It seems more likely to Morgan Stanley's Gerard Minack that central bankers may win the battle: sustaining recovery in developed economies with extraordinarily loose monetary policy. For a while this would go hand-in-hand with better equity performance. The battle is against a crisis caused by too loose monetary policy, elevated debt and mis-priced risk. Ironically, he notes, central bankers may overcome these problems by running even looser monetary policy, encouraging a new round of levering up, and fresh mis-pricing of risk. However, winning the battle isn't winning the war. If central bankers do win this round, the next downturn could be, in Minack's view, an omnishambles. In short, it seems more likely that central bankers may add another leg to the credit super-cycle. The key question for investors in this scenario is when (and how) this cycle may end, and Minack's hunch is that this cycle is already closer to 2006 than 2003.
Why do I bring all of this up? Because it was China’s stimulus and China’s economy that supposedly lead the world back towards growth again. China is the proverbial canary in the coalmine, the economy that most quickly reveals what’s coming and where we’re all heading…
The markets have begun to wonder whether the Fed (and other central banks) will ever be able to exit from its Quantitative Easing policy. We believe there is only one reasonable exit the Fed can take. Rather than sell its portfolio of bonds or allow them to mature naturally, we believe the Fed’s only practical exit will be to increase the size of all other balance sheets in relation to its own. This “exit” will be part of a larger three-part strategy for resetting the over-leveraged global economy, already underway...
The spectre of stagflation threatens the UK economy due to concerns that sterling weakness will contribute to even higher inflation amid very weak economic growth and the likelihood of a recession – likely a severe one.
Markets are pricing in a jump in inflation as inflation expectations, as measured by the difference between nominal and inflation-linked bond yields, ticked up to near 3.3% yesterday.
Recent poor economic data and the appalling UK fiscal position are rightly leading to concerns of stagflation as was seen in the 1970s. Conditions that make owning gold and silver vitally important to own in order to protect and grow wealth.
There was much chatter by the punditry in the early part of 2013, when the Shanghai Composite appeared relentless in its surge, when it was tracking the S&P virtually tick for tick, hitting a 2013 high in mid-February, and which was "explained" to be the prima facie proof of the Chinese rebound. The reason said chatter has disappeared is that as of last night's close, the SHCOMP is now officially red for the year.
This is the third day in a row that an attempt to mount an overnight ramp out of the US has fizzled, with first the Nikkei closing down for the second day in a row and snapping a week-long rally, and then the Shanghai Composite following suit with its 5th consecutive drop in a row as the rumblings out of the PBOC on the inflation front get louder and louder, following PBOC governor Zhou's statement that inflation expectations must be stabilized and that great importance must be attached to inflation. Stirring the pot further was SAFE chief Yi Gang who joined the Chinese chorus warning against a currency war, by saying the G20 should avoid competitive currency devaluations. Obviously China is on the edge, and only the US stock market is completely oblivious that the marginal economy may soon force itself to enter outright contraction to offset the G-7 exported hot money keeping China's real estate beyond bubbly. Finally, SocGen released a note last night title "A strong case for easing Korean monetary policy" which confirms that it is only a brief matter of time before the Asian currency war goes thermonuclear. Moving to Europe, it should surprise nobody that the only key data point, Eurozone Industrial Production for January missed badly, printing at -0.4% on expectations of a -0.1% contraction, down from a 0.9% revised print in December as the European recession shows no signs of abating. So while the rest of the world did bad or worse than expected for the third day in a row, it will be up to the POMO and seasonally adjusted retail sales data in the US to offset the ongoing global contraction, and to send the perfectly manipulated Dow Jones to yet another all time high, in direct refutation of logic and every previous market reality ever.
The UK government appears to be contemplating changing the BOE's mandate so it can be freer tolerate greater near-term price pressures. The Tory-led government is commented to fiscal consolidation--austerity--the same kind of policies many want to see the US adopt, and needs greater monetary stimulus to avoid a deeper contraction in the UK economy.
If there is one firm that would know what the arrival of a Goldmanite at the head of the BOE means for the GBP, and specifically EURGBP, it would be Goldman. Moments ago Goldman's Tom Stolper just poured more gas into the EURGBP "parity" fire, sending the EUR spiking. That said, the logical Stolper-contrarians in us say this is precisely the time to fade the relentless move higher in the EURGBP: history is on our side about 93% of the time. After all, Goldman's prop flow desk is now selling the pair to its clients. This is even as we said to short the GBP with both hands and feet in late November when Carney's appointment was announced: a move that has resulted in nearly a +1400 pip gain in the GBPUSD short. Oh well, time to take profits.
- Cardinals head to conclave to elect pope for troubled Church (Reuters)
- Hyperinflation 'Unthinkable' Even With Bold Easing: Abe (Nikkei)
- Ryan Plan Revives '12 Election Issues (WSJ)
- Italy 1-yr debt costs highest since Dec after downgrade (Reuters)
- Republicans to unveil $4.6tn of cuts (FT) - Obama set to dismiss Ryan plan to balance budget within decade
- CIA Ramps Up Role in Iraq (WSJ)
- Hollande Hostility Fuels Charm Offensive to Show He’s No Sarkozy (BBG)
- SEC testing customized punishments (Reuters)
- Judge Cans Soda Ban (WSJ)
- Hungary Lawmakers Rebuff EU, U.S. (WSJ)
- Even Berlusconi Can’t Slow Bulls Boosting Euro View (BBG) - luckily the consensus is never wrong
- Funding for Lending ‘put on steroids’ (FT)
- Investigators Narrow Focus in Dreamliner Probe (WSJ)
- With new group, Obama team seeks answer to Karl Rove (Reuters)
With their crackpot monetary ideas, central banks have been robbing Peter to pay Paul without knowing which one was which. And a problem here is this thing behavioral psychologists call self-attribution bias. It describes how when good things happen to people they think it’s because of something they did, but when bad things happen to them they think it’s because of something someone else did.... When we look around we can’t help feeling something similar is happening. The 99% blame the 1%; the 1% blame the 47%. In the aftermath of the Eurozone’s own credit bubbles, the Germans blame the Greeks. The Greeks round on the foreigners. The Catalans blame the Castilians. And as 25% of the Italian electorate vote for a professional comedian whose party slogan “vaff a” means roughly “f**k off ”, the Germans are repatriating their gold from New York and Paris. Meanwhile in China, that centrally planned mother of all credit inflations, popular anger is being directed at Japan, and this is before its own credit bubble chapter has fully played out. (The rising risk of war is something we are increasingly worried about…) Of course, everyone blames the bankers (“those to whom the system brings windfalls… become ‘profiteers’ who are the object of the hatred”).
First it was a sudden bout of tightening following a series of record liquidity withdrawing repos, then it was two disappointing PMIs, then it was a warning that China's property market is (as usual) overheating and major curbs were being implemented, then it was China's "state of the union" address in which the country trimmed substantially its outlook for the remainder of the year, predicting well below trendline economic growth, inflation and credit expansion, then we got an absolute collapse in Chinese imports indicating the domestic economy had gone into a state of if not shock then outright stasis, and finally overnight we got an update on China's retail sales and industrial output which both had their weakest combined start to a year since the global recession in 2009, leading Bloomberg to title its summary article, "China’s Economic Data Show Weakest Start Since 2009", and further adding that the data is now "adding to signs of a moderating rebound in the world’s second-biggest economy." Luckily, in the new batshit normal, who needs the fastest growing marginal economy: the weight of the growing world can obviously be dumped on the shoulders of the savings-less, part-time working US consumer, accountable for 70% of US GDP, and thus about 20% of the global economy. What can possibly go wrong?
Consensus suggests India is a basket case while China is recovering. We think both views are incorrect and therein lies opportunities for contrarian investors.
This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
The US dollar rose to new multi-month highs against several of the major currencies, including the euro, Swiss franc, British pound and the Japanese yen. The BOJ, BOE and ECB meet last week and none changed policy. The Swiss National Bank meets on March 14 and is also unlikely to change policy. The Federal Reserve meets the following week and is widely expected to stay its course. It is not monetary policy then providing the new trading incentives.
Nor can the dollar's gains be attributed to political uncertainty in Europe stemming from the inconclusive Italian elections, as was the case previously. The immediate shock has worn off and Italian stocks and bonds have recovered the lion's share of those initial losses.
We know that core and periphery are struggling under the same monetary policy sun as divergences grow wider. We also know that even in the core, the Franco-German divide continues to gape. However, for a 'union' that continues to promote itself as the utopian solution for 27 nations across Europe, it seems there is an even bigger chasm - the gender pay gap. On International Women's Day, Bloomberg's Niraj Shah notes that women earn on average 16% per hour less than men with Estonia (27% gap) and Austria (24%) at the worst end of the spectrum and Italy (6%) and Slovenia (2%) at the most equitable end. And finally, even with a woman running the show, Germany's gender-pay-gap is a surprising 22%.