The global economy’s glory days are surely over. Yet policymakers continue to focus on short-term demand management in the hope of resurrecting the heady growth rates enjoyed before the 2008-09 financial crisis. This is a mistake. When one analyzes the neo-classical growth factors – labor, capital, and total factor productivity – it is doubtful whether stimulating demand can be sustainable over the longer term, or even serve as an effective short-term policy. Instead, policymakers should focus on removing their economies’ structural and institutional bottlenecks. In advanced markets, these stem largely from a declining and aging population, labor-market rigidities, an unaffordable welfare state, high and distorting taxes, and government indebtedness.
With emerging markets in panic mode, investors are bound to be reminded of the enduring observation, first made by a 19th century British businessman named John Mills, that: “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal in hopelessly unproductive works.” With that in mind, investors seem happy to link the ongoing emerging market sell-off to either a) China’s large capital misallocation triggered by the 2008-11 credit boom or b) the Federal Reserve’s promise to start tapering last May, followed up now by the real thing. But could there perhaps be another explanation?
A Comedy Of IMF Forecasting Errors: Global Trade Growth Tumbles More Than 50% From IMF's 2012 PredictionSubmitted by Tyler Durden on 01/21/2014 10:33 -0500
The most notable feature of today's set of numbers is the IMF's forecast of world trade. In a word: it is crashing. Consider that 2013 world trade was expected to grow by 5.6% in April 2012. Now: it is more than 50% lower at just 2.7%! Yet what is truly hilarious and certainly head scratching, is that somehow the IMF now anticipates a pick up in global growth in 2014 from its previous forecast of 3.6% to 3.7%, even as global trade is revised lower once more to the lowest prediction for 2014:, and currently stands at just 4.5% compared to 4.9% in October 2013 and 5.5% a year ago (it goes without saying that the final global trade number for 2014 will be well lower than the IMF's optimistic forecast). How global GDP is expected to grow on the margin compared to previous forecasts even as trade contracts is anyone's guess...
... We have created an apparently wonderful economic model that seems to provide us with so many benefits. When you consider the incredible feats of technology and the global consumerist lifestyle we enjoy it is easy to marvel at what has been achieved. Of course what may be less obvious is the dark side of the growth economic model which is deeply inequitable, restricting its benefits to the relative elite in the western world and trapping the rest of the world in poverty. Most dangerous of all is the unsustainability of the model and where it is taking us in the future. There is now a perfect storm gathering that includes economic indebtedness, resource shortages, population pressures, and climate change that is guaranteed to derail civilisation. Despite this the political and economic mainstream are largely in denial about what is happening– like the hapless engineer and politician in the story everyone agrees that we must restart the ‘growth economy’ and continue to progress down the business as usual pathway. Very few people are taking the long term view and watching the direction towards doom that this pathway leads us. Too invested in the benefits of our current lifestyle, no one wants to hear the counsel of the philosopher who sees the disaster that looms ahead.
At this point, the problem of hitting limits in a finite world has morphed into primarily a financial problem. Governments are particularly affected. They find that they need to borrow increasing amounts of money to provide promised services to their citizens. Debt is a huge problem, both for governments and for individual citizens. Interest rates need to stay very low, in order for the current system to “stick together.” Governments are either unaware of the true nature of their problems, or are doing everything they can to hide the true situation from their constituents. The public has been placated by all kinds of misleading stories about how oil from shale will be the solution. Quantitative Easing (used by governments to lower interest rates) has temporarily allowed stock markets to soar, and allowed interest rates to stay quite low. So superficially, everything looks great. The question is how long all of this will last?
Sir Halford Mackinder’s 1904 speach in which he outlined his “Heartland Theory” was a founding moment for geo-politics. He argued that control of the Eurasian landmass (Europe, Asia and the Middle East), which contained the bulk of the world’s population and natural resources, was the major geo-political prize. As time passed, energy (first crude oil then natural gas), became increasingly integral to this concept and its strategic significance cannot be overstated. Remarkably, Mackinder’s theory has remained equally valid, if not more so, in the modern era - although key “pivot areas” for exercising control have evolved. In addition to Central Asia and Trans-Caucasus in Mackinder’s day, the oil producing nations of the Middle East took on increasing importance in the “New Great Game”. We see a “New New Great Game” emerging.
Even Before 9/11, NSA Knew In Real-Time Which Countries Both Parties to Phone Calls Were In
The world economy has experienced another year of subdued growth, having failed to meet even the most modest projections for 2013. Most developed economies continued trudging along toward recovery, struggling to identify and implement the right policies. Meanwhile, many emerging economies encountered new internal and external headwinds, impeding their ability to sustain previous years’ economic performance. Nonetheless, some positive developments in the latter part of the year are expected to gain momentum through the coming year. But the global economy is still subject to significant downside risks. In short, while the global economic outlook for 2014 has improved, policymakers worldwide must remain vigilant about downside risks and strengthen international cooperation. Developments in 2013 provide strong incentive for policymakers to do so.
While cash flows may be an anachronism in a time when the return of the dot com bubble means only future corporate prospects of growth matter, and the lower the actual profits or earnings the greater the upside stock potential due to ridiculous future PE multiples (flashing back to the year 2000), for some the lifeblood of success is still dependent on cash flow. Or the lack thereof. Such as Greece, where a brief episode known as the "Grecovery" driven by a recent export surge was put on indefinite hiatus where as Kathimerini says "exports run out of steam due to cash flow problems." It explains: "The rise of Greek exports sadly proved short-lived, as the momentum observed in the last couple of years has all but vanished. Exporters estimate that 2013 will end with a rise of 3 to 4 percent. But that figure includes fuel products, and when they are taken out of the equation it turns into an annual drop of 2 to 3 percent."
See why the Fed is unlikely to taper in December, but Q1 14 is much more likely. Read a preview of the highlights from the week ahead.
- Wonder why: JPMorgan plans to keep pay roughly flat from last year (Reuters) - maybe this: Charles Schwab Warns "We Are In A Manipulated Market"
- Democrats overturn filibuster rule, increasing Obama’s power (FT)
- Day JFK Died We Traded Through Tears as NYSE Shut (BBG)
- When even dictators snub Obama - Afghanistan rejects U.S. call for quick security deal (Reuters)
- Obama Plunges in Investor Poll as Stocks Make New Highs (BBG)
- Iran, six powers struggle to overcome snags in nuclear talks (Reuters)
- Derision for China’s ‘rejuvenation index’ (FT)
- Bottom is in: Paulson Said to Inform Clients He Won’t Add More to Gold (BBG)
- German business sentiment rebounds strongly (WSJ)
- WTO on verge of global trade pact (FT)
The financial crisis of 2007-2008 has sparked the most intense interest in international monetary reform since Richard Nixon closed the gold window at the New York Fed and devalued the U.S. dollar in 1971.
While chart analogs provide optically pleasing (and often far too shockingly correct) indications of the human herd tendencies towards fear and greed, a glance through the headlines and reporting of prior periods can provide just as much of a concerning 'analog' as any chart. In this case, while these 3 pictures can paint a thousand words; a thousand words may also paint the biggest picture of all. It seems, socially and empirically, it is never different this time as these 1936 Wall Street Journal archives read only too well... from devaluations lifting stocks to inflationary side-effects of money flow and from short-covering, money-on-the-sidelines, Jobs, Europe, low-volume ramps, BTFD, and profit-taking, to brokers advising stocks for the long-run before a 40% decline.
- China Pledges Greater Role for Market in Economy (WSJ), China vows 'decisive' role for markets, results by 2020 (Reuters)
- China expected to cut growth target to 7% (FT)
- World Trade Center Tower Debuts in Manhattan Leasing Test (BBG)
- Job Gap Widens in Uneven Recovery (WSJ)
- Khamenei’s conglomerate thrived as sanctions squeezed Iran (Reuters)
- Swiss referendum on wages of high earners stirs debate (FT)
- Obama to Nominate Massad to Head CFTC (WSJ)
- Japan readies additional $30 billion for Fukushima clean-up (Reuters)
- Target Fills Its Cart With Amazon Ideas (WSJ)
- Shadow banks reap Fed rate reward (FT)
"We’re seeing a new era of currency wars," Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon in London. This is what Bloomberg reported today in a piece titled "Race to Bottom Resumes as Central Bankers Ease Anew." For the most part Bloomberg's account is accurate, although it has one fundamental flaw: currency wars never left, but were merely put on hiatus as the liquidity tsunami resulting from the BOJ's mega easing lifted all boats for a few months. And now that the world has habituated to nearly $200 billion in new flow every month (and much more when adding China's monthly new loan creation), the time to extract marginal gains from a world in which global trade continues to contract despite the ongoing surge in global liquidity, central banks are back to doing the one thing they can - printing more. So what should one watch for now that even the MSM admits the currency wars are "back"? Goldman lists the 5 key areas to watch as central banks resume beggar thy neighbor policies with never before seen vigor.