Gross Domestic Product
The economic growth expectations for the world in 2014 just plunged to fresh lows at a mere 2.78% - that is 15% "less" growth than was expected a year ago. The world's equity markets are up 25% "more" than at the start of 2013. Thus, our dysfunctional dystopian world where 'less' economic growth is 'more' wealth-creating. Long live the central bank utopia...
Bear markets are punishment for over-exuberance and greed, notes ConvergEx's Nick Colas, teaching investors to be more careful next time around. That’s a pretty popular narrative in capital markets, and with two tough bear markets over the past 15 years, Colas suggests you’d think that there’s no way investors would be guilty of blowing bubbles again. Right? Well, as Nick explains, if the evidence from actual crime and punishment is any guide, this moral narrative is actually quite wrong.
Yesterday we reported that in an attempt to unclog Europe's broken credit and monetary piping, European regulators are preparing to get their hands dirty by easing rules on, and unleashing, an asset class once labelled toxic sludge, i.e., all the worst of the worst debt that was the reason why Europe is in a 6 year-old depression, and hope and pray it somehow fixes itself. Today, the ECB reported the latest data on European credit creation in the private sector. Or rather lack thereof. Because at -2.2%, this was essentially an all time low private sector loan "growth" (rather, credit destruction). Which means Europe will have to throw all the toxic sludge it can find in its desperation to reignite yet another credit bubble, something Bernanke's cronies appear to have done far more admirably.
And so the various estimates of Q4 GDP have made an almost full circle: starting at 3.22% in the first forecast, plunging to 2.38% in the second, and finally settling at 2.63%, a miss from the expected 2.7%. This is down from 4.1% recorded in Q3 which however as everyone knows by now was purely due to a unprecedented, record inventory build up.
Gazprom must really be demanding payment on overdue Ukraine invoices which is the only way we can explain the unprecedented speed with which the IMF has managed to cobble together a makeshift bailout package of up to $27 billion - the bulk of which will naturally go to Russia - which has just made Ukraine its latest vassal state. There are of course, conditions: "Approval is “expected in April, following the authorities’ adoption of a strong and comprehensive package of prior actions aiming to stabilize the economy and create conditions for sustained growth,” IMF mission chief Nikolay Gueorguiev said in the statement. Disbursement may start next month, he said at a news conference in Kiev." And then comes the hyperinflation: "Monetary policy will target domestic price stability while maintaining a flexible exchange rate. This will help eliminate external imbalances, improve competitiveness, support exports and growth, and facilitate the gradual rebuilding of international reserves. The NBU plans to introduce an inflation targeting framework over the next twelve months to firmly anchor inflation expectations"... Very high inflation targeting.
- BOE to Sign Agreement With China on Yuan Clearing Next Week (BBG)
- U.S. law firm plans to bring suit against Boeing, Malaysia Airlines (Reuters)
- Citigroup Fraud Stings Mexico Star as Medina-Mora Chased (BBG)
- Fraternity Chief Feared for Son as Hazings Spurred JPMorgan Snub (BBG)
- UBS suspends six more forex traders (FT)
- Goodbye CSCO Q1 EPS: China to strengthen Internet security after U.S. spying report (Reuters)
- Good luck: Spain Banks With $55 Billion of Property Seek Deals (BBG)
- Citic Pacific Said to Plan About $4 Billion Public Offering (BBG)
- Yahoo Japan to buy eAccess from SoftBank for $3.2 billion (Reuters)
- "Whatever it takes" to talk down the Euro: Euro, peripheral bond yields fall on ECB easing debate (Reuters)
Let the fun begin.
After tumbling overnight to just around 101.80, the USDJPY managed to stage a remarkable levitating comeback, rising all the way to 102.3, which in turn succeeded in closing the Nikkei 225 at the highs, up 1% after tumbling in early trade. The Shanghai Composite was not quite as lucky and as fear continue to weigh about a collapse in China's credit pipeline, the SHCOMP was down more than 0.8% while the PBOC withdreww even more net liquidity via repos than it did last week, at CNY 98 billion vs CNY 48 billion. That said, this morning will be the fifth consecutive overnight levitation in futures, which likely will once more surge right into the US market open to intraday highs, at which point slowy at first, then rapidly, fade again as the pattern has seemingly been set into algo random access memory. Which in a market devoid of human traders is all that matters.
Looking ahead at the next couple of weeks, Citi's Stephen Englander sees multiple sources of risk which he does not think are fully priced in. Most of these risks appear to be asset market negative, involving higher US rates, more geopolitical disruption and downside economic shocks.
The idea of “under-shooting inflation from below” is just ritual incantation. It provides the monetary central planners an excuse to keep the printing presses running red hot, but the true aim is not hard to see. After a 30 year rolling national LBO that has taken credit market debt outstanding to $59 trillion and to an off-the-charts leverage ratio of 3.5X national income, the American economy is saddled with $30 trillion of incremental household, business, financial and public debt compared to its historically sound leverage ratio of 1.5X GDP. We are at peak debt. Household, business and government balance sheets are tapped-out. The problem is not too little CPI inflation, but the unavoidability of a pay-back era of sustained debt deflation.
Two years ago, on April 2, 2012, long before it became abundantly clear to even the most clueless CNBC hacks, we said that there will be no capex boom as long as corporate management teams abuse ZIRP (and yes, it is all the Fed's fault as we further explained) to allocate capital, most of it courtesy of low-cost debt, by providing quick returns to activist investors through dividends and buybacks, instead of reallocating the funds to grow the company by investing in Capex (the latest proof of the unprecedented lack of capital spending growth increase came earlier today) and SG&A or at least M&A. Two years later after our post, whose conclusion has been proven empirically by what has happened in the US economy where CapEx still refuses to pick up despite endless lies of some recovery that refuses to materialize except in talking head year-end bonuses, none other than the head of the world's largest asset manager, BlackRock's Larry Fink admits we were right all along.
The Greek economic collapse, depression and bankruptcy has seen many odd things in its brief and often times violent history (in those days when the violent elements were not on strike), but this surely is the first time when one of the countless Greek bailouts may be on the rocks due to the disagreement over the definition of "fresh milk." No, really. Reuters explains that Greece's government risks another rebellion over bailout terms this week after milk producers lobbied against a move to free up prices as part of efforts to make the economy more competitive. Basically, for Greeks, milk is fresh if it is 5 days old or less, yet according to the always fascinating codex of the Troika, "fresh" can be labeled anything that is as old as 11 days.... including the salmonella bacteria it contains. What's worse, is that the "spoiled milk" scandal, far from a joke, has swept over the country, and now even threatens to topple the government.
Presented with little comment aside to ask... if 'weather' can do this much damage to the US economy and 'faith' in the wealth effect-building benefits of the US equity market are this weak, then there are a few uncomfortable truths about to punch some talking heads in the mouth...
As Fortune's Stephen Gandel begins, "if you hate the Fed, you have a new hero." He is referring to none other than GMO's Jeremy Grantham who aggressively takes on the status-quo-hugging faith in the omnipotence in Central banking prowess with fact and anecdote in this brief interview..."Higher interest rates would have increased the wealth of savers. Instead, they became collateral damage of Bernanke's policies. The theory is that lower interest rates are supposed to spur capital spending, right? Then why is capital spending so weak at this stage of the cycle. There is no evidence at all that quantitative easing has boosted capital spending. We have always come roaring back from recessions, even after the mismanaged Great Depression. This time we are not..we have never had such a limited recovery."
For some inane reason, about a year ago, there was a brief - and painfully boring - academic tussle between one group of clueless economists and another group of clueless economists, debating whether Too Big To Fail banks enjoy an implicit or explicit taxpayer subsidy, courtesy of their systematic importance (because apparently the fact that these banks only exist because they are too big in the first place must have been lost on both sets of clueless economists). Naturally, it goes without saying that the Fed, which as even Fisher now admits, has over the past five years, worked solely for the benefit of its banker owners and a few good billionaires, has done everything in its power to subsidize banks as much as possible, which is why this debate was so ridiculous it merited precisely zero electronic ink from anyone who is not a clueless economist. Today, the debate, for what it's worth, is finally over, when yet another set of clueless economists, those of the NY Fed itself, say clearly and on the record, that TBTF banks indeed do get a subsidy. To wit: " in fact, the very largest (top-five) nonbank firms also enjoy a funding advantage, but for very large banks it’s significantly larger, suggesting there’s a TBTF funding advantage that’s unique to mega-banks."