In most countries, deleveraging is only in its early stages. In a report today, McKinsey notes that total debt to GDP has declined in only three countries since the 2008-09 crisis (US, South Korea, and Australia) as total debt has actually grown in the world's ten largest mature economies (due mainly to rising government debt - Keynesian style?). Greatly concerned that the UK and Spain are slow to delever, they do note that the US is more closely following the two phase deleveraging process that 1990s Finland and Sweden followed but point to the household segment as leading the way with 15% reduction in debt to disposable income (driven unsurprisingly in major part by mortgage defaults). The bottom line is US (households) are at best one-third of the way through their deleveraging and the UK (financials) and Spain (non-financials) face much more significant pressures (which will inevitably impact aggregate demand given governmental borrowing pressures) as their deleveraging has only just begun. Historically, deleveraging has begun in the private sector and government has stepped up to borrow and fill the aggregate Keynesian hole left behind. McKinsey points out deleveraging normally takes 4-6 years which we suspect will remain an anchor for demand and growth in the mean-time (perhaps as disappointing earnings revisions are already pointing to).
European indices as well as major currency pairs are trading in slight negative territory at the midpoint of today’s session due to profit-taking and cautious sentiment dominating the market, with the worst performing sector being Oil & Gas showing volatile trading this morning. In European macro news, Greek PSI talks are closer to coming to a conclusion, with a source saying that the haircut announcement is likely to be today.
- Fed Holds Off for Now on Bond Buys (Hilsenrath)
- Bonds Show Return of Crisis Once ECB Loans Expire (Bloomberg)
- Greek Debt Talks Enter Third Day After ‘Substantial’ Discussions (Bloomberg)
- Sharp clashes at Republican debate ahead of vote (Reuters)
- Lagarde Joins Warning on Fiscal Cuts Before Davos (Bloomberg)
- Investors exit big-name funds as stars fail to shine (Reuters)
- Payday lenders plead case to consumer agency (Reuters) - the EFSF included?
- EU Toughens Fiscal Pact Bowing to ECB Objections, Draft Shows (Bloomberg)
- Minister Urges Japan to Use Strong Yen (FT)
- China Eyes Pension Fund Boost for Stock Market (Reuters)
- China Manufacturing Contraction Boosts Case for Easing: Economy (Bloomberg)
- The Fed's HFT price manipulation code stolen? U.S. Charges Programmer With Stealing Code (Reuters)
- One million homeowners may get mortgage writedowns: U.S. (Reuters)
- In MF Global, JPMorgan again at center of a financial failure (Reuters)
- China's Money Rates Slump After PBOC Injects Money (Reuters)
- Athens closes in on bondholder pact (FT) - or not
- Hedge Funds May Sue Greece If Loss Forced (NYT)
- China Said to Weigh Easing Constraints on Banks as Growth Slows (Bloomberg) - But wasn't a rate cut already priced in on Monday?
- Obama Under Attack Over Keystone Rejection (FT)
- Chinese Economy Heads for Soft Landing in 2012 (China Daily) - don't really expect "China Daily" to tell you otherwise
- Brazil Cuts Interest Rates Further to 10.5% (FT)
- India to Launch $35bn of Public Investments (FT)
Why anyone thinks that any one of a group of highly interlinked and interdependent countries heavily reliant on EU trade & toursim in a severe economic downturn facing harsh auterity measures may be doing well in the near to medium term is beyond me!
- Here we go again: IMF Said to Seek $1 Trillion Resource-Boost Amid Euro Crisis (Bloomberg)
- China said to Tell banks to Restrict Lending as Local Officials Seek Funds (Bloomberg)
- EU to Take Legal Action Against Hungary (FT)
- Portugal Yields Fall in Auction of Short-Term Debt (Reuters)
- US Natural Gas Prices at 10-Year Low as Warm Weather Weakens Demand (Reuters)
- German Yield Falls in Auction of 2-Year Bonds (Reuters)
- World Bank Slashes Global GDP Forecasts, Outlook Grim (Reuters)
- Why the Super-Marios Need Help (Martin Wolf) (FT)
- Chinese Vice Premier Stresses Government Role in Improving People's Livelihoods (Xinhua)
While his diagnosis of the balance sheet recessionary outbreak that is sweeping global economies (including China now he fears) is a useful framework for understanding ZIRP's (and monetary stimulus broadly) general inability to create a sustainable recovery, his one-size-fits-all government-borrow-and-spend to infinity (fiscal deficits during balance sheet recessions are good deficits) solution is perhaps becoming (just as he said it would) politically impossible to implement. In his latest missive, the Nomura economist does not hold back with the blame-bazooka for the mess we are in and face in 2012. Initially criticizing US and now European bankers and politicians for not recognizing the balance sheet recession, Koo takes to task the ECB and European governments (for implementing LTRO which simply papers over the cracks without solving the underlying problem of the real economy suggesting bank capital injections should be implemented immediately), then unloads on the EBA's 9% Tier 1 capital by June 2012 decision, and ends with a significant dressing-down of the Western ratings agencies (and their 'ignorance of economic realities'). While believing that Greece is the lone profligate nation in Europe, he concludes that Germany should spend-it-or-send-it (to the EFSF) as capital flight flows end up at Berlin's gates. Given he had the holidays to unwind, we sense a growing level of frustration in the thoughtful economist's calm demeanor as he realizes his prescription is being ignored (for better or worse) and what this means for a global economy (facing deflationary deleveraging and debt minimization) - "It appears as though the world economy will remain under the spell of the housing bubble collapse that began in 2007 for some time yet" and it will be a "miracle if Europe does not experience a full-blown credit contraction."
As the buy-the-ratings-downgrade-news surge on European sovereigns stalls (following a few weeks of sell-the-rumor on France for example), the ever-ready-to-comment mainstream media remains convinced that the impact is priced in and that ratings agencies are increasingly irrelevant. UBS disagrees. In a note today from their global macro team, they recognize that while the downgrades were hardly a surprise to anyone (with size of downgrade the only real unknown), the effect on 'AAA-only' constrained portfolios is important (no matter how hard politicians try to change the rules) but of more concern is the political impact as the divergence between France's rating (and outlook) and Germany (and UK perhaps) highlights harsh economic realities and increases (as EFSF spreads widen further) the bargaining power of Germany in the economic councils of Europe. Furthermore, the potential for closer relationships with the UK (still AAA-rated) increase as the number of AAA EU nations within the Euro only just trumps the number outside of the single currency. This may be one of those rare occasions where politics is more important than economics.
Gold & Silver Banker-Cartel Prolonged Price Suppression Has Set the Foundation for an Explosive Move Higher in 2012Submitted by smartknowledgeu on 01/17/2012 08:54 -0400
Recently, public interest in gold and silver and gold/silver mining stocks has been at multi-year lows. And that is a super bullish contrarian indicator.
- Greece Running Out of Time as Debt Talks Stumble (Bloomberg)
- China Economic Growth Slows, May Prompt Wen to Ease Policies (Bloomberg)
- Spain Clears Short Term Debt Test, Bigger Hurdle Looms (Reuters)
- U.S. Market Shrinks for First Time Since 2009 (Bloomberg)
- IMF, EU May Need to Give E. Europe More Help (Bloomberg)
- Securities Regulator to Relax Rules on Listing (China Daily)
- Monti Seeks German Help on Borrowing (FT)
- Draghi Questions Role of Ratings Companies After Downgrades (Bloomberg)
- Jon Huntsman Will Leave Republican Presidential Race, Endorse Mitt Romney, Officials Say (WaPo)
- Dont laugh - Plosser: Fed Tightening Possible Before Mid-2013 (WSJ)
- Greece’s Creditors Seek End To Deadlock (FT)
- France Can Overcome Crisis With Reforms – Sarkozy (Reuters)
- Nowotny Says S&P Favors Fed’s Bond Buying Over ECB’s ‘Restrictive’ Policy (Bloomberg)
- Bomb material found in Thailand after terror warnings (Reuters)
- Ma Victory Seen Boosting Taiwan Markets as Baer Considers Upgrading Stocks (Bloomberg)
- Japan Key Orders Jump; Policymakers Fret over Euro (Reuters)
- Renminbi Deal Aims to Boost City Trade (FT)
Although gold had its largest drop in the last 2 weeks on Friday, (-1.6%), it was 1.3% higher on the week and trading higher this morning. Many analysts feel that current sovereign, macroeconomic and geopolitical risks are not reflected in gold's price. Friday's news of France's loss of its AAA rating has put the European Financial Stability Facility (EFSF) at risk. The Eurozone economy resembles a large ship sailing in rough seas since France fund's 20% of the EFSF fund and 8 other members were also downgraded. This will almost certainly lead to the EFSF's downgrade which would result in the fund too paying more to borrow as credit costs rise. There are icebergs lurking in increasingly murky Eurozone waters. The European downgrades were long expected and may have been priced in the markets. The risk of a non orderly Greek default and of contagion in the Eurozone remains and is not priced into markets. It would lead to the euro falling sharply against other fiat currencies and particularly against gold.
After the fairly muted Wellington open, the reaction of the European bond markets to the S&P downgrade will be the next focus of attention. One benefit of the S&P ratings action is that it takes away one source of uncertainty. Given a French downgrade wasn't widely anticipated, market focus on this issue may well be short lived. Related to the European downgrades is the rating of the EFSF, which was also put on credit watch in early December. S&P have commented that they are in the process of evaluating the impact of the sovereign downgrades on the EFSF rating. For the AAA rating to be maintained it would require further commitments from European governments. Remaining in Europe, newswires report that Greek debt talks will resume Wednesday, thus the Greek PSI is likely to remain a focus all week.