher in January, compared with a year earlier, although it was 10.7% less than in the preceding month. ”

Not only that but Jerusalem was the city with the highest demand for workers in all of Israel. Who would have thought that the poorest city in Israel is suddenly enjoying a bit of economic revival, all while the rest of the global economy sinks further and further into the abyss.

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Proving the point that we live in a global economy, and that widening deficits have become normal, Israel announced that their deficit has become more than 2% of GDP.

Globes reports, “According to preliminary estimates from the Accountant General, the budget deficit excluding net credit reached NIS 15.2 billion in 2008. The figure represents 2.1% of GDP. The budget deficit target was 1.6% of GDP, or NIS 11.5 billion. The budget deficit, as a proportion of GDP, rose in 2008 after four consecutive years of falling deficits, as a proportion of GDP, from 5.4% in 2003 to no deficit in 2007.”

With falling income from tax receipts, Israel will need to cut back on spending in order to keep the deficit at a manageable level. With a sinking economy, trying to convince people that less spending is needed will be no easy task.

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With global markets reeling and investors completely having lost faith in the financial system, the question needs to be raised whether Israel will turn into safe haven for investors fleeing financial turmoil. The Shekel continues to strengthen against the USD and many Israelis have been sending money back to Israel in droves.

But I can’t imagine that in this era of a truly global economy with global interdependence, Israel will remain largely unaffected by the surrounding turmoil. It just doesn’t make sense. It’s important to note that the Israeli banks have had some exposure to sub-prime as well as both Lehman Brothers and Wamu. While Israeli banks are know for their stinginess in lending money to ‘main street’, they tend to lend money no questions asked to the 10 powerful families the control the local economy. The question is how will these families be able to weather the storm. I hate to think of what will happen if they are unable to pay back their loans. We have started to see that with tycoon Arkady Gaydamak, basically offering his businesses at fire-sale prices in order to raise cash, and one local bank, Mizrachi, actually made a credit call on him.

According to Globes, Former PM and current opposition leader Benjamin Netanyahu, says that Israel needs to take strong steps to avoid falling into economic slowdown. The article says, “We must prepare for a severe slowdown.” He goes on to detail some measures that could be taken to avoid the meltdown. “In order to create rapid growth and use the crisis to strengthen the Israeli economy, we must cut taxes, implement economic reforms, and streamline government work. If we do this, when the global economy recovers, Israel will be in better shape.”

Investors should keep an eye on how the local government reacts to the growing nervousness over the economy. Any missteps could send Israel into an economic downturn that rivals what we see in Europe and the US.

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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Aaron Katsman
IsraelNewsletter.com

Clearly demonstrating his total misunderstanding of how a free-market works, Democratic presidential candidate Barack Obama said ‘it would be a shame’ if Anheuser-Busch (NYSE:BUD) was sold to a foreign company.

According to a Reuters report, Obama said, ” I think we should be able to find an American company that is interested in purchasing Anheuser Busch if in fact Anheuser-Busch feels that it’s necessary to sell.”

Huh?

Who is the ‘we’ Obama is referring to? Is it the government? Since when is the US government an investment banker? It’s not exactly a secret that the maker of Budweiser is in play. If there was a US company interested in purchasing Anheuser-Busch, they could put out an offer. The lack of a competitive offer means that no one is interested based on the asking price. Isn’t that rather obvious? Maybe the government should nationalize the company, in order to keep it in American hands!

Is Obama advocating the worst kind of government intervention? Does he really believe that he knows better than the market, regarding whether a publicly traded company should be sold and to whom? His protectionist tones mimic his beliefs on NAFTA. It sure appears that Obama has shown a consistent policy of being against free trade.

What’s wrong if an American company is sold to a foreign buyer? As fellow IOI colleague Zack Miller says, ” Isn’t his policy xenophobic?” Conversely, what are his feelings about an American company buying a foreign firm?

From the little we know about his stance on free trade, the impact to Israel as well as the global economy could be profound. If Obama wants to make the US into an economic island, it would cause not just catastrophe to nations no longer able to export their goods into the US, but would harm the US consumer, with less choice and more costly goods.

Someone needs to ask Obama to explain in depth his belief that we need to find an American company to buy Anheuser-Busch. As I mentioned, if he really is a protectionist, shouldn’t the voters be made aware of this and shouldn’t he need to explain his position?

In order for the economy to grow we need less government intervention not more. Let the market sort things out, and keep the government out of the way.

Disclosure: Author’s fund has no position in any stock mentioned as of 7/09/08.

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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