Global Economy

Yesterday we assessed the impact a second Obama term would have on the US economy and markets. Now let’s assess what impact a Romney Presidency would have on the US economy and financial markets.

As we warned here first, and as the sellside crew finally caught on, while the key macro event this week is the US presidential election, the one most "under the radar" catalyst will take place in Greece (currently on strike for the next 48 hours, or, "as usual") on Wednesday, when a vote to pass the latest round of Troika mandated austerity (too bad there is no vote to cut corruption and to actually collect taxes) takes place even as the government coalition has now torn, and there is a high probability the ruling coalition may not have the required majority to pass the vote, which would send Greece into limbo, and move up right back from the naive concept of Grimbo and right back into Grexit. Which is why the market's attention is slowly shifting to Europe once more, and perhaps not at the best time, as news out of the old continent was anything but good: Spain's October jobless claims rose by 128,242, higher than the estimated 110,000 and the biggest jump in 9 months, bringing the total number of unemployed to 4,833,521, a rise of 2.7%, according to official statistics released Monday. This means broad Spanish unemployment is now well above 25%.  In the UK, the Services PMI plunged from 52.2 to 50.6, which was the lowest print in nearly two years or since December 2010, and proved that the Olympics-driven bump of the past few months is not only over, but the vicious snapback has begun.

Indeed, when you think about it, 2008 happened at a time when paper money was still perceived as a safehaven. That is no longer the case as the Central Banks now have the printers running both day and night. Small wonder that Gold and Silver are at or near all time highs in every major currency.

• In Darkened NYC, Safety On The List Of Concerns (AP)
• New York Subway System Faces Weeks to Recover From Storm (Bloomberg) ... as we said
• Power Outages May Last More Than a Week (WSJ)... same
• U.S. stock markets to reopen on Wednesday after storm (Reuters)
• Questions Cloud Market Reopening (WSJ)
• Apple revolution shows signs of reboot (FT)
• Euro Chiefs Set to Grant Greece Extension Amid Squabbles (Bloomberg)
• Italy Bank Poll Casts Shadow Over Savings (WSJ)
• Shocked UBS staff take to Twitter (FT)
• Corporate China hit by unpaid bills (FT)
• Panasonic Posts Loss of Nearly $9 Billion (WSJ)
• BoJ independence called into question (FT)
• Barclays hit by fresh U.S. investigations (Reuters)
• Adoboli’s Girlfriend Said Confess, Co-Worker Said to Run (Bloomberg)

What is really causing the economic malaise that the U.S. faces today?  Most economists believe that it is the lack of aggregate demand that is causing the problem which can be rectified by continued deficit spending.  The current Administration believes that it is simply the lack of the "rich"  not paying their "fair share" and that a redistribution of wealth will solve the issue.  Romney believes that his 5-point plan will create 12 million jobs in the near future.  All are wrong.  

This is no longer your "father's economy." The importance of this shift in the U.S. from away from being the epicenter of global production and manufacturing to a service and finance based economy should not be overlooked.  This transition is responsible for the issues that are impeding economic growth in the U.S. today from structural unemployment, declining wage growth and lower economic prosperity. What does this have to do with GDP and exports?  Well, just about everything. With exports declining which is impacting corporate profit margins, employment conditions deteriorating, and business spending contracting - these are all the necessary ingredients to spin out a negative economic growth rate at some point in the not so distant future.

Since the 2008 financial crisis the foundations of the global economy have been in repair, translating into a prolonged period of economic frailty. Against this backdrop, social and political tensions have increased between citizens and government, international institutions and governments, and individual nation states. The European debt crisis remains the largest challenge facing the global economy. A negative resolution emanating from the world’s largest economic bloc would cause harmful ripple effects worldwide in global trade flows. More importantly, it could also mark a paradigm shift in international relations, dealing a critical blow to what has been a relentless trend towards liberalism since the end of World War II, while providing fecund ground for a resurgence in realist ideology. Interestingly though, constructivism may be at the forefront in explaining the current dilemma between the European core and its periphery. It would also be wise to ponder the idea of whether a supranational government could exist. Proceeding down a path with a likely dead end would consume precious resources and lead to widespread suffering among every day citizens.

If you often wonder why ‘free market capitalism’ feels like it is failing despite universal assurances from economists and political pundits that it is working as intended, your intuition is correct. Free market capitalism has become a thing of the past. In truth free market capitalism has been replaced by something that is truly anti-free market and anti-capitalistic. The diversion operates in plain sight. Beginning sometime around 1970 the U.S. and most of the ‘free world’ have diverged from traditional “free market capitalism” to something different. Today the U.S. and much of the world’s economies are operating under what I call Monetary Fascism: a system where financial interests control the State for the advancement of the financial class. This is markedly different from traditional Fascism: a system where State and industry work together for the advancement of the State. Monetary Fascism was created and propagated through the Chicago School of Economics. Milton Friedman’s collective works constitute the foundation of Monetary Fascism. Today the financial and banking class enforces this ideology through the media and government with the same ruthlessness of the Church during the Dark Ages: to question is to be a heretic.   When asked in an interview what humanities’ future looked like, Eric Blair, better known as George Orwell, said “Imagine a boot smashing a human face forever.”

As the saying goes, when China sneezes, the rest of the world catches the cold. So far, if one were to look at the macro-economic surprise indices for US, Europe, and China, it would appear that China's weakness was largely ignored by US and Europe which have notably 'outperformed' relative to expectations in the last two months. However, what is apparent is that this is a lead-lag relationship which the FT provides an excellent flow chart of how China's dominant ebbs and flows chain-react around the world's supply (and demand) chains. Furthermore, the successive peaks in economic cycles since 2009 have been lower and lower as even relatively minor shifts in China's domestic production, stockpiling, or spending can have big impacts on the other side of the world. As the IMF notes: "China can transmit real shocks widely, whether these originate domestically or elsewhere."

The term 'Plutonomy' was originally coined by Citigroup analyst Ajay Kapur, who argued that in many countries, an ever larger part of economic activity was due to the the richest segments of society, as wealth disparities have increased a great deal in recent decades. Countries with especially large Gini coefficients (i.e., an especially large gap between rich and poor) were deemed to represent such 'Plutonomies' by Kapur. We would briefly comment  here that one of the main reasons why the gap between rich and poor has widened so much is the vast amount of monetary inflation that has taken place in recent decades. It is not inequality as such that is the problem. The problem is that while the rich have gained from monetary inflation, the middle class and the poor have at the same time lost out.

No surprise Europe remains highly vulnerable to sudden sentiment shifts. How to stablise it? The usual smoke & mirrors are conveying what might or might not be good news on Greece [since denied]. The crisis in Europe may be contained, but it clearly isn't solved. "Europe is like an overweight dinosaur on a crash diet, that's got really really bad toothache with not a dentist in sight." But But But.. yesterday's ructions weren't just about the political shenanigans that pass for markets these days. There are deep undercurrents roiling these placid markets. All of which leads us to wondering what happens next? If this continues what hope for next year? Low low yields and global economic depression? Boy scout time...

Unlcear if as on recent occasions, there will be 7,000 policemen protecting him: Mario Draghi travels to Berlin today to meet with key German parliament members involved in the eurozone crisis policy.  This private meeting is the ECB president’s effort to defend his new bond buying plan as a legitimate instrument in its monetary policy arsenal. Germany’s legislative backing is critical for Draghi’s plan to buy up Spanish and other eurozone area government bonds. The Bundesbank president, Jens Weidmann, says the program is tantamount to financing governments by printing money, which is prohibited by the ECB’s founding treaty. ECB presidents normally give evidence to the European parliament but rarely if ever address national legislatures especially behind closed doors.  This journey is highly unusual but a critical sell for Draghi. Today’s session will be followed by a press briefing at 4pm local time by Mr. Draghi and Bundestag leader Norbert Lammert.

Hands down, the best way to trade stock market volatility day today is simply not to do it, cash out, and purchase hard assets, in particular, precious metals.

Debt.  There isn't a day that passes as of late that the issue of debt doesn't arise.  Federal debt and consumer debt (including mortgages) are of the most concern due to its impact on the domestic economy.   Debt is, by its very nature, a cancer on economic growth.  As debt levels rise it consumes more capital by diverting it from productive investments into debt service.  As debt levels spread through the system it consumes greater amounts of capital until it eventually kills the host. The problem is that during a “balance sheet” recession the consumer is forced to pay off debt which detracts from their ability to consume.   This is the one facet that Keynesian economics doesn’t factor in. It’s time for our leaders to wake up and smell the burning of the dollar – we are at war with ourselves and the games being played out by Washington to maintain the status quo is slowing creating the next crisis that won’t be fixed with monetary bailout.

The International Monetary Fund’s paper, “The Chicago Plan Revisited” by Jaromir Benes and Michael Kumhof highlighted a means to wipe out debt by legislation by using state created money to replace the private banking system and was commented on in The Telegraph by journalist Ambrose Evans-Prichard. The full paper can be read here. In sum, the paper illuminates on a plan created in 1936 by professors Henry Simons and Irving Fisher during the aftermath of the US Depression. It examines how money  created by credit cycles leads to a damaging creation of wealth.   Authors, Benes and Kumhof argue that credit-cycle trauma - caused by private money creation – has been around forever and lies at the root of debt catastrophes as far back as ancient Mesopotia and the Middle East. They claim that not only harvest cycles lead to defaults but rather the concentration of wealth in the hands of lenders would have augmented the outcome.