For the last few days we have been bombarded with words that appear 'peaceful' and problem-solving from Russia with love. Of course, 'no change' benefits mother Russia the most as his government's gas revenues (and political power) will continue to flow from Europe (a quarter of Russian government income comes from being Europe's gas supplier). So it will come as no surprise that amid the Mother Theresa acts, The Telegraph reports that Putin is readying delivery of more S-300 air-defense missile systems to Iran and will continue to discuss "working together in the nuclear energy spehere." Combine that with experts' views that Russia's plan to dismantle Syria's stockpiles of mustard gas, sarin, VX nerve agents is a long shot; initially "sounding attractive, but very quickly, operational problems could derail obtaining international control, much less actually destroying the arsenal." It would appear, despite all the chatter, that Putin is increasing his power-base in the region.
- Obama Holds Fire on Syria, Waits on Russia Plan (WSJ)
- China Shadow Banking Returns as Growth Rebound Adds Risk (Reuters)
- Not one but two: Greece May Need Two More Aid Packages Says ECB’s Coene (WSJ)
- BoJ insider warns of need for wage rises (FT) ... as we have been warning since November, and as has not been happening
- California city backs plan to seize negative equity mortgages (Reuters)
- Home Depot Is Accused of Shaking Down Suspected Shoplifters (BBG)
- Most-Connected Man at Deutsche Bank Favors Lightest Touch (BBG)
- Norway Pledges to Limit Oil Spending (BBG)
- China Shadow Banking Returns as Growth Rebound Adds Risk (BBG)
- Gundlach Says Fed Is Mistaken in How It's Ending Easing (BBG)
Despite earlier comments from Obama on Tuesday night, who called for a pause in authorizing military strikes on Syria, which led to another drop in crude prices overnight, the drop has since reversed and both WTI and Brent Crude contracts are trading in the green. Whether this is the result of a note by Goldman analysts who noted that the Brent crude sell-off was overdone and that they see no improvement regarding the conflict in Libya which is constraining oil production, or because Russia is once again throwing hurdles in the international process to force Syrian disarmament, is unknown. The lack of any key catalysts and no USDJPY levitation, led to most global markets unchanged, and futures currently trading sideways. What is not trading sideways is Apple which is down over 2% to just over $480 as all hopes of a China Mobile deal fall apart, coupled with pervasive critical panning of the new iPhones which, aside for the commodity version, is just the old iPhone with an extension that allows the NSA's new fingerprint database to be filled in record time.
Always on the look-out for a silver-lining, the world's commission-taking asset managers are flooding into the new cleanest dirty shirt of European stocks (the more beaten-down, the better) - apparently on the basis of the exuberance in surging PMIs. Aside from the fact Draghi himself already poured cold-water on people's belief in the strength of the European recovery last week, and our note this weekend on the 'roughness' of PMI survey "soft" data, investors remain unmoved and momentum has taken over now. However, as Goldman explains some of the optimism on the basis of recent manufacturing PMIs may not square with evidence of a structural break in the link between the PMIs and growth. While a reading of 50 may in pre-crisis days have indicated positive growth on the periphery, it today may only indicate flat (or even negative) growth, as the external financing constraint prevents better sentiment from translating into activity.
In the US, retail sales on Friday will be the main data release. In addition, Congress will return from its 5-week recess on Monday and will likely keep their focus on Syria this week. Finally, San Francisco Fed President Williams (who does not vote on FOMC policy this year) will speak on Monday. Last week, Williams argued that the FOMC should maintain its focus on the unemployment rate, despite its limitations. After Friday's employment report saw the unemployment rate drop again due to falling participation, this issue is likely to resurface. The Fed's communication blackout period begins on Tuesday so Williams will be the last FOMC speaker before the September meeting ends on the 18th.
As macro news continues to trickle in better than expected, the latest batch being benign (if completely fake) Chinese inflation data (CPI 2.6%, Exp. 2.6%, Last 2.7%) and trade data released overnight which saw ahigher than expected trade balance ($28.5bn vs Exp. $20.0; as exports rose from 5.1% to 7.2%, and imports dipped from 10.9% to 7.0%, missing expectations), markets remain confused: is good news better or does it mean even more global liquidity will be pulled. As a result, the release of an encouraging set of macroeconomic data from China failed to have a meaningful impact on the sentiment in Europe this morning and instead stocks traded lower, with the Spanish IBEX-35 index underperforming after Madrid lost out to Tokyo to win rights to host 2020 Olympic Games. Even though the news buoyed USD/JPY overnight, the pair faced downside pressure stemming from interest rate differential flows amid better bid USTs. The price action in the US curve was partly driven by the latest article from a prolific Fed watcher Jon Hilsenrath who said many Fed officials are undecided on whether to scale back bond purchases in September. Hilsenrath added that the Fed could wait or reduce the programme by a small amount at the upcoming meeting. Going forward, there are no major macroeconomic data releases scheduled for the second half of the session, but Fed’s Williams is due to speak.
The Labor Force Participation Rate - in English, the percent of the population that is either in a job or looking for a job - fell yesterday to fresh 35 year lows. This is not a new trend, in fact since the end of 1999 (the dot-com bust) it has trended lower from well over 67% to the current 63.2%; which means the current unemployment rate would be almost 11% if the labor force was constant from when Obama took office. There appear to be at least four reasons (excuses) put forth for this dismal 'structural' trend but chief among them - and propagandized by most in the mainstream (given its lack of 'blame') - is the so-called 'aging of America' or demographics. There is only one problem with that 'myth'; it's entirely inconsistent with other Western economies who are experiencing exactly the same demographic shift. The collapse in the US labor force is, in fact, due to excess credit having fueled artificial growth for 3 decades; and now a government throwing free money at the population in the form of disability insurance (which has surged) and student loans (which are exponentially exploded). So who (or what) is to blame for the US' collapsing workforce? Simple, the unintended consequences of government interference.
Pouring forth from all of the nations on the Continent, like a Preacher with the "Good News," is the notion that Europe is over the recession, that every country is doing just fine and that all problems have been solved. This, in our opinion, could not be further from the truth. It is the spiel of the day and reality will be found in the footnotes of tomorrow as long as tomorrow is after September 22... Even Draghi was forced to admit that thing smay have got a little ahead of themselves...
*DRAGHI SAYS CAN'T SHARE ENTHUSIASM ABOUT RECOVERY
As a reminder, September 22 is the date for the German Elections. All of Europe and the IMF are keeping their heads down, playing nice and saying very little until this date comes and goes.
What perhaps Minsky couldn’t conceive of was the point at which debt, deficits and interest rates would go to such extremes that the creation of credit itself, which was and remains the heart of capitalism, would be threatened. No longer might the seventh inning stretch lead to a Coke, some “Cracker Jacks” and the resumption of the old ballgame. Instead, zero-bound interest rates and debt/GDP ratios in a majority of capitalistic economies would begin to threaten, not heal, the nature of finance and investment in the real economy. Investors, leery of not only overleveraged investment banks such as Lehman Brothers, but overextended countries such as Greece, Cyprus and a host of Euroland lookalikes would derisk as opposed to rerisk as per the Minsky model. As well, with interest rates close to the zero bound, investors in intermediate and long term bonds would become dependent on Big Bank to do their bidding. When that QE buying power became jeopardized via tapering and the eventual ninth inning conclusion of asset purchases, then the process of maturity extension and the terming out of historically modeled corporate lending was prematurely threatened.
Today we present the Target2-system and the fiscal bail-out facilities in our series on European efforts to bail out itself. For new readers, check out part 1 here http://bawerk.net/?p=123
Reading the financial press, one gets the impression there are only two sides to the austerity debate: pro-austerity and anti-austerity. In reality, we have three forms of austerity. There is the Keynesian-Krugman-Robert Reich form which promotes more government spending and higher taxes. There is the Angela Merkel form of less government spending and higher taxes, and there is the Austrian form of less spending and lower taxes. Of the three forms of austerity, only the third increases the size of the private sector relative to the public sector, frees up resources for private investment, and has actual evidence of success in boosting growth.
After strong performance for the last 3 months as investors around the world turn their eye towards Europe as the hot-money inflow area for clean dirty shirt macro tourists, the core of Europe's hope, Germany, has seen its equity market stumble a little recently. Since Monday alone, the DAX is down 2%, underperforming such stalwart economies as Spain and Greece. The reason, aside from international money flows and "war-" and "Taper"-premia, appears to be worries that Merkel may be losing popularity. After 17 million watched the German debates on Sunday night, opinion polls show Merkel's opposition, Peer Steinbruck, surged in popularity...
In a sense the markets are experiencing a "Vietnam Moment" where we all believed what we were told and we all accepted the official headlines until the day came when we found out we had been flimflammed and you know the results of that fiasco. We believe that the markets are quite close to a shift in psychology where people and institutions alike no longer blindly accept the stories as told.
If you were a totally bankrupt European Government relying on the promise of additional funds from Germany to stay in power and your options were A) start cranking out better data now with the promise of future bailouts from Germany or B) having to deal with a German Chancellor who wants out of the Euro… which would you choose?
While we understand Europe's desperation to telegraph an improvement in its economy, driven by both GDP and such sentiment indicators as PMI data, very much as we saw in early 2011 before the carpet was pulled from beneath Europe and it promptly slid into a double dip, one thing that is unclear is why Europe continues to insist using Spain as the marginal indicator of improvement. After all, for every 50+ PMI print or "just barely positive" GDP there is a total (or youth) unemployment chart rising to fresh highs and confirming there is no consumption, and certainly no loan creation - the two driving forces of Keynesian economic growth. But while those two data dynamics are well-known to most, perhaps the true Ying and Yang indicators of Spain's economy are these two, somewhat less popular, charts.