From Complacency To Crisis Around The World

Tyler Durden's picture

We have discussed the CRIC cycle a number of times - especially with regards Europe - but it seems the never-ending story of Crisis-Response-Improvement-Complacency has struck once again as Morgan Stanley notes when complacency becomes pervasive, it usually gives way to a renewed crisis. Complacent financial markets appear to be looking through the fact that the global economy remains stuck in a 'twilight zone' between expansion and recession. Dismissing weak PMIs in China and EU, markets have feasted in QEternity and OMT and this has, as expected, affected European policy-makers (e.g. ongoing disagreements over the details of the much-anticipated negative-feedback-loop-breaking banking union; and Spain/Italy's 'belief' they can avoid an ESM 'austerity' program). 


The Einhorn Cycle...


Via Brevan Howard:


The recovery in the US continues to be subdued, with the latest jobs report looking especially bleak. Payroll employment rose by only 96,000 and prior months’ gains were revised down. Smoothing through the monthly volatility, job creation has slumped below 100,000 over the last four months. Although the unemployment rate declined to 8.1%, this was only because many workers have given up looking for jobs. In fact, the labor force participation rate has fallen to a multi-decade low. Perhaps most alarmingly, hints of deflation are creeping into wages as average hourly earnings have declined outright since last month.


Hopes that activity would pick up meaningfully in the second half of the year have obviously been dashed. The labor market is stuck in low gear and GDP growth is tracking below 2%. The sectors of the economy that had been leading the expansion now appear to be vulnerable. Orders for core capital goods have fallen below shipments which usually means that business investment is on the verge of falling into recession. Forward-looking indicators for manufacturing are also sobering. In the most recent survey of manufacturing supply managers, orders contracted for the third consecutive month. Clearly, businesses are concerned about global growth as well as home-grown worries about the fiscal cliff looming at the start of 2013. Housing remains a bright spot, with new construction, sales and prices all trending upward. Unfortunately, the housing sector is too insignificant as a share of the overall economy to offset the sluggishness in other sectors.


With both growth and the labor market disappointing and measures of core price inflation falling, the Federal Reserve ("Fed") confirmed additional quantitative easing on 14 September. At its last meeting, the Federal Open Market Committee pointed to action by saying that they would “closely monitor” developments and provide additional monetary accommodation “as needed". The minutes stated that additional easing would likely be “fairly soon” if there is not a “substantial and sustainable” improvement in growth. The preferred options are Treasury and MBS purchases as well as extending and perhaps enhancing the policy commitment to keep rates low into 2015 as the recovery further progresses. These measures may provide a safety net for the economy but are not expected to add more than one-quarter to one-half of a percentage point to GDP growth. Even after Fed action, the economy is anticipated to face serious downside risks.


In the second quarter, EMU GDP contracted by -0.2% quarter-on-quarter, marking the beginning of a renewed recession period. In August, the Composite EMU PMI declined further, but only slightly. Noticeably, the German PMI continued to fall, to as low as 47.0, a value almost in line with the EMU average. Orders were lower than the EMU average. The unemployment rate continues to be the key worry, reaching previously unseen peaks in Spain and Greece, and new highs in Italy also. Owing to increases in VAT in some member states, as well as the hikes in energy and food prices, inflation rates in the euro area are creeping upwards despite the economic slowdown.


In the September policy meeting, the ECB decided to keep all its policy rates unchanged, as the staff revised the GDP projections downwards and HICP projections upwards. In the questions and answers session, President Draghi was not encouraging of an imminent rate cut decision, although the Introductory Statement highlighted that the Council envisages downside risks around the new GDP projections. Crucially, the ECB disclosed details of the new bond market program (Outright Monetary Transactions, or OMT):


(i) the program will target bonds with 1-3 years maturity;

(ii) no quantities are set ex-ante;

(iii) the purchases will be sterilized;

(iv) in terms of seniority purchases will be treated pari-passu to the private sector;

(v) neither the intervention targets for bond yield levels nor the indicators that would guide the ECB purchases were specified;

(vi) conditionality will be strict, and;

(vii) the IMF will participate in the surveillance of the programs.


The ECB also modified its collateral requirements so that countries in the OMT would see their minimum credit rating thresholds for sovereign bonds removed. The initial market reaction to the ECB announcement was positive, as investors seemingly considered it an important step in supporting the peripheral economies in their adjustment effort. The attention is now turning to Spain, which is considered likely to be the first country to apply for the program, and to what will be the additional conditionality required for them to qualify.


Some unusual holiday patterns related to this year’s Jubilee celebrations caused distortions in the monthly and quarterly data (temporarily pulling down second quarter growth and pushing up third quarter growth) of around 0.0-0.5%, which highlights the weak underlying growth trend. This has created some confusion as it led to some excessive pessimism in the second quarter, and might cause some unjustified optimism during the third quarter.


The bigger picture is that UK growth is somewhere between the US (growth slightly below trend) and the eurozone (recession). What UK policymakers were hoping for is that the three major headwinds - household deleveraging, bank deleveraging and fiscal austerity - would be partly offset by an investment and export recovery, assisted by a weak currency. However, with 50% of the UK’s exports going to the eurozone, an export-led recovery is not viable. While exports to the rest of the world have risen 10% over the past year, this has been entirely offset by eurozone exports which are down 10%.


Meanwhile, domestic headwinds show no sign of abating. Credit growth to households and firms has been zero for four years now and the housing market remains stagnant in both activity and prices. On the inflation front, there have been some upward revisions in near-term forecasts due to energy and food prices however the medium-term picture remains benign. Inflation expectation surveys are close to long-run averages and wage growth remains subdued. Recent currency strength is also anticipated to put downward pressure on inflation and is a further unwelcome impediment to the rebalancing of the economy towards exports.


Currently, the BoE’s QE target of GBP 375bn is expected to be reached in November. In recent months, the BoE has also launched a Funding for Lending Scheme, intended to lower bank funding costs and generate loans for the real economy. There has been progress towards lowering bank funding costs, but it is too early in the program to assess progress against the second goal. Fiscal policy has not yet wavered from the mantra of “sticking with the austerity plan”. Disappointing growth figures have led to a higher deficit path via automatic stabilizers, but have been accompanied by promises of further austerity in years to come. With tight fiscal policy, ongoing domestic deleveraging headwinds, and an EMU recession continuing to hinder UK recovery prospects, weak growth and monetary stimulus look set to continue.


Activity in Japan continues to slow in the third quarter, following a disappointing second quarter. Indeed, second quarter GDP was revised downward, now showing a growth rate of only 0.7% quarter-on-quarter annualized, half of the growth shown by the initial release. Furthermore, at the beginning of the third quarter, actual data indicated further deceleration both in domestic and external demand. In July, private consumption fell by 0.5% month-on-month ("m/m"), to a level 0.9% lower than the second quarter average; export volumes contracted by 3.1% m/m, and were about 4.5% lower than in the second quarter; and, to complete the dismal picture, industrial production also dropped by 1.2% m/m, disappointing market expectations of an expansion, to a level 2% lower than that recorded in the second quarter.


Conditions are in place for another fall in GDP during the third quarter. However, in August, indications provided by surveys were more mixed. While the weakness in manufacturing seems to be continuing, due especially to an on-going deterioration in global demand – the manufacturing PMI fell further – some indicators more geared on domestic demand like the services PMI or consumer confidence indicators improved. The deteriorating business cycle has not yet reached the labor market, which remains stable, as indicated by both the unemployment rate, at a low 4.3%, and the job-to-applicant ratio. The rate of deflation also remains constant, with the CPI index excluding both food and energy contracting in July at a pace of 0.6% year-on-year ("y/y"), like in June.


The Chinese economy continues to experience a soft patch. In August, the official manufacturing PMI fell to 49.2, the lowest level since December 2011, while the HSBC PMI dropped to 47.6, the lowest level since April 2009. This weak PMI data shows a renewed slowdown in manufacturing activity as de-stocking continues and new orders are yet to catch up. Indeed, actual industrial production continued to slow, from 9.2% y/y in July to 8.9% y/y in August. The rest of the economy is somewhat more robust, as both the official Chinese non-manufacturing PMI and the HSBC Services PMI are fluctuating around higher levels. Overall, China's growth rate is likely to slow further in y/y terms in the third quarter.


There are some signs that inflation has bottomed out, as the y/y CPI growth rate rebounded to 2% in August. Both input and output price indices of the non-manufacturing PMI jumped sharply to over 50, while input prices in the manufacturing PMI rebounded although remaining below the 50 threshold. Perhaps more importantly, property prices continued rising in August for the third consecutive month. Policy-wise, the People's Bank of China continues to use reverse repo to inject liquidity rather than reducing the reserve requirement ratio or cutting rates as expected by the market, in response to concerns about the renewed rise in property prices. With no aggressive easing in the pipeline despite weakening growth, China’s activity is anticipated to remain subdued for a prolonged period.

But apart from all that concern: World Wealth (according to Credit Suisse's indicator) has just reached all-time highs...


This feels eerily like the March/April period when post-LTRO improvements induced euphoria in traders and governments/ECB to relax prematurely and as Brevan Howard explains above - every major developed economy is facing significant downside risks - no matter how enthusiastic markets appear to be.

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Oh regional Indian's picture

Vicious Cycle versus Virtuous cycle.

Clearly the dominant paradigm is Vicious.

It's a debt "Fueled" world. It will burn. Inevitability. The clues are in the language.



macholatte's picture



Interesting that the chart above might coincide with the massive amount of new debt.....

Mantra: wealth = debt?


If you make $33,500 a year, you are among the richest 5% in the world.

There are 6.2 billion people less wealthy than you.


World Wealth Calculator

Precious's picture

A long way to fall for all those in America with Chronic Affluency Syndrome.

macholatte's picture


Debt = Wealth = Freedom = Slavery



If the ESM gets approval to use the same leverage techniques as the EFSF, it would have a lending power of around 2 trillion euros without countries having to contribute any more capital to the fund.

Euro zone to boost bailout fund firepower to 2 trillion euros: report

All Risk No Reward's picture

Debt Money Tyranny flow charted in PDF format

Spread the word.

There is no way out until we kick the "Money Power" to the curb.

“This Act establishes the most gigantic trust on earth.…When the President signs this Act, the invisible government by the Money Power, proven to exist by the Money Trust Investigation, will be legalized.…The money power overawes the legislative and executive forces of the Nation and of the States. I have seen these forces exerted during the different stages of this bill.…”
~Congressman Charles A. Lindbergh, referring to the act which established the Federal Reserve. Congressional Record, Vol. 51, p. 1446. December 22, 1913.

“Under the Federal Reserve Act, panics are scientifically created. The present panic is the first scientific one, worked out as we figure a mathematical equation.”
~Congressman Charles A. Lindbergh, The Economic Pinch, 1921.


resurger's picture

" The losses will be incalculable "


Ralph Spoilsport's picture

From Richard Fisher,  President and CEO of the Federal Reserve Bank of Dallas:

"The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course."

LMAOLORI's picture



The common man on the street could tell those jokers what's the matter with the economy too many people with out jobs, too much spending by government, too much free money (IOER $4 Billion a year not to lend) for member banks and the Fed policies favor the rich. Be afraid very afraid that we have people like that in power because all they will do is more of the same.

Fed’s Kocherlakota Backs EVEN More Stimulus in Policy Reversal

OneTinSoldier66's picture

Too much money out of thin air TBTF Banksterism.

poor fella's picture

It's sooooo simple. Developed countries need SHIT JOBS! Having a shit job is better than being unemployed - period. And people would be happy to do them. I've worked my share of crappy jobs for crappy bosses - but I knew is wasn't permanent. I'd learn something and move on. If you're out of high school and can't find a job, your screwed. If you graduate college and can't find a job, you're screwed and wrapped in a debt burden.

Close all tax loopholes protecting outsourcing and face reality that just-in-time production and supply chains are a short-lived benefit to the wealthy, C-suite, and Ponzi Street that isn't sustainable. Globalization is an utter failure that will bring about worldwide unrest. OWS' new mantra should be "SHIT JOBS, SHIT JOBS, SHIT JOBS". 


Snakeeyes's picture

So Congress and the Administration stage the single biggest tax increase in history? And the Fed buys billions in MBS to compensate? THIS IS MADNESS!!!!!!!!!!!!!!!!!

vinayjha's picture

Robo computer will look for headline and if the headline says "easing" "bailout" "bond buying" it will only push stock higher, no matter if the headlines are two year old. The crash is difficult unless any hacker publishes news on reteurs, " that greece is broken" It will be interesting to see how robo computer then react.


timbo_em's picture

According to German weekly Spiegel the troika geniuses discovered that the hole in the Greek budget is lightly larger than expected - 20B instead of 11.5B. I did not see that coming...NOT!

And while a few weeks back the Greek PM Samaras promised ze Germans to pay back every Euro even if it has to come from his own account, he is pushing for OSI behind the scenes.

edit: good piece by Peter Tchir about QE:

LULZBank's picture


a few weeks back the Greek PM Samaras promised ze Germans to pay back every Euro even if it has to come from his own account

Does he happen to be a politician by any chance?

Colonel Klink's picture

He didn't mean it.  His lips were moving.

Heroic Couplet's picture

Ray Dalio was running his mouth about "oooh it's gonna be Hitler" Maybe it's gonne be Ray Dalio taking up the a4se and neither Hitler nor Main Street will notice or care.

Scalaris's picture

It has become clear, that what we need is, some more announcements, about some more announcements.

q99x2's picture

That is not a graph of the health of US corporations that is a graph of how Obama fixed the economy.

kevinearick's picture

Survival of the unfittest

LULZBank's picture

OT but have to mention: "Support the property market with your pension or else we'll do it for you."

falak pema's picture

I feel like I'm on that circle when I come to Zh, round n round all the time.

DR's picture

LOL...That "World Wealth" chart  looks more like a bubble reflation,,,

ShakaZulu's picture

I bet that champagne party bubble occurs right around the same time Bilderberg meets.

Jake88's picture

It is different this time. there will never again be a crash, because the Fed has our back. Free money for everyone forever.

poor fella's picture

If 'free money' actually trickled down to Main Street and retained buying power, the Fed might be seen in a different light. As if maybe they were trying to help avoid depression.

But since nobody outside The Ponzi Street Banksters Club sees any benefit, money is devalued daily, and depression is one headline away, there will be a crash - the one that "nobody saw coming".

orangegeek's picture

World Wealth (according to Credit Suisse's indicator) has just reached all-time highs...


The perfect nugget of news that is typically found at a major top.


Primary wave 3 is ready to get rolling.

zorba THE GREEK's picture

World wealth has reached an all-time high. Now if those five guys would share some of that wealth

with the rest of us, that would be nice.

Stuck on Zero's picture

One step or two missing from the circle:

The banksters steal more from the public treasury.

Taxes are raised on the middle class.



SheHunter's picture

..."Payroll employment rose by only 96,000"...
..."prior months’ employment gains were revised down"...
...job creation slumped below 100,000"...
..."labor force participation rate at multi-decade low"...
..."average hourly earnings declined since last month"...

and then in the next para:

..."Housing remains a bright spot, with new construction, sales and prices all trending upward"...

You say WHAT? Housing UP? WHO is buying? Certainly not those who have stumbled into the long line of un-employed, under-employed or self-employed American workers.

These stats do not match one another.

MFLTucson's picture

You fuckin idiots think we can do 4 more years of this imposter/american hater?

Haager's picture

Another imposter would be little different, you know?

Alpha Monkey's picture

Check this out and see if it enlightens you a bit.  Left, right, that only matters for those unable to see the whole picture.  At the top, they are the same entity.

Grand Supercycle's picture


Due to recent central bank intervention and short covering spikes, these daily charts are extremely overextended and significant correction expected very soon: