Europe Q4 GDP declines 0.6%, and economy contracts 0.9%. No one should be surprised at the latest disappointing European GDP numbers, but they hide important trends – Germany’s Q4 0.6% GDP drop was worse than expected, although the expectations remain for growth later this year. For the rest of Europe the numbers were generally worse than expected – and no one credible is talking about significant growth prospects. (Sure, the Euro Elites are telling us they see growth tomorrow.. but tomorrow is always tomorrow..) My current interest in Spain was pricked by Blackrock CEO Larry Fink’s comments to ABC following a visit to Madrid. He reckons “Spain will be a star economy if reforms continue.” Spain last ran a balanced budget in Q1 2008 when growth was 2%. Now the economy is shrinking 1.7% on an annualised basis.” That’s a massive amount of catch up to be achieved. We are looking at another 3-4 years of economic misery just to get the Spanish economy back into the EU’s 3% deficit/GDP groove. Then we’re looking at on-going relative poverty for Spanish workers within Europe. At some point... something has to give...
It started overnight in Japan, where Q4 GDP posted a surprising and disappointing 3rd quarter of declines, then quickly spread to France, whose Q4 GDP declined -0.3% Q/Q missing expectations of a -0.2% drop, down from a +0.1% increase, then Germany, whose GDP also missed expectations of a -0.5% drop, declining from a +0.2% increase to a -0.6% drop, then on to Italy (-0.9% vs Exp. -0.6%, last -0.2%), Portugal (-1.8%, Exp. -1.0%, last -0.9%), Greece (down -6.0%, previously -6.7%), Hungary (-0.9%, Exp. -0.3%), Austria (-0.2%, down from 0.1%), Cyprus (-3.1%, last -2.0%), and so on. To summarize: Eurozone GDP dropped far more than expected, or posting a -0.6% decline in Q4, worse than the -0.4% expected, which was the largest drop since Q1 2009, and down from the -0.1% posted in Q3. And since this was a second consecutive negative quarter of GDP decline for the Eurozone, the technical recession (double dip? triple dip? is anyone even counting anymore?) in Europe too is now official.
After trending gently higher for the first half of the week, the euro has been sold to new three week lows in response to the disappointing Q4 GDP figures. The GDP figures are of course backward looking and more recent data, such as the PMI figures and German factory orders suggest the regional economy is stabilizing here in early Q1.
There is a middle step to go from the GDP figures to the euro and that is the interest rate channel. There has been some speculation that the passive tightening of the euro area financial conditions (including the shrinking of the ECB's balance sheet) and the strength of the euro would prompt the ECB to cut the refi rate later in Q1. The poor GDP readings bolster such expectations and this can be seen in short-term interest rates. The March Euribor futures contract is now implying 0.24% rate, having matched the lowest rate since Jan 23, or before the early repayment of LTRO I was announced.
How do you hedge when shots are pips? The next world war will be computerized. The global economy is on the brink and battle lines are forming with one objective, restoring economic balance. Properly engineered devaluation measures would accomplish precisely that. This is a new age of currency wars. In the past countries would directly manipulate the value of their currency with trade wars and the like. But today’s currency war is a result of unconventional monetary policy by central banks, which indirectly impacts the value of a countries currency.
Despite so much pent up hope that Japan would post a 0.4% annualized growth (and a 0.1% rise Q/Q) in its Q4 GDP, finally exiting that pesky triple dip recession it has been stuck in for the past five years, moments ago the Cabinet Office reported that contrary to optimistic expectations, in the 4th quarter the economy again contracted for the third straight quarter, this time by 0.4% annualized, and 0.1% on a Q/Q basis. This was driven by a whopping 14% SAAR implosion in exports, which should not come as a surprise to those who have been tracking the ongoing destruction of Japan's trade balance (and current account surplus). "Japan's economy may show some weakness for the time being. But it is likely to resume a moderate recovery thereafter due to the Bank of Japan's monetary easing, the effect of an emergency economic package, as well as an expected moderate recovery in the global economy," Economics Minister Akira Amari said in a statement. True: there is hope. And there is the reality that all the BOJ is doing is desperately trying to offset the loss of the Chinese export market, which courtesy of the ever escalating foreign relations snafu involving a few islands close to a massive gas field, remains as shut as ever. And as long as China refuses to assist Japan in its trade and current account deficit predicament, Amari can hope, and hope, and hope.
The rise in energy prices; the surge in food prices; and the march higher in nominal stock market indices - all symptoms of one thing - central bank (or government) policy; and CNBC's Rick Santelli is calling them to task for their two-faced ignorance. "What is the difference between outright currency manipulation versus the collateral damage to one's currency based on central bank programs?" he rhetorically asks, "in my mind, very little, but obviously, in the minds of many leaders of G-7 developed economies, there's a huge distinction." And therein lies the rub. As Japan follows Bernanke's decade-old plan to reflate by literally printing money into existence - just as every other developed fiat currency nation - their argument is that they are fighting deflation - or stimulating growth - when, in fact "The distinction between collateral damage and outright manipulation is absolute malarkey." Now that the currency wars have gone global - no matter what well-placed op-eds will try to convince otherwise - Santelli sums it all up perfectly, "in the end when you don't have a standard and you have printing and fiat currency, what level of value is real?" We remind those bullish Japanese stocks that the 11% rise in the NKY since the holidays has created 0% wealth for a USD investor thanks to the JPY destruction - ask the Zimbabweans how wealthy they felt.
As if the 20% JPY devaluation over the last few months was not enough, the Japanese government is going directly at the core of the inflation manufacturing business... they have imposed sanctions that Japan's five largest refiners cut their production by 1.1million barrels per day (or 20%). We recently noted (here and here) the rise in both the price of gasoline (at record highs) and JPY-based price of the raw material (WTI or Brent) - and it seems Abenomics can only see the upside of the inflationary cycle (as they cut supply) - as opposed to the consumer-sentiment-sapping margin-crushing deflationary impact of higher input costs to life. One thing is for sure, Abe is all-in - no matter what G-20 defense he offers. Perhaps this is why JGBs have not reacted as much - they are seeing through the short-term inflationary hope to the longer-term deflationary dump.
Reports indicating that Americans have invested more in equity funds here in 2013 than they did all last year have given rise to talk of the "Great Rotation". The idea is that Americans are selling fixed income investments bought during the financial crisis and now buying shares. We are less sanguine. There is a third asset class that needs to be integrated into the analysis: cash. After surveying the data and various reports, it looks to us that the flows into equities is not coming out of fixed income but rather money market funds and deposits.
The Eurozone is not a debt crisis that is "fixed," it is a debt crisis waiting to implode. The happy-talk that the Eurozone debt crisis has been resolved is ubiquitous. But when did ubiquitous happy-talk make it correct? Since the crisis is about debt--too much of it, and too much of it cannot and will not be paid back--then perhaps it would be prudent to look at two charts of eurozone credit.
Following yesterday's G-7 announcement which sent the USDJPY soaring, and its embarrassing "misinterpretation" clarification which undid the entire spike, by an anonymous source in the US who said the statement was in fact meant to state that the Yen was dropping too fast and was to discourage "currency wars", it was only a matter of time before another G-7 country stepped into the fray to provide a mis-misinterpretation of the original G-7 announcement. That someone was the BoE's outgoing head Mervyn King who at 5:30 am eastern delivered his inflation reporting which he said that "it’s very important to allow exchange rates to move," adding that "when countries take measures to use monetary stimulus to support growth in their economy, then there will be exchange rate consequences, and they should be allowed to flow through." Finally, King added that the BOE will look through CPI and relentless UK inflation to support the recovery, implicitly even if it means incurring more inflation.
The price action in the foreign exchange market is choppy as short-term participants seem nervous after being whipsawed yesterday. Sterling fell nearly a cent to new multi-month lows following the BOE's inflation report that confirmed official expectations that price pressures will remain above target and King welcomed the recent depreciation of the point. Also of note the Australian dollar, which staged a sharp recovery off the year's lows yesterday and has seen follow through buying today, helped perhaps by gains in a consumer confidence measure.
The was nothing in the rogue G7 sourced comment yesterday that that Japanese Finance Minister Aso did not say prior to the G7 statement and before the weekend. The pace of the yen's depreciation was too fast. The market reacted to it at the time.
5% fewer words, slightly shorter than last year but just as hope-full. From a hike (and inflation-indexed) in the minimum wage to a 140x multiplier of genome sciences investment (now that is Keynesian awesomeness); from extending homeownership (and refinancing plans) even more to energy independence; from Apple, Ford, and CAT's US Manufacturing to Bridge-Building and infrastructure spending; and from Trans-Pacific and -Atlantic Trade to cyber-security; it's all gonna be great - because as President Obama reminded us at the start... "Our housing market is healing, our stock market is rebounding," and this won't add a dime to the deficit... oh and that Student loan bubble - no worries, there's a college scorecard so now you know where to get the biggest bang for your credit-based buck. Summing it all up: Guns 9 : 3 Freedom ; Jobs 31 : 17 Tax ; Congress 17 : 40 Work ; Recovery 2 : 0 Unicorns ; Spending 3 : 2 Cutting
As debate about currency wars heats up, there's been little talk about which currencies will prove safe havens. We think the Singapore dollar tops the list.
First domestic fiscal policy, and now global monetary policy has become an utter circus:
- G7 OFFICIAL SAYS G7 STATEMENT WAS MISINTERPRETED, STATEMENT SIGNALED CONCERN ABOUT EXCESS MOVES IN JAPANESE YEN
- G-7 OFFICIAL: G-7 CONCERNED ABOUT UNILATERAL GUIDANCE ON YEN
- G7 OFFICIAL SAYS G7 IS CONCERNED ABOUT UNILATERAL GUIDANCE ON THE YEN, JAPAN WILL BE IN SPOTLIGHT AT G20 MEETING IN MOSCOW
We already mocked the G-7's original stupidity... and now they say it was not what they meant. Because what the G-7 clarification really means it that while the G-7 will supposedly "allow the market to set rates", the G-7 was not happy with how the market set rates following the G-7 statement. And... #Ref!
Confused what the earlier released statement by the G-7 means? Fear not, because here comes Goldman with a post-mortem. And just in case anyone puts too much credibility into a few sentences by the world's developed nations (whose viability depends in how quickly each can devalue relative to everyone else) in which they say nothing about what every central bank in the world is actually doing, here is a history of four years of G-7 statements full of "affirmations" and support for an open market exchange policy yet resulting in the current round of global FX war, confirming just how 'effective' the group has been.