The Central Banks have turned us into dispensible members of the Suicide Squad
At a press briefing, China revealed its growth target for the year and for the first time since 1995, it’s a range rather than a set number. The economy will grow between 6.5% and 7% in 2016, Xu said in a tacit admission that things are indeed slowing down for the engine of global growth and trade. More notable than the growth target were comments from National Development and Reform Commission Chairman Xu Shaoshi on the country’s acute overcapacity problem, defaults, and social unrest.
Instead of looking at the rise of the NASDAQ to bubble territory and using that as a basis to assume the economy is strong, it is more useful to look at real assets like commodities. For real economic growth, commodities matter much more than a money printing drive to inflate stocks like biotech and technology.
While the biggest news of the night had nothing to do with either oil or China, all that mattered to US equity futures trading also was oil and China, and since WTI managed to rebound modestly from their biggest 2-day drop in years, rising back over $30, and with China falling only 0.4% overnight after the National Team made a rare, for 2016, appearance and pushed stocks to close at the day's high, US E-minis were able to rebound from overnight lows in the mid-1880s, and levitate above 1900. Whether they sustain this level remains to be seen.
"The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities.... As a result of the severe decline in real activity and subdued inflation, short-term Treasury rates fall to negative ½ percent by mid-2016 and remain at that level through the end of the scenario."
It certainly does feel like groundhog day today because while last week's near record oil surge is long forgotten, and one can debate the impact the result of last night's Iowa primary which saw Trump disappoint to an ascendant Ted Cruz while Hillary and Bernie were practically tied, one thing is certain: today's continued decline in crude, which has seen Brent and WTI both tumble by over 3% has once again pushed global stocks and US equity futures lower, offsetting the euphoria from last night's earnings beat by Google which made Alphabet the largest company in the world by market cap.
Today’s plunging oil prices will benefit a few. Motorists, once again, will be happy; but the pain will be earth-shaking for many others. Never mind the inevitable turmoil in global financial markets or the collapse of shale-oil production in the United States and what it implies for energy independence. The real risk lies in countries that are heavily dependent on oil. As in the old Soviet Union, the prospects for social disintegration are huge. Europe is already struggling to accommodate refugees from the Middle East and Africa, imagine what would happen if they imploded and their disenfranchised, angry, and impoverished residents all started moving north.
"Unless the root causes of popular discontent are addressed (uneven growth, pockets of high unemployment and weak wage growth), the protest vote is unlikely to go away. In fact, it may well grow."
After last week's relatively quiet, on macro data if not central bank news, week the newsflow picks up with the usual global PMI survey to start, and end the week with the US January payrolls report.
It didn't take much to fizzle Friday's Japan NIRP-driven euphoria, when first ugly Chinese manufacturing (and service) PMI data reminded the world just what the bull in the China shop is leading to a 1.8% Shanghai drop on the first day of February. Then it was about oil once more when Goldman itself said not to expect any crude production cuts in the near future. Finally throw in some very cautious words by the sellside what Japan's act of NIRP desperation means, and it becomes clear why stocks on both sides of the pond are down, why crude is not far behind, and why gold continues to rise.
"Cash had a pretty good run for 4,000 years or so. These days, though, notes and coins increasingly seem declasse: They're dirty and dangerous, unwieldy and expensive, antiquated and so very analog.... Much depends on the details, of course. But this is a welcome trend. In theory, digital legal tender could combine the inventiveness of private virtual currencies with the stability of a government mint."
"The nominal GDP of the industrialized world has grown just 4.1% since the lows of Q1’2009, one of the tiniest, deflationary expansions ever. And while asset prices are up significantly since their 2008/09 lows, the underlying message from Wall Street in recent years has been doggedly deflationary."
That American Dream thing is a going up in smoke. Upward mobility has stalled, and stagnation is setting in. Skyrocketing costs and shrinking opportunity are meeting head on with full on economic disaster. The "Dude, Where’s My Stuff?" generation doesn’t have much motivation to go on for growing up and getting their life together these days.
What’s a Keynesian monetary quack to do when the economy and markets fail to remain “on message” within a few weeks of grandiose declarations that this time, printing truckloads of money has somehow “worked”, in defiance of centuries of experience, and in blatant violation of sound theory? In the weeks since the largely meaningless December rate hike, numerous armchair central planners, many of whom seem to be pining for even more monetary insanity than the actual planners, have begun to berate the Fed for inadvertently summoning that great bugaboo of modern-day money cranks, the “ghost of 1937”.