On November 7, when the ECB announced a "surprising" rate cut, 67 out of 70 economists who never saw it coming, were shocked. We were not. As we observed ten days prior, Europe had just seen the latest month of record low private sector loan growth in history. Or rather contraction. Back than we said that "one of our favorite series of posts describing the "Walking Dead" monetary zombie-infested continent that is Europe is the one showing the abysmal state Europe's credit creation machinery, operated by none other than the Bank of Italy's, Goldman's ECB's Mario Draghi, finds itself in." We concluded: "we now fully expect a very unclear Draghi, plagued by monetary zombie dreams, to do everything in his power, even though as SocGen notes, he really has no power in this case, to show he has not lost control and start with a rate cut in the November ECB meeting (eventually proceeding to a full-blown QE) in order to boost loan creation." Less than two weeks later he did just that. The problem, as the ECB reported today, is that not only did M3 decline once more, to 1.4% or the slowest pace in over 2 years and well below the ECB's 4.5% reference growth value, but more importantly lending to companies and households shrank 2.1% in October - the biggest drop on record! Draghi's monetary zombies are winning.
Yesterday the US Senate held hearings on "virtual currencies" (meaning Bitcoin). Meanwhile the "virtual currency" ran up above $800/USD and it was reported it got above $900. It pulled back but as of now, is hovering above $700.
The latest myth of a European recovery came crashing down two weeks ago when Eurostat reported an inflation print of 0.7% (putting Europe's official inflation below that of Japan's 1.1%), followed promptly by a surprise rate cut by Mario Draghi which achieves nothing but sends a message that the ECB is, impotently, watching the collapse in European inflation and loan creation coupled by an ongoing rise in unemployment to record levels (not to mention the record prints in the amount of peripheral bad debt). Needless to say, all of this is largely aggravated by the EURUSD which until a week ago was trading at a two year high against the dollar, and while helpful for Germany, makes the so-needed external rebelancing of the peripheral Eurozone countries next to impossible. Which means that like it or not, and certainly as long as hawkish Germany says "nein", Draghi is stuck in a corner when it comes to truly decisive inflation-boosting actions. But what is Draghi to do? Well, according to BNP's Paul-Mortimer Lee, it should join the "no holds barred" monetary "policy" of the Fed and the BOJ, and promptly resume a €50 billion per month QE.
Just as Friday ended with a last minute meltup, there continues to be nothing that can stop Bernanke's runaway liquidity train, and the overnight trading session has been one of a continuing slow melt up in risk assets, which as expected merely ape the Fed's balance sheet to their implied fair year end target of roughly 1900. The data in the past 48 hours was hot but not too hot, with China Non-mfg PMI rising from 55.4 to 56.3 a 14 month high (and entirely made up as all other China data) - hot but not too hot to concern the PBOC additionally over cutting additional liquidity - while the Eurozone Mfg PMI came as expected at 51.3 up from 51.1 prior driven by rising German PMI (up from 51.1 to 51.7 on 51.5 expected), declining French PMI (from 49.8 to 49.1, exp. 49.4), declining Italian PMI (from 50.8 to 50.7, exp. 51.0), Spain up (from 50.7 to 50.9, vs 51.0 expected), and finally the UK construction PMI up from 58.9 to 59.4.
There are three dimensions to the broader investment climate: the trajectory of Fed tapering, the ECB's response to the draining of excess liquidity and threat of deflation, and Chinese reforms to be unveiled at the Third Plenary session of the Central Committee of the Communist Party.
The Fed will have to increase QE (not taper it) because systemic debt is compounding faster than production and interest rates are already zero-bound. Lee Quaintance noted many years ago that the Fed was holding a burning match. This remains true today (only it is a bomb with a short fuse). Thirteen years after the over-levered US equity market collapsed, eleven years following Bernanke’s speech, five years after the over-levered housing bubble burst, and four years into the necessary onset of global Zero Interest Rate Policies and Long-Term Refinancing Operations, global monetary authorities seem to have run out of new outlets for credit. In real economic terms, central bank policies have become ineffective. In other words, the US is now producing as much new debt as goods and services.
This morning, as part of the US Treasury's report on global currencies, Secretary Lew made the following remark:
- *LEW SAYS JAPAN 'APPEARS TO BE TURNING AN ECONOMIC CORNER'
Which got us thinking... when have we heard the US Treasury say exactly the same thing... (for exactly the same "policy-based" reason)... The answer is 10 years ago!
We recently noted that, despite all the hot money flows and self-congratulatory extrapolation, European macro data is collapsing (as opposed to supporting ideas of recovery). In fact, it is falling at the fastest pace in over a year as the prospect of the euro area falling into deflation may be increasing; as Bloomberg's Niraj Shah notes the single currency rises, growth loses momentum, money-supply expansion slows and bank lending stagnates. As Shah fears, that may push the region into a debt spiral as the real value of debt increases, marking a new phase in the crisis.
As frequent readers will recall, one of our favorite series of posts describing the "Walking Dead" monetary zombie-infested continent that is Europe is the one showing the abysmal state Europe's credit creation machinery, operated by none other than the Bank of Italy's, Goldman's ECB's Mario Draghi, finds itself in. As a reminder, it was as recently as September when we found that "Mario Draghi's Nightmare Gets Worse" because "European Loans Declined At Record Rate." To our complete lack of surprise, when a few hours ago the ECB released the latest monetary and credit creation update for the month of September, it showed... no change. Or rather, while loans to the private sector are at all time record lows, that other metric which Draghi at least has some direct control over (since he obviously can't control the amount of confidence in the system aside from threats of brute force), M3, just had its lowest pace of increase since January 2012.
Busy, Lackluster Overnight Session Means More Delayed Taper Talk, More "Getting To Work" For Mr YellenSubmitted by Tyler Durden on 10/25/2013 06:00 -0500
It has been a busy overnight session starting off with stronger than expected food and energy inflation in Japan even though the trend is now one of decline while non-food, non-energy and certainly wage inflation is nowhere to be found (leading to a nearly 3% drop in the Nikkei225), another SHIBOR spike in China (leading to a 1.5% drop in the SHCOMP) coupled with the announcement of a new prime lending rate (a form a Chinese LIBOR equivalent which one knows will have a happy ending), even more weaker than expected corporate earnings out of Europe (leading to red markets across Europe), together with a German IFO Business Confidence miss and drop for the first time in 6 months, as well as the latest M3 and loan creation data out of the ECB which showed that Europe remains stuck in a lending vacuum in which banks refuse to give out loans, a UK GDP print which came in line with expectations of 0.8%, where however news that Goldman tentacle Mark Carney is finally starting to flex and is preparing to unleash a loan roll out collateralized by "assets" worse than Gree Feta and oilve oil. Of course, none of the above matters: only thing that drives markets is if AMZN burned enough cash in the quarter to send its stock up by another 10%, and, naturally, if today's Durable Goods data will be horrible enough to guarantee not only a delay of the taper through mid-2014, but potentially lend credence to the SocGen idea that the Yellen-Fed may even announce an increase in QE as recently as next week.
Moments ago Mario Draghi's nightmare just got worse following a release by the ECB overnight that loans to the private sector dropped 2 percent from a year earlier. That’s 16th monthly decline and the biggest since the start of the single currency in 1999. "The data shows a depressing picture for the credit market," said Annalisa Piazza, an analyst at Newedge Group in London. "Although the ECB made clear that the ECB cannot do much to boost credit to the corporate sector, we expect the current picture for loans to remain one of the key reasons behind expectations of a prolonged period of accommodation." Translated: all monetary transmission mechanisms in Europe are completely broken, which in turn feeds the feedback loop of the deleveraging depression, leading to even less demand for loans, more deleveraging by banks ad lib.
The best summary of what has (not) been going on in the downward drifting equity markets comes from DB's Jim Reid, quoting: "Markets are in non-panicky limbo at the moment ahead of the upcoming US budget debate. US equities fell for the 5th day in row (S&P 500 -0.27%) and although this is the worst run since the Christmas/New Year’s Eve period of 2012 (due to the fiscal cliff debacle), the cumulative fall is only -1.9% over this decline. Meanwhile Treasuries hit a 7-week low in yield as they recorded their 12th decline in the last 14 days." As has been the case over the past week, stocks in Asia have generally traded lower with the exception of the Nikkei225 which day after day continues to do its insane penny stock thing, first dropping -1.5% only to close up 1.2% on absolutely no news, but some chatter the Abe administration would raise the sales tax on October 1, only to offset the fiscal benefit by lowering corporate tax. How this has any net impact is beyond us. Proceeding to Europe, stocks failed to sustain the initial higher open and moved into negative territory, with Italian asset classes underperforming, as market participants digested reports citing Italian MP Gasparri saying that PdL lawmakers are ready to quit if Berlusconi is ousted. This in turn saw a number of Italian banking stocks come under intense selling pressure, with the Italian/German yield spread widening in spite of supportive reinvestment flows that are due this week.
European August PMI Hits 26 Month High Despite 19th Straight Month Of Accelerating Manufacturing Job LossesSubmitted by Tyler Durden on 09/02/2013 05:24 -0500
After China's weekend PMI release, Monday saw the full data dump of final Manufacturing PMIs from Europe, which on the surface was as good as it could get: with a composite PMI print of 51.4, compared to expectations and a flash reading of 51.3, this was the highest number in 26 months. Summarizing the European final August PMI data: manufacturers feel broadly better about themselves: in fact the best in 26 months, with new orders largely fueled by export demand. Yet exports to where one wonders, considering net trade surplus data has been stronger than expected for virtually all nations in the past month: after all in a zero trade sum world someone has to be substantially increasing their imports? But more importantly, actual jobs - the real growth dynamo for the European economy - continue to deteriorate, accelerating their downward pace having declined for 19 months in a row.
The key overnight events were already discussed previously, but here they are again: the wholesale selloff in Asia (which subsequently shifted to Europe), the accelerating outflows from India (moment ago the SEBI website announced a net INR13.7 billion selling in Indian stocks yesterday and the near record collapse in the Indian Rupee to new record lows, and the ongoing uncertainty over Syria and what it will do to crude prices (if SocGen is right, nothing good). In brief: a market conditioned and habituated to a world in which Bernanke promises "to make everything ok" suddenly finds itself in the throes of uncertainty and following 4 years of dumb trend-following, has no idea what to do.
$51, 323, 233, 866, 518. That’s the current global public debt that exists all countries together. Next year it will rise to$54, 020, 847, 580, 179.