What a year 2012 has been! The mainstream media continues to tell us what a “great job” the Obama administration and the Federal Reserve are doing of managing the economy, but meanwhile things just continue to get even worse for the poor and the middle class. Right now we are living in a bubble of debt-fueled false prosperity that allows us to continue to consume far more wealth than we produce, but when that bubble bursts we are going to experience the most painful economic “adjustment” that America has ever gone through. We need to be able to explain to our fellow Americans what is coming, why it is coming and what needs to be done. Hopefully the crazy economic numbers that we have included in this article will be shocking enough to wake some people up.
An abysmal indicator for Europe
Turkey’s trade balance may turn on whether President Barack Obama vetoes more stringent sanctions against Iran after the U.S. Senate passed a measure targeting loopholes in gold exports to the Islamic Republic. Turkey’s gold trade with neighbouring Iran has helped shrink its trade deficit over the past year according to Bloomberg. Incredibly, precious metals accounted for about half of the almost $21 billion decline. That’s calmed investor concern over its current-account gap, and helped persuade Fitch Ratings to give Turkey its first investment-grade rating since 1994. The U.S. Senate voted 94-0 on Nov. 30 to approve new sanctions against Iran, closing gaps from previous measures, including trade in precious metals. Obama, who opposes the move on the grounds it may undercut existing efforts to rein in the nation’s nuclear ambitions, signed an executive order in July restricting gold payments to Iranian state institutions. Turkey exported $11.9 billion of gold in the first 10 months of the year, according to the Ankara-based statistics agency’s website. A very large 85% of the shipments went to Iran and the United Arab Emirates. Iran is buying the gold with payments Turkey makes for natural gas it purchases in liras, Turkish Deputy Prime Minister Ali Babacan told a parliamentary committee in Ankara on Nov. 23.
There is a one way conveyor belt taking businesses, jobs and money out of this country.
So just what is below "stall-speed" growth in the New Normal? And with 48 out of 49 economists now predicting what we said would happen back in September, namely that the Fed will go all in with QEternity+1 and take its balance sheet to $4 trillion (and then $5 trillion in 2014) yet firmly holding their 2013 year end GDP forecast at 2.0%, lower than Q3 2011's 2.7%, does it mean that even $1 trillion in additional flow and stock from the Fed can barely keep the economy above the Old Normal stall speed definition? What exactly would happen if the Fed were to not monetize hundreds of billions in debt? We shiver to even think.
The US Census Bureau reported that in October, the total deficit with China hit a record $29.5 billion. What did America need to export so much that it is willing to impair its GDP (net imports are a GDP drain) and boost the GDP of China? "Primarily computers and toys, games, and sporting goods." In other words, gizmos and iPhones. And no, China did not buy US bonds - recall that China has boycotted US Treasurys for precisely one year - so the age old equality that we export China worthless paper in exchange for just as worthless gizmos, yet somehow everyone benefits, is no longer valid. What the US does, however, export to China, is inflation, courtesy of the USDCNY peg, and is the reason why the PBOC is still terrified, and certainly will be after Bernanke announces QE4EVA (RIP QEternity) tomorrow, to ease more as the last thing it can afford is to create its own inflation in addition to importing America's.
The boost to GDP from the declining US trade deficit is over. While the September trade deficit number was revised further lower, to $40.3 billion from $41.5 previously, October saw a pick up to $42.2 billion, slightly less than the expected $42.7 billion, but a headwind to Q4 GDP already. As a result, expect a modest boost to Q3 GDP in its final revision, even as Q4 GDP continues to contract below its consensus of sub stall-speed ~1%. The reason for the decline: a 3.6% decline in exports of goods and services. This was the biggest percent drop in exports since January 2009 as the traditional US import partners are all wrapped in a major recession. What helped, however, was the offsetting drop in imports by 2.1%, the lowest since April 2011, as US businesses are likewise consumed by a concerns about the global economy. And without global trade, whose nexus just happens to be Europe, there can be no global or even regional recovery. So far, all hopes of a pick up in global economy have been largely dashed. Yet one country benefits from the ongoing US slump is China: imports from China - consisting primarily of computers and toys, games, and sporting goods- jumped 6.4% to a record $40.3 billion, offset be a modest rise in exports - primarily soybeans - to $10.8 billion, bring the China deficit to a record $29.5 billion from $29.1 billion in September. Of course, one wouldn't get that impression looking at the Chinese side of the ledger: the Chinese Customs department, reported a September and October trade surplus with the US amounting to $21.1 and $21.7 billion. One wonders, somewhat, where the over $16 billion difference has gone.
In a session that has been largely quiet there was one notable macro update, and this was the German ZEW Economic Sentiment survey, which after months in negative territory, surprised to the upside in December, printing at 6.9, on expectations of a -11.5 number, and up from -15.7. This was the first positive print since May, and in stark contrast with the dramatic cut of German GDP prospects by the Bundesbank from last Friday, which saw 2013 GDP slashed by 75% from 1.6 to 0.4%. In fact, moments after the ZEW report, which is mostly driven by market-sentiment, in which regard a soaring DAX has been quite helpful, the German RWI Institute cut German 2012 and 2013 GDP forecasts from 0.8% to 0.7% and from 1% to 0.3%. In other words, any "confidence" will have to keep coming on the back of the market, and not the economy, which is set to slow down even further in the coming year. But for a market which will goalseek any and all data to suit the narrative (recall the huge miss in US Michigan consumer confidence which lead to a market rise), this datapoint will undoubtedly serve as merely another reinforecement that all is well, when nothing could be further from reality. Also, since we live in interesting "Baffle with BS" times, expect the far more important IFO index to diverge once again with its leading ZEW indicator (as it did in November) - after all everyone must be constantly confused and live headline to positive headline.
Nationalizations and protectionism have run into a buzz saw.
We have been tracking the deterioration of the US dollar's technical tone over the past three weeks. That ended abruptly. Weak euro area data, a more dovish than expected ECB, and heightened political uncertainty in Italy, saw the euro reverse lower after briefly moving above an eighteen month-old downtrend.
The UK also cut its growth outlook, and poor data increases the likelihood that the BOE may have to resume its gilt purchases in the new year, though consumer inflation expectations have ticked up recently.
At the same time, there appears to be little progress on the US fiscal talks. Whenever a top official signals this, the dollar seems to tick up on risk-off considerations, though with diminishing impact. The stronger than expected November employment data is not sufficient to stay the Fed's hand and the FOMC will most likely expand the long-term assets purchased under QE3+ at its meeting that concludes on December 12.
The US dollar extended yesterday's gains and remain bid ahead of the November jobs report. The deterioration of the economic and political situation in the euro area appears to be the single biggest factor behind the greenback's sharp recovery. The dollar is little changed against the yen as the market grapples with the implication of the earthquake and tsunami.
Asian equity markets were mostly higher with the MSCI Asia-Pacific Index was up about 0.25% and,. of note, the Shanghai Composite extended this week's recovery, gaining 1.6% to bring the weekly advance to 4.1%. European bourses are bit heavier. Spanish and Italian bonds remain under pressures, while Greek bond yields continue to fall as a the bond buy back offer expires today and the market anticipates a successful conclusion.
We share five observations today.
A consolidative tone threatening to emerging in the foreign exchange market, as prices churn awaiting not only today's press conference following the ECB meeting, but also tomorrow's US employment data and prospects for an expansion of QE3+ at next week's FOMC meeting.
Five major central banks were to meet this week, with only the Reserve Bank of Australia poised to act. They did cut rates, but the accompanying statement did not tip the hand of the next move. The market took advantage of the jobs data's favorable optics to reduce the likelihood of a follow up cut in February to about 50/50.
The details of the employment report were really weaker than it appeared. The 13.9k increase in jobs is misleading as it was driven exclusively by part-time jobs. Full time work actually fell 4.2k, the first decline in four months. The unexpected decline in the unemployment rate to 5.2% from 5.4% in Sept and Oct was a function of a decline in the participation rate. The Australian dollar has traded now (barely) on both sides of yesterday's range. Offers in the $1.05 area continue to slow the Aussie's ascent.
When it comes to firmly established, currency-for-commodity, self reinforcing systems in the past century of human history, nothing comes close to the petrodollar: it is safe to say that few things have shaped the face of the modern world and defined the reserve currency as much as the $2.3 trillion/year energy exports denominated exclusively in US dollars (although recent confirmations of previously inconceivable exclusions such as Turkey's oil-for-gold trade with Iran are increasingly putting the petrodollar status quo under the microscope). But that is the past, and with rapid changes in modern technology and extraction efficiency, leading to such offshoots are renewable and shale, the days of the petrodollar "as defined" may be over. So what new trade regime may be the dominant one for the next several decades? According to some, for now mostly overheard whispering in the hallways, the primary commodity imbalance that will shape the face of global trade in the coming years is not that of energy, but that of food, driven by constantly rising food prices due to a fragmented supply-side unable to catch up with increasing demand, one in which China will play a dominant role but not due to its commodity extraction and/or processing supremacy, but the contrary: due to its soaring deficit for agricultural products, and in which such legacy trade deficit culprits as the US will suddenly enjoy a huge advantage in both trade and geopolitical terms. Coming soon: the agri-dollar.
In Part I, we looked at the period prior to and during the time of what we now call the Classical Gold Standard. It should be underscored that it worked pretty darned well. Under this standard, the United States produced more wealth at a faster pace than any other country before, or since. In Part II we focus on the Post-1913 (Fed to Nixon) era and the fact that - for many reasons, politicians felt that a quasi-government agency could make better credit decisions than the market. This regime was unstable, as economists such as Jacques Rueff and Robert Triffin realized. Since then, it has become obvious that without the anchor of gold, the monetary system is un-tethered, unbounded, and unhinged. Capital is being destroyed at an exponentially accelerating rate, and this can be seen by exponentially rising debt that can never be repaid, a falling interest rate, and numerous other phenomena.
The dollar rises for the same reason gold and grain rise: scarcity and demand. Which is easier to export: manufactured goods that require shipping ore and oil halfway around the world, smelting the ore into steel and turning the oil into plastics, laboriously fabricating real products and then shipping the finished manufactured goods to the U.S. where fierce pricing competition strips away much of the premium/profit? Or electronically printing money and exchanging it for real products, steel, oil, etc.? I think we can safely say that creating money out of thin air and "exporting" that is much easier than actually mining, extracting or manufacturing real goods. This astonishing exchange of conjured money for real goods is the heart of the "exorbitant privilege" that accrues to the issuer of the global reserve currency (U.S. dollar). To understand the reserve currency, we must understand Triffin's Paradox.