Global Economy

It seems not every nation's head of central banking believes in the Bernanke Doctrine of moar QE is better QE... Hong Kong Monetary Authority Chief Executive Norman Chan said Monday that quantitative easing is not a panacea, and added:

... there is a possibility that the process of deleveraging is disrupted by quantitative easing, leading to sharp increases in asset prices in the first place. Yet, since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient... (and asset prices might drop sharply and remain volatile). As a result, households are unwilling to increase spending and in the end, the real economy fails to rebound.

While everyone loves a good inspirational movie - Rudy (every underdog has his day), Field of Dreams (if you build it they will come), Million Dollar Baby (be relentless); it is a somewhat sad reflection of reality that in fact - hope and trying hard is simply not enough (especially when you are a debt-saturated global economy). Two data points highlight this better than any others. Today we see wholesale inventories relative to sales at multi-year highs (aside from the great recession's peak) - having risen for almost two years now as we have built 'stuff' but the buyers just haven't come. And to rub a little more salt into the eternal optimist's wounds, it appears that Small Business Optimism has continued its divergence from equities (which notably saw stocks crash the previous two times). Equities remain the hope-driven liquidity-fueled home of the algo-optimist while all around struggles '300'-like with economic reality. Are stocks about to have their "I see dead people" moment?

The boost to GDP from the declining US trade deficit is over. While the September trade deficit number was revised further lower, to $40.3 billion from $41.5 previously, October saw a pick up to $42.2 billion, slightly less than the expected $42.7 billion, but a headwind to Q4 GDP already. As a result, expect a modest boost to Q3 GDP in its final revision, even as Q4 GDP continues to contract below its consensus of sub stall-speed ~1%. The reason for the decline: a 3.6% decline in exports of goods and services. This was the biggest percent drop in exports since January 2009 as the traditional US import partners are all wrapped in a major recession. What helped, however, was the offsetting drop in imports by 2.1%, the lowest since April 2011, as US businesses are likewise consumed by a concerns about the global economy. And without global trade, whose nexus just happens to be Europe, there can be no global or even regional recovery. So far, all hopes of a pick up in global economy have been largely dashed. Yet one country benefits from the ongoing US slump is China: imports from China - consisting primarily of computers and toys, games, and sporting goods- jumped 6.4% to a record $40.3 billion, offset be a modest rise in exports - primarily soybeans - to $10.8 billion, bring the China deficit to a record $29.5 billion from $29.1 billion in September. Of course, one wouldn't get that impression looking at the Chinese side of the ledger: the Chinese Customs department, reported a September and October trade surplus with the US amounting to $21.1 and $21.7 billion. One wonders, somewhat, where the over $16 billion difference has gone.

Own Physical Gold Now - While You Still Can!

“Farther from care than danger…”

The title above is a quote from Sir Thomas More’s classic, Utopia, describing a people’s overconfidence in their capacity for navigation given the compass for the first time.

A week ago, Mark Carney was announced as the BoE’s next Governor amid much fanfare. This week, Japan’s election could herald a new more aggressive approach from the BoJ. 2013 will then see speculation mount about Bernanke’s successor and also likely see the operation of the ECB landmark OMT program. It will also mark the 100 years of the Fed and probably much reflection on their impact on the US/Global financial system. So, as Deutsche's Jim Reid notes, central banks will remain in the spotlight for 2013. However whilst their actions to date have certainly minimized the tail-risk post-GFC, they have yet to lift real GDP above their 2007/2008 peak in most countries and virtually every developed economy is operating well below what is perceived to be trend growth. QE would have been seen as highly unorthodox four years ago - and unique for most central banks stretching back through their history. However fast forward to today, that old unorthodoxy has become the new orthodoxy. But what have the world’s central banks got left to offer a world that at some point might be hungry for more?  as the world economy peers into the future and sees a growing threat of a recurring recessions and below target inflation, radical monetary policy may become increasingly appealing as elected politicians stuck in gridlock turn to (relatively) politically unconstrained central bankers to save them from their failings and get their economies racing again. For better or for worse.

Your comprehensive yet concise, one-stop summary of all the bullish and bearish events of the past week.

Citi's Robert Buckland explains: If policymakers really do want to encourage stronger economic growth (and especially higher employment) then we would suggest that they take a closer look at the equity market's part in driving corporate behaviour. Despite high profitability, strong balance sheets and ultra-low interest rates, any stock market observer can see daily evidence of why the listed sector is unlikely to kick-start a meaningful acceleration in the global economy. A recent Reuters headline says it all: "P&G Plans to Cut More Jobs, Repurchasing More Shares". If anything, low interest rates are increasingly part of the problem rather than the solution. Perversely, they may be turning the world's largest companies into capital distributors rather than investors.

The Great Depression brought about the Keynesian Revolution, complete with new analytical tools and economic programs that have been relied upon for decades. In dampening each successive downturn, authorities accumulated increasingly larger deficits and brought about a debt supercycle that lasted in excess of half a century. The efficacy of these tools and programs has slowly been eroded over the years as the accumulation of policy actions has reduced the flexibility to deal with crises as we reach budget constraints and stretch the Fed’s balance sheet beyond anything previously imagined. Some have referred to this as reaching the Keynesian endpoint. Keynes would barely recognize where we now find ourselves. In this ultra loose policy environment we are limited by our Keynesian toolkit. Without a new economic paradigm, the deleterious consequences of the current misguided policies are a foregone conclusion.

Today's "trading", in a repeat of what has become a daily routine, can be summarized as follows: flashing red headline about Fiscal Cliff hope/optimism/constructiveness out of a member of Congress who bought SPY calls in advance of statement: market soars; flashing red headlines about the inverse of Fiscal Cliff hope/optimism/constructiveness out a member of Congress who bought SPY puts in advance of statement: market plunges. Everything else is noise, as is said hope/expectations/constructiveness too since it is increasingly likely nothing will happen until the debt ceiling hike deadline in March, but stop hunts must take place in a market which nobody even pretends is driven by fundamental newsflow. Such as the bevy of PMIs released last night, the key of which was the China HSBC PMI as reported previously, which beat expectations by the smallest of possible increments, at 50.5, but rising to expansion territory and the highest in 13 months, which sent the EURUSD spiking and has kept it in the 1.3030 range for the duration of the overnight session. Sadly, those on the ground in China hardly felt the number was a bullish as EURUSD trading algos around the world, sending the Shanghai Composite to a fresh post-2008 low, closing down over 1% at 1,960. But let's just ignore this inconvenient datapoint shall we?

The 2007 puncturing of housing market prices and the 2008 financial market swoon are the precedents to two much larger and much more dangerous bubbles. These more pernicious threats are the dollar bubble ("printing money") and the government debt bubble ("borrowing money"). While both are expanding at a sickening pace, in the near term they deceptively make things seem much better than they are. But, like all bubbles, they are unsustainable. The Fed is well-aware of this dire probability, but finds itself increasingly stuck to avoid it. The Fed's main strategic consists completely of "hope". It's backup strategy? "Panic" and thus the need to focus on preservation of purchasing power, and positioning one's financial assets safely before the aftershock arrives.

Following some well-timed 'suggestions' in Natural Gas and Apple this year, the new bond guru has some rather more concerning views about the future of America. Reflecting on a dismal outlook progressing due to the fact that "Retirees take resources from a society, and workers produce resources", Gundlach has cut his exposure to US equities (apart from gold-miners and NatGas producers) noting their expensive valuation and low potential for growth. In a forthcoming Bloomberg Markets interview, the DoubleLine CEO warns we are about to enter the ominous third phase of the current debacle (Phase 1: a 27-year buildup of corporate, personal and sovereign debt. That lasted until 2008, when Phase 2 started, unfettered lending finally toppled banks and pushed the global economy into a recession, spurring governments and central banks to spend trillions of dollars to stimulate growth) as deeply indebted countries and companies, which Gundlach doesn’t name, will default sometime after 2013. "I don’t believe you’re going to get some sort of an early warning," Gundlach warns "You should be moving now."

This objective one-stop-shop report concisely summarizes the important macro events over the past week.

I am not really a doomer. But I do think that societies and individuals that do not prepare for the worst (and hope for the best) are needlessly endangering themselves. Tail risk events happen. An MIT study earlier this year predicted that the global economy would collapse by 2030. A new national survey by National Geographic and Kelton Research finds some interesting results... 9% of people have alternative power sources? 21% have made some attempt to grow their own food? Only 43% have a spare supply of drinking water? Not prepared at all.

Doug Casey often gets letters from angry readers who accuse him of hating America, disloyalty, and perhaps even treason. The truth is that he loves the idea that was America. It's the United State it has become for which he has nothing but contempt. Where to begin? ...the US Constitution was essentially a coup; the delegates to what we now call the Constitutional Convention were not empowered to replace the existing government – only to improve upon the Articles of Confederation between the then-independent states. The framers of the Constitution drafted it with the notion of a national government already in place, but calmed fears of loss of state sovereignty by calling the new government the "United States of America" – a verbal sleight of hand that worked for over half a century. Then the southern states decided to exercise what these words imply, their right to leave the union... and as the government becomes more powerful, it's completely predictable that everything – including the justice system – will become ever more politicized... As great as a US citizen's risk is in the marketplace these days, the greatest single risk to their wealth and health is the government.