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John Taylor Explains Why The "Global Frown" Will Turn Europe Upside Down
The Global Frown
August 12, 2010
By John R. Taylor, Jr.
Chief Investment Officer
Everything was fine last week. Even the ugly US employment numbers that were released on Friday morning were greeted with enthusiasm by the global marketplace as both the bond market and the equity market rallied. What could be better? The numbers weren’t that bad and there was always next month when they could improve. Why not hope for the better outcome in the future as the government authorities and the news reports wanted you to believe? Basically numbers like the ones last Friday are ‘Goldilocks’ numbers, not too hot and not too cold. They allow everyone to think that things are not great, but the authorities can, and will, make them better. Poor employment numbers imply the Fed will lower rates, which would make equities more attractive in the future (using the dividend discount model or something similar). At the same time bonds rally as a result of the projected lower rates, and finally the dollar declines which helps commodities and carry trades, also making it easier to repay outstanding dollar-denominated debts. Winners all around. “Sweet!”, as they say in the lottery ads here in New York.
From the foreign exchange point of view, the market calls this the “dollar smile”. If the dollar’s economic numbers are weak, but not terrible, then the dollar will decline while all other markets rally – this is the dip in the middle of the smile. If the numbers are good, then the dollar will rally – twisting the right end higher. But if the US numbers are truly terrible, then the dollar will rally as well. The rationale seems complex but the forces moving the dollar are very powerful. If the US economy is perceived as heading into recession, then banks and other financial actors take risk off the table, cutting back their balance sheets, which sets off a scramble for dollars. In the modern marketplace, recessions make the dollar go higher. The very aggressive dollar rally in the fall of 2008 is a powerful example of what happens to the left end of the dollar smile. From the US point of view, this is clearly a dollar smile, but when the same thing is seen from the rest of the world, it becomes a global frown. If the US is either strong or weak, the global markets suffer. Profits are made only when the US economy is struggling along, and losses multiply when the US either goes on a positive tear or gets into serious trouble.
Things changed dramatically between Friday, when the weak employment numbers were released, and Tuesday afternoon when the Fed announced it was edging back toward Quantitative Easing by taking the roughly $180 million it received from interest and pay-downs in its MBS portfolio and reinvesting that cash in the Treasury market. This move told the world the Fed saw the US economy headed into a recession. Although both Friday and Tuesday signaled a weak US economy, the Fed’s position only became clear on Tuesday, and by early Wednesday, the whole world knew the US economy was headed lower. The Fed’s move signaled the situation was not a lukewarm Goldilocks but a cold one on the way to getting colder. At FX Concepts, we have been calling for a recession next year, and as the Fed – and the market players – come to realize this, equity markets, commodity prices and currencies (except the yen) should all decline. At the same time, liquidity should tighten dramatically, credit spreads should widen, and government bond markets should rally strongly. Although the US signaled the beginning of the coming recession, the Eurozone is still naively expecting its €750 billion rescue plan with austerity thrown in to save the day. Our analysis argues that this plan will start crumbling within the next few weeks, sending the euro sharply lower once again and ushering in the deep recession of 2011.
h/t Teddy KGB
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We had the "Great Recession" and now we can look forward to the "Deep Recession" all while in the "Continuing Depression".
Let's focus on the positive and the number of union jobs we just saved. Of course, let's not focus on the states being so fricking broke that their only answer was to fire teachers and police. Let's not focus on the underlying cause that salaries, pension obligations, and public sector benefits are completely out of line with reality no less spending and rather than address any of that we want to apply a bandaid and loot the public for more money.
Sorry, had to vent.
Generation M doesn't like to go to school so at least they won't really make a big problem out of it.
@Slim
In a debt based system it does not really matter who eats the pie - if you reduce wages you increase profits - all this surplus goes to consumption.
Whats the point in taking a wage cut if the fruit of your labours goes to a banker.
Capitalism should be about building capital baby.
We need and appreciate the international perspective here, but you often miss important details about what is killing this country. Only government and health care pay real wages and benefits these days. Regardless of what you see in the MSM, everyone else is getting raped.
A nation divided against itself cannot stand.
Blood soaked Abe Lincoln
Sure - you are talking about fairness in a system which is very important.
But I am trying to explain a society generates a certain surplus - some is given towards consumption and in a modern society that is either wages benefits or profits.
As long as banks refuse to have any capital on their books any efficiency will be translated into the above and the credit will erode capital over time until there is nothing left.
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Once you've gnawed your own leg off, the other one looks tasty the next time you get hungry -- arms next, but then what?
Zero interest rates destroy capital or at best prevent capital formation. The only way to build capital is for people to save and the best way to encourage savings would be to raise interest rates to give a decent return on savings. If we consume all of the surplus, there will be no capital formation.
I would argue that saving in dollars or any debt currency does not build capital as it is a token for future consumption - it does not build capital for future consumption.
You are in essence like a miner who receives tokens to use at the company store.
It is up to the owners of the mine to build or destroy capital.
They can decide to mine the present seams without developing further mine shafts or they can increase the capital base of the mine by seeking further deposits.
Up to the 1960s the company owners decided to increase the capital base through extensive fiscal spending on things such as technology and the like but once the monetarists gained control they cut fiscal spending on future technology and also cut the leg off the last symbolic representation for true capital in the system - Gold.
This is why technological capital spending such as on nuclear power ceased in the 70s as the monetory system no longer representated true capital spending as wealth creating but expressed all wealth through capital extraction.
France realizing this had to spend vast sums of fiscal money that appeared to be making a loss on nuclear power as they still beleived at the time that increasing true national wealth was worth the cost despite what it siad on the fiscal books which just declared it a cost.
If Gold was still part of the system of balancing the wealth of nations this cost would also be expressed as having true value.
Slim, the local politicians threats to cut teachers and police jobs are pure misdirection.
By threatening these more essential services, and thereby focusing the political discussion on "teachers" and "police", they misdirect from bloated bureaucracies full of elaborate makework jobs that school systems and police departments(and all government agencies) tend to build and harbor and featherbed.
Schooling and policing are probably a bit less efficient at the front lines than these jobs were fifty years ago, thanks to the general social permissiveness and associated whiny types stopping these traditional authority figures from acting, but they're not four or five times less efficient. It shouldn't take 5x the number of school system employees today, per student educated, than it did fifty years ago, to teach literacy, numeracy, scientific and civics subjects that citizens ought to know. However, rather than take on the mafia of useless perma-jobs sucking the life out of those organisations, the bought and paid for politicians take their side, joining with them against the teachers (and actual police and actual fire fighters) doing the actual work taxpayers want done.
re: misdirection... I agree completely, public salaries and entitlements need to take a hit
You are referring to what has been called, among other things, the Washington Monument Syndrome. http://en.wikipedia.org/wiki/Washington_Monument_Syndrome
However, it's a tactic that has been around as long as there have been hidden agendas and lack of transparency.
Don't get me started on the education-union complex. It still amazes me, after many years, that voters keep approving and/or supporting massive increases in education spending at the local and national level. A chart showing inflation-adjusted dollars spent per pupil in this country against academic performance would probably cause a few jaws to drop. Sadly, given our current state of affairs, it would shortly be followed by a call to spend more money to solve the "educational" problem of tremendously more spending yielding diminishing returns (sort of like our current fiscal stimulus efforts).
I think "recession" is the politically correct euphemism for depression. Remember statistics are used for perception management, a game best played by politicians.
You are probably right. If so, then 'deep recession' is code for The Greater
Depression.
Reality, bitchez!
2011... gosh that year is going to be a disaster. 2012 is going to be mint!
The economy WILL AT LEAST expant 500% in 2012!!
after it first crashes 99,9% in 2011....
Yup.
John R. Taylor is a genius. I love this guy. He always calls it dead on. He's Old School Wall Street before it got taken over by money grubbing, arrogant, slick hair, pukes who would sell their mother to make a buck. Fuck them.
+100 DarkMath.... I think I am in love with you.
Probably Japan is "flooding the archipielago" with EUR today... :)
pukes who would sell their mother to make a buck
The old saying was "he would sell his mother for an eighth".
Maybe today's Wall St scum aren't so bad - they'd at least ask a buck for her. Or maybe it's just inflation ;p
As Homer would likely say, "It always comes down to Goldilocks." Well written, but I suspect six months late on the timing prediction. The triple Manhattan sized iceberg cometh at our Titanic. We have plenty of rotten welds to worry about. Fifty fifty Israel hits Iran after the Nov. elections. Greece or Spain, etc., may get wise and default any day. On and on... This week has been a lolapolooza of doom and gloom. Even Canadian Sarah Mac, bless her little red head, is having trouble with her big gig.
John Taylor rocks!! Depression, bitchez.
To be honest, this article sounds like : Look we might suck, but they suck so to so you should all feel better!
And because most Americans only know Europe because of movies, they are willing to swallow all that nonsence like a cheap hooker.
This is so crybaby stuff.
Only look at the american problems, and solve these first before comparing shit to others so you can feel better.
America goes down, Europe goes down. The tail doesn't wag the dog. Europe is to damn indebted, home prices are far too high in most Euro states, the EU has no fiscal union or effective bailout mechanism and youth unemployment stinks. Plus the derivatives market ensures that Europe, China, Japan and the US are all interconnected. One goes down, they all fall down.
Sudden Debt, talking like this you are not going to get any hot girls!!!!
This is what a hot blonde thinks after reading the article: "As long as countries around the world play Monopoly with USD at any sign of trouble the dollar is king. Keep shorting the shit out of the EUR"
-Best wishes XOXO Pam
sorry to bother you with this trivial issue in the midst of a global meltdown, but how do you get an avatar (gif file etc) to animate on this site??? (My little bankster is supposed to raise his gun and POP... ) I also have one of a bloke heaving on his trading screen...I want to at least look pretty on the way down...thanks!
Hello iPood,
An animated .gif is an animated .gif! The problem that you are experiencing it's not related with the animation 'per se' but with the dimensions of your animation. Let me explain you sweetie...Zero Hedge only allows avatars of 40 x 40 pixels... if you check the size of your avatar (the original animated gif that you uploaded and you have in your computer)... go ahead right click it (and under properties ) find the dimensions.... you see how it's not 40 x 40 !!! so the problem is that once you uploaded the Zero Hedge web sites re-formats the dimension to make it 40 x40 taking a "snapshot" of the first gif image of your animation. How to fix this.... you need to use some software like Photoshop that would let you re-size your original animated .gif to make it 40 x 40 pixels before uploading it. I hope this helps....
.... let me put this in simple terms "yes, size does matters"
xoxo Pam
Got it ! Many thanks.. xo
After reading this thread I for some reason think that it is important to see your bankster shoot his gun.
So make it shoot!
well, there goes the neighborhood ;-) - Ned
The Great Recession never ended - its symptoms were masked by unprecedented spending. But the underlying disease has never been cured, and the current regime has no intention of doing so.
Ned, as they say, money is in the treatment, not the cure.
More lies and fraud to think about.
The unraveling of the bailout package has already begun:
http://www.reuters.com/article/idUSTRE67B2E320100812 (Greek GDP/employment worse than expected)
http://www.reuters.com/article/idUSBRU01096220100812 (Slovakia declines to participate)
Yep. Saw the Slovakia story on Bloomberg yesterday, and went "hhmmmm....".
Not sure if this is a stance based on principle, or if it is just laying the groundwork for behind the scenes enticements/baksheesh in return for a "change of heart", as the Slovak PM is meeting with Merkel later this month.
It is after all pretty asinine to ask the Slovaks, who had to abide by the fiscal rules to join the Euro, and who are at best half as rich as the Greeks, to pay for the Greeks' cheating.
Agreed, assuming that the Slovaks didn't pull a Greece to get into the EU. I suspect they didn't, but just an opinion. The PM's statement was straight-forward common sense. However, in politics, things are rarely as they seem. This could be an exception, or some really well-played theater. Time will tell.
The rising euro the last two-three months choked off any life that may have existed there. Way to go SNB!
Think of it as a patient in icu and someone slowly turning the o2 valve off.
Love your avatar! So who is Beavis?
I believe Larry Summers is Beavis. Tim G as Butthead. ha ha
Doesnt appear to be too complex to me, European institutions must buy dollares as soon as the US stock market goes South. Its still the leverage ...
Since everybody expects that the Euro will tank in another major US SM sell off I expect "this time it will be different", but I would be very interested to learn a bit more about the "analysis"...
Mr Taylor, where is your argument relating to Europe?
So this is the actual argument. I tell you so based on our analysis, which you can't read here (but you may want to buy).
Slovakia revolts against help for Greece and won't contribute to rescue package.
As a freeman, I take proud in these words: "I am a Slovakian"
high heels, panty hose, proud slovakian, freeman----I guess it all fits together somewhere. As a German, I find it hilarious.
My 3 line synopsis of Taylor's article.
The market now realizes US fiscal stimulus has failed. EU will be screwed as result. Better step aside before a falling Euro hits you on the head.
DOW and SP500 bearish megaphone wedge charts continue ...
http://stockmarket618.wordpress.com
The Federal Reserve’s decision to reinvest principal payments on mortgage holdings into Treasuries should eventually boost demand for riskier assets, according to Anthony Crescenzi of Pacific Investment Management Co.
The central bank’s reduction of its target lending rate to virtually zero in 2008 didn’t have an immediate reaction either, said Crescenzi, a strategist at Newport Beach, California-based Pimco, in an interview on Bloomberg Television’s “In the Loop” program. The Standard & Poor’s 500 Index dropped as much as 1.2 percent today to its lowest intraday level since July 22.
“It took until March 2009 until it was risk-on,” said Crescenzi, whose company manages the world’s largest bond fund. “It was many months. The Fed will hope that this is a short- term reaction, that the effects of its actions, which is the purchase of securities, and the impact it has on interest rates will in fact push investors to move out the risk spectrum.”
Taylor = yawn...another so-called guru talking his book...
Taylor is not a guru, nor is he trying to sell any book. Taylor has been all over the recession since before it started and has been consistently bearish for a long time. As others have noted, he is a straight shooter who calls them like he sees them.
I guess I will say it.
Is Gold now the leading EURO sovereign default indicator? The key here is if we see some central bank momentum into Gold over sustained weeks.
If so this will be a large decouple event.
Mark Beck