Don't like how high debt-to-GDP figures are? Revise 'em. Unhappy at the post-'recovery' growth rates? Revise 'em. Disappointed at the pace of economic improvement in the last decade or two compared to the rest of the world? Revise 'em. This week "we are essentially rewriting economic history" as the BEA is set to revise GDP data from as far back as 1929. The 'adjustments' to account for intangibles (that best known of micro- accounting fudge factors) and as we noted previously in great detail, will increase GDP by around $500 billion. Of course, these changes are defended aggressively (just as the hedonic adjustments to inflation calculations 'make perfect sense') as GDP will now reflect spending on research, development, and copyrights as investment - and reflect pension deficits for the first time (think of all that potential future GDP from massive pension deficits now). With Q2 GDP growth estimates set for a dismal 1.1%, expectations are for the short-term economic data to be revised upwards (and with any luck the great recession never happened at all).
The recent decline in gold prices and the drain from physical ETFs have been interpreted by the media as signaling the end of the gold bull market. However, our analysis of the supply and demand dynamics underlying the gold market does not support this thesis. In our view, the bullion banks’ fractional gold deposit system is testing its limits. Too much paper gold exists for the amount of physical gold available. Demand from emerging markets, who do not settle for paper gold, has perturbed the status quo. Thus, our recommendation to investors is the following: empty unallocated gold accounts and redeem your gold in physical form (while you still can).
It has all gone belly up if we look at the EU and we are honest. Yes, they might be trying to paper of the cracks and yes they might be shoving some super strong glue in their to stop everyone pulling in different directions, but if they are really truthful about it, the EU28 (now that Croatia has become a member since July 1st 2013)
It is easy to get the impression that the naysayers are wrong on Europe. After all the predictions of Armageddon, ten-year government bond yields for Spain and Italy fell to the 4% level, France which is retreating into old-fashioned socialism was able to borrow at about 2%, and one of the best performing bond investments has been until recently – wait for it – Greek government bonds! Admittedly, bond yields have risen from those lows, but so have they everywhere. It is clear when one stands back from all the usual euro-rhetoric that as a threat to the global financial system it is a case of panic over. Well, no. Europe has not recapitalized its banking system the way the US has (at great taxpayer expense, of course). Therefore, it is much more vulnerable. Where European governments and regulators have failed to make their banks more secure it is because they tied their strategy to growth arising from an economic recovery that has failed to materialize. The reality is that the Eurozone GDP levels are only being supported at the moment by the consumption of savings; in orther words, the consumption of personal wealth. Wealth that is not infinite; and held by those not likely to tolerate footing the bill for much longer.
- Scalpel in Hand, Chinese Premier Li Stirs Reform Hopes (Reuters)
- Obama Sets Conditions for Keystone Pipeline Go-Ahead (FT)
- World’s Most Indebted Households Face Rate Pain (BBG)
- SAC Probers Weighing 'Willful Blindness' Tack (WSJ)
- Draghi Says ECB Ready to Act, Calls for Investment Over Tax (BBG)
- U.S. Tops China for Foreign Investment (WSJ)
- Basel Presses Ahead With Plans to Limit Bank Borrowing (FT)
- Gillard Ousted as Australia PM by Rival Rudd (FT)
- Japan Economic Strength Will Show in Stocks, Nishimura Says (BBG)
The narrow EuroStoxx 50 index is now at its lowest in over seven months (-5.4% year-to-date and -12.5% from its highs in May) and the broader EuroStoxx 600 is also flailing lower. The European bank stocks pushed down to their lowest in almost 10 months and are now in bear market territory - down 22.5% from their highs. Spain and Italy are now testing their lowest level in 9 months. While the sovereign bond market had been relatively quiet last week, it started to catch down to stocks today with Portugal, Spain, Italy, and Belgium all giving up significant parts of their Draghi-promise gains. Europe's VIX broke above 26% for the first time in almost 10 months. Think that there should be a flight-to-safety? Think again - Swiss 2Y rates spiked to 10.1bps (remember it was -44.5bps in August 2012) - their highest in 22 months. EURUSD smashed lower in the pre-open US and then oscillated higher in the most mechanically odd manner for the rest of the EU day...
For the past several years, a firmly entrenched psyche of ‘win-win’ for risk-taking behavior has dominated. The thinking has been that the Fed would either help achieve a sustained recovery (allowing distorted prices to be validated by economic fundamentals), or the FOMC would provide more price-boosting liquidity. Now, faith in this proposition is slowly being eroded. Global central banks have collectively provided $11 trillion in liquidity over the past several years. The initial moves were taken to spark domestic demand, but some recent external actions have been retaliatory in nature, implemented as a means to influence currency levels. These new forms of hostilities are indications that the external ramifications of QE policies may no longer be passively tolerated.
US jobs data is important, but other forces are at work that seem more powerful.
That concept of the Chinese Dream "came just in time" and will "benefit the world"
House prices - with respect to both levels and changes - differ widely across OECD countries. As a simple measure of relative rich or cheapness, the OECD calculates if the price-to-rent ratio (a measure of the profitability of owning a house) and the price-to-income ratio (a measure of affordability) are above their long-term averages, house prices are said to be overvalued, and vice-versa. There are clearly some nations that are extremely over-valued and others that are cheap but as SocGen's Albert Edwards notes, it is the UK that stands out as authorities have gone out of their way to prop up house prices - still extremely over-valued (20-30%) - despite being at the epicenter of the global credit bust. Summing up the central bankers anthem, Edwards exclaims: "what makes me genuinely really angry is that burdening our children with more debt to buy ridiculously expensive houses is seen as a solution to the problem of excessively expensive housing." It's not different this time.
Back in 2010 we started an annual series looking at the (re)distribution in the wealth of nations and social classes. What we found then (and what the media keeps rediscovering year after year to its great surprise) is that as a result of global central bank policy, the rich got richer, and the poor kept on getting poorer, even though as we predicted the global political powers would, at least superficially, seek to enforce policies that aimed to reverse this wealth redistribution from the poor to the rich (a doomed policy as the world's legislative powers are largely in the lobby pocket of the world's wealthiest who needless to say are less then willing to enact laws that reduce their wealth and leverage). Now that the topic of wealth distribution (or rather concentration) is once again in vogue, below we present the latest such update looking at a global portrait of household wealth. The bottom line: 29 million, or 0.6% of those with any actual assets under their name, own $87.4 trillion, or 39.3% of all global assets.
Algirdas Šemeta, the European Commissioner responsible for Taxation and Customs Union, Audit and Anti-Fraud has announced in a speech that there are ten nations in the EU that need to cut the tax burden on labor if they are going to aid the growth of the European Union. They are hindering investment and holding back output of firms across the EU, although he admits that it is not reducing the tax burden alone that will solve the problems of the economic crisis.
The Belgian Central Bank said yesterday that about 25 tons of the European nation’s gold reserves have been lent to bullion banks according to Bloomberg. Nearly 10% or about 25 metric tons of the National Bank of Belgium’s remaining 227.5 tons of gold reserves are currently lent to bullion banks, Director and Treasurer Jean Hilgers told the central bank’s annual meeting in Brussels. The proportion of gold reserves on loan declined from 84.3 tons on December 31, 2011, and averaged 48.1 tons in 2012 as loans matured and some gold loans were reimbursed early. Hilgers said that the Belgian central bank sees gold lending decreasing further this year. During the 1990’s, Belgium sold some 1,000 tons of gold into the market - more than three quarters of its remaining holdings. The Belgian gold reserves, which had already seen sizeable liquidation in late 1978, fell from 33.7 million ounces on 12/31/88, to just 5.7 million ounces on 03/31/98, or a fall of 83% in less than 10 year.
Most people do not think that Europe engages in Quantitative Easing. They know that the United States engages in it, that Britain engages in it and now that Japan engages in it but they think that Europe has so far refused to be involved. They think this because this is what they have been told. Unfortunately this is inaccurate. The European Quantitative Easing takes place every day just not in the manner utilized by America and others. However, it takes place all the same and it is done in a manner to circumvent the rules of the European Union. This is also why the ECB has such a massive balance sheet. What Europe has done is gotten around their own regulations which forbid the ECB from lending money directly to nations.
Currency wars are so pre-"QE eternity." At least that is the opinion of Indian multi-billionaire Lakshmi Mittal, and owner of the world's biggest steelmaker, who urged Europe to embrace protectionism and erect trade barriers to "protect" its manufacturers (benefiting one ArcelorMittal among others), while at the same time bashing austerity, saying "the futures of EU manufacturing depended on politicians in Brussels helping industry face what he said was unfair competition from China." In other words, it's time for Europe to escalate into full blown trade warfare with China. It is unclear if Mr. Mittal had any thoughts on how China would, in turn, escalate to this progression in trade warfare: whether with tariffs, subsidies, or outright dumping. What does appear quite clear is that the owner of ArcelorMittal, who on Friday posted a net loss of $345 million (down from a $92 million profit a year earlier) on Q1 sales plunging by 13%, whose stock is just off its 52 week lows, and who said he may close plants in Eastern Europe if the "economy continues to slump", may have some ulterior motives in asking that Europe fight his war for him.