Things in risk land started off badly this morning, with the worst start to a year ever was set to worsen when European equities came under early selling pressure following news of German unemployment falling to record low, offset by a record high Italian jobless rate, with declining oil prices still the predominant theme as Brent crude briefly touched its lowest level since May 2009, this consequently saw the German 10yr yield print a fresh record low in a continuation of the move seen yesterday. However, after breaking USD 50.00 Brent prices have seen an aggressive bounce which has seen European equities move into positive territory with the energy names helping lift the sector which is now outperforming its peers. As a result fixed income futures have pared a large majority of the move higher at the EU open. But the punchline came several hours ago courtesy of Eurostat, when it was revealed that December was the first deflationary month for the Eurozone since the depths of the financial crisis more than five years ago, when prices dropped by -0.2% below the -0.1% expectation, and sharply lower than the 0.3% increase in November, driven by a collapse in Energy prices.
The new year is not even a week old and already the volatility fireworks are off, as well as the continued commodity derisking. But while for now US stocks continue to be an island oasis in a turbulent global sea where GDP forecasts decline every single day, the same can not be said about either the Euro, which after crashing overnight to a 9 year low, and rebounding briefly, has continued to decline and is now once again flirting with a key support level, this time 1.19, last reached during the May 2010 first Greek bailout. The catalyst, as usual, Greece which may or may not be leaving the Eurozone shortly, as well as ongoing bets on ECB QE following this morning's regional German inflation data which declined once more and now hints at outright deflation in Europe's strongest nation.
The reason why the BLS has not yet revealed the reality of the shifting US labor force, and why there is virtually no real wage growth across the US, is that the BLS simply backs into statistically goal-seeked results, using seasonal and statistical (birth/death) adjustments to smooth a trendline to beat a monthly bogey used by algos to bid stocks higher. Meanwhile, the reality at the micro level, is that increasingly more Americans are seeing their work status transformed from full-time to part-time status, earning less in the process, having no healthcare and retirement benefits and virtually no job security. As a result, starting this year, some 19 states just increased their minimum wage threshold, with 3 more states due to follow later in 2015. This takes place at the state level because for numerous reasons, there simply wan't enough of a consensus to pass this at the Federal level.
I do not think it is an exaggeration to say that we gold advocates have gone all in. We have made one argument for gold...
Following the start of Abenomics in 2012, Japan moved back to the center of attention of global financial markets. After two and a half decades of economic stagnation, hopes were high that Japan would escape its long stagnation and deflation. Plenty of economists around the globe hoped that, in so doing, Japan would show the western world, mainly the Eurozone, the way to do the same and avoid a similar long period of low growth and stagnating incomes. Conversely, the failure of Abe’s plan for Japan’s recovery would not only be a disaster for the country of the rising sun. It would also be very bad news for central bankers and politicians in the west as well. It would prove that Keynesian policies don’t work in a world of too much debt and shrinking populations.
"People should not be worried," explained Kazakhstan President Nursultan Nazarbayev in a TV address over the weekend, "we have a plan in place if oil prices are $40 per barrel." Kazakhstan, the second largest ex-Soviet oil producer after Russia, explains "there are reserves which could support people, preventing living conditions from worsening." However, if A. Gary Schilling's reality check of $20 oil being possible comes to fruition, as he explains, what matters are marginal costs - the expense of retrieving oil once the holes have been drilled and pipelines laid. That number is more like $10 to $20 a barrel in the Persian Gulf... We wonder who has a plan for that?
Great news: The prices consumers pay dropped 0.3% MoM in November - the biggest deflation since Dec 2008. Of course, The Fed will be in "considerable" panic mode at this data and may choose to crush the hope of so many that rate hikes are coming in mid-2015 as definitive evidence that the US economy is well on the road to recovery. Ex-Food-and-Energy, prices rose 1.7% YoY - slightly missing expectations of +1.8%. Of course, a big driver of this 'transitory' disinflation is a 10.5% YoY drop in Gasoline and 6.6% MoM drop in November. Despite this huge drop, and thge promises of various talking heads, airfares rose 1.36% in November (after also rising 2.39% in October) - so much for the benefits to the consumer.
Who said economics can’t be fun?! How is it not absolutely brilliant that in the face of a collapsing shale oil industry – or at least, for the moment, of its financing model -, and the worst week for the Dow since 2011, the Thomson Reuters/UofMichigan consumer sentiment index shows American consumers are more optimistic than they’ve been in 8 years, and that “more consumers volunteered good news than bad news than in any month since 1984?? 1984! How does one trump that as a contrarian signal? And that I don’t mean to sound funny: that is serious.
Not quite as many fireworks overnight, in another session dominated by central banks. First it was revealed that China had injected CNY400 billion into the banking system to add liquidity as the economy slows, which is ironic because on the other hand China is also seemingly doing everything in its power to crash its nascent stock market bubble mania, following the latest news that China’s CSRC approved 12 IPOs ahead of schedule which is seen as a pre-emptive step to tighten interbank liquidity amid the recent rise in margin trading. Another central bank that was busy overnight was Russia's, which proceeded with its 5th rate hike of the year, pushing the central rate up by 100 bps to 10.50% as expected. Elsewhere, the Bank of England wants to move to a Fed-style decision schedule and start releasing immediate minutes as Governor Mark Carney overhauls the framework set up more than 17 years ago. The Swiss National Bank predicted consumer prices will drop next year and said the risk of deflation has increased as it vowed to defend its cap on the franc. Finally Norway’s central bank cut its main interest rate for the first time in more than two years and signaled it may ease again next year as plunging oil prices threaten growth in western Europe’s biggest crude exporter.
Underneath the Propaganda, the Economy Is In BAD SHAPE …
The simple message: Quantitative Easing has failed to generate inflation. Stated alternatively: QE has not been able to overcome still extant deflationary pressures. Global central banker actions in printing over $13 trillion of new money over the last 6 years have been insufficient to surmount still existing deflationary forces. It tells us the probability of further global deflationary impulses are very real. This has direct implications for any sector of the economy or financial markets whose fundamentals are negatively leveraged to deflationary pressures (think banks, real estate, etc.) Be assured the central bankers are more than fully aware of this.
The game has been lost, but central bankers are still on the field, wandering around in disbelief that their unspeakable powers to issue money and credit have failed. You can print all the money you want, but it will never boost wages to keep up with prices.
Now that China is on the same boat as the rest of the world, and its stock market is a direct reflection of hopes for constant liquidity injections by the central banks, nothing could be better for stocks than bad news, which is precisely what it got. After the biggest crash in the Shanghai Composite in 5 years, what China got just the bad economic update it needed, when it reported a PPI of PPI (-2.7%, Exp. -2.4%), the 33rd consecutive decline and a CPI (1.4%, Exp. 1.6%), lowest since November 2009, when the big banks’ RRR rate stood at 15.5% vs. current 20%. And so hope of yet more PBOC interventions to halt China's deflation promptly reversed SHCOMP losses of over 4% on the session (at which point it was just shy of correction territory from recent highs hit just this week), and stocks surged to close up almost 3%, erasing half of yesterday's losses. This spike came despite reports Chinese regulators may limit brokerages' interbank borrowing.
A story has been echoing around the financial news for a few weeks: the Chinese economy is now larger than the economy in the US. Not so fast...
You can’t force people to spend, not if you’re a government, not if you’re a central bank. And if you try regardless, chances are you wind up scaring people into even less spending. That’s the perfect picture of Japan right there. There’s no such thing as central bank omnipotence, and this is where that shows maybe more than anywhere else. And if you can’t force people to spend, you can’t create growth either, so that myth is thrown out with the same bathwater in one fell swoop. Some may say and think deflation is a good thing, but I say deflation kills economies and societies. Deflation is not about lower prices, it’s about lower spending. Which will down the line lead to lower prices, but then the damage has already been done, it’s just that nobody noticed, because everyone thinks inflation and deflation are about prices, and therefore looks exclusively at prices.