David Rosenberg, in one of his recent missives, wrote: "...based on the current trend in the LEI and the level of the diffusion index, history suggests that the next recession is at least four years away." While anything is certainly possible, it is highly unlikely that the current economic environment is supportive of another four years of a "struggle along" economy. Given the artificial supports during recent years, the extreme extension in assets prices, record levels of margin debt and the chase for yield in "junk credits," it is highly possible that the next recessionary decline could be much larger than the historical average.
The “faster rotating sanctions spiral with Russia” causes worst plunge in the history of the German consumer index.
"Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly.... Central banks, including the U.S. Federal Reserve, have taken aggressive action, consistently lowering interest rates such that today they hover near zero. They have also pumped trillions of dollars’ worth of new money into the financial system. Yet such policies have only fed a damaging cycle of booms and busts, warping incentives and distorting asset prices, and now economic growth is stagnating while inequality gets worse. It’s well past time, then, for U.S. policymakers -- as well as their counterparts in other developed countries -- to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy... The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them"...
Last week’s Jackson Hole meeting helped to highlight a simple reality: unlike other parts of the world, the eurozone remains mired in a deflationary bust six years after the 2008 financial crisis. The only official solutions to this bust seem to be a) to print more money and b) to expand government debt. Nothing Mr Draghi said in his Jackson Hole speech changed this reality.
At this stage, the path of least resistance is for the eurozone, and especially France, to continue disappointing economically, for the euro to weaken, and for Europe to remain a source of, rather than a destination for, international capital.
It is unclear exactly why stock futures, bonds - with European peripheral yields hitting new record lows for the second day in a row - gold, oil and pretty much everything else is up this morning but it is safe to say the central banks are behind it, as is the "de-escalation" algo as a meeting between Russia and Ukraine begins today in Belarus' capital Minsk. Belarusian and Kazakhstani leaders will also be at the summit. Hopes of a significant progress on the peace talks were dampened following Merkel’s visit to Kiev over the weekend. The German Chancellor said that a big breakthrough is unlikely at today’s meeting. Russian FM Lavrov said that the discussion will focus on economic ties, the humanitarian crisis and prospects for a political resolution. On that note Lavrov also told reporters yesterday that Russia hopes to send a second humanitarian aid convoy to Ukraine this week. What he didn't say is that he would also send a cohort of Russian troops which supposedly were captured by overnight by the Ukraine army (more shortly).
Today, the world economy is in uncharted territory. Never before has the developed world carried this much debt. Never before have the central banks of those same countries expanded their balance sheets so much. Never before has so much sovereign debt been outright monetized. Never before have major financial institutions been officially designated as “too big to fail” and thereby been granted special license to assume gigantic risks. Dr. Lacy Hunt, economist and current executive vice president of Hoisington Investment Management Company, expects the macroeconomic situation to get worse from here...
It is clearly not in the interests of the long-standing members of the EU to escalate a 'sanctions and financial conflict' with Russia. This is why politicians are walking on eggshells, paying lip-service to America and the scared Eastern fringe members of NATO while hoping this goes no further. So long as this is the case it is clear that NATO members are powerless to stop Russia from wresting control of all or parts of Ukraine from the government in Kiev. Putin knows this; unfortunately it is not clear to us that the American government does. All in all it seems likely that after a period of slow-burn as Putin dictates the pace of developments, the political situation in Ukraine will deteriorate with some unhelpful nudges from Russia.
- Ukraine accuses Russia of invasion after aid convoy crosses border (Reuters)
- Hunt for Foley’s Killer Spans Old Policing and Tech Tools (BBG)
- U.S. Probe Examines GM Lawyers (WSJ)
- Argentina accuses U.S. Judge Griesa of "imperialist" attitude (Reuters)
- Violence-weary Missouri town sees second night of calm (Reuters)
- Geneva Banks Break 200-Year Silence to Unveil Earnings (BBG)
- Richest Jailed Putin Foe Says Ukraine Fears Sparked Prosecution (BBG)
- Disclosure of Failed Attempt to Rescue James Foley Is Criticized (WSJ)
- Execution of U.S. journalist reveals the changing business of war coverage (Reuters)
While today's key events were supposed to be the Jackson speeches first by Janet Yellen at 10:00am Eastern and then by Mario Draghi at 2:30 pm, Ukraine quickly managed to steal the spotlight yet again when moments after the first Russian humanitarian aid convoys entered Ukraine allegedly without permission, Kiev first accused Russia of staging a direct invasion, even if moments later it changed its tune and said it had allowed the convoy in to "avoid provocations." In other words, your daily dose of Ukraine disinformation, which initially managed to push futures down some 0.3% before futs regained virtually all losses on the subsequent clarifications. Expect much more conflicting, confusing and very provocative headlines out of Kiev as the local government and the CIA try to get their story straight.
If QE is ending because it was so successful, then why is aggressive forward guidance necessary? If QE worked so well, then why will Yellen likely need to mention ‘the elevated number of part time workers’, ‘under-utilization of labor resources’ or ‘room for improvement in the labor market’? In regard to its inflation mandate, there is no evidence that QE has had any impact other than causing asset price inflation.
With the FOMC Minutes in the books, the only remaining major event for the week is the Jackson Hole conference, where Yellen is now expected to talk back any Hawkish aftertaste left from the Minutes, and which starts today but no speeches are due until tomorrow. And while the Minutes were generally seen as hawkish, stocks continue to levitate, blissfully oblivious what tighter monetary conditions would mean to an asset bubble, which according to many, is now the biggest in history. And speaking of equities, US futures climbed to a fresh record high overnight on just the right mix of bad news.
When a tin-foil-hat-wearing blog full of digital dickweeds suggest the dollar's reserve currency status is at best diminishing, it is fobbed off as yet another conspiracy theory (yet to be proved conspiracy fact) too horrible to imagine for the status quo huggers. But when the VP of Research at the New York Fed asks "Could the dollar lose its status as the key international currency for international trade and international financial transactions," and further is unable to say why not, it is perhaps worth considering the principal contributing factors she warns of.
While everyone's (algorithmic) attention will be focused on today's minutes from the July 29-30 FOMC meeting for views on remaining slack in U.S. economy following recent changes in the labor market (especially a particularly solid JOLTS report which indicates that at least on the openings front, there is no more) and any signal of policy change by the Fed ahead of Fed Chair Janet Yellen’s speech in Jackson Hole on Aug. 22, a curious thing happened overnight when a few hours ago the BoE's own minutes show the first vote split since 2011, as Weale and McCafferty argue for a 0.75% bank rate. Then again, if the Russians are finally bailing on London real estate, the inflationary pressures at the top of UK housing may finally be easing. In any event, every FOMC "minute" will be overanalyzed for hints of what Yellen's speech on Friday morning will say, even if stocks just shy of all time highs know quite well she won't dare say anything to tip the boat despite her warnings of a biotech and social network bubble.
While the markets are currently suggesting that the "dip" is over, there are several immediately prevailing risks that could catch unwitting investors.