Trade Deficit

So much for that December plunge in the US trade deficit, which plunged from $48.6 billion to three year low of $38.5 billion supposedly on a drop in energy imports, but in reality was due to a drop in broad imports as the US economy ground to a halt ahead of the Fiscal Cliff. In January, or after the stop gap measure to allow the economy to continue, things went back to normal, with the US returning to doing what it does best: importing, especially importing expensive energy, and sure enough the deficit spiked promptly back to $44.4 billion - it recent long-term average - as exports were $2.2 billion less than December exports of $186.6 billion while January imports were $4.1 billion more than December imports of $224.8 billion. Immediate result: look for banks to trim 0.2-0.3% GDP points from their Q1 GDP forecasts.

In today's overnight trading, it was all about Europe (and will be with today's BOE and ECB announcements), where things continue as they have for the past six months: when it is a problem that can be "solved" by throwing bucketloads of money, and/or guaranteeing all risk, things appear to be better, such as today's EUR5.03 billion Spanish bond auction (the 0.03 billion part being quite critical as otherwise how will the authorities indicate the pent up demand by the Spanish retirement fund and various other insolvent ECB-backstopped Spanish banks for Spanish debt). And while events that can be "fixed" with massive liquidity injections are doing better, those other events which rely on reality, and the transfer of liquidity into the real economy, are just getting worse and worse. Sure enough, today we also learned that French unemployment rate just hit a 13 year high. But it wasn't only the French economy that continued to slide into recession: Germany wasn't immune either following "surprising" news that German January Factory Orders tumbled -1.9% M/M on expectations of a 0.6% rise, down from a revised 1.1% in December. The great equalization in Europe continues, as the PIIGS, kept still on artificial life support do everything in their power to drag down the core.

In the upcoming week the key focus on the data side will be on US payrolls, which are expected to be broadly unchanged and the services PMIs globally, including the non-manufacturing ISM in the US. Broadly speaking, global services PMIs are expected to remain relatively close to last month's readings. And the same is true for US payrolls and the unemployment rate. On the policy side there is long lost with policy meetings but we and consensus expect no change in any of these: RBA, BoJ, Malaysia, Indonesia, ECB, Poland, BoE, BoC, Brazil, Mexico.  Notable macro issues will be the ongoing bailout of Cyprus, the reiteration of the OMT's conditionality in the aftermath of Grillo's and Berlusconi's surge from behind in Italy. China's sudden hawkishness, the BOE announcement and transition to a Goldman vassal state, and finally the now traditional daily jawboning out of the BOJ.

For several long months now, the market has been treated to an unadulterated diet of such gross monetary irresponsibility, both concrete and conceptual, from what seems like the four corners of the globe and it has reacted accordingly by putting Other People's Money where the relevant central banker's mouth is. Sadly, it seems we are not only past the point where what was formerly viewed as a slightly risqué "unorthodoxy" has become almost trite in its application, but that like the nerdy kid who happens to have done something cool for once in his life, your average central banker has begun to revel in what he supposes to be his new-found daring – a behaviour in whose prosecution he is largely free from any vestige outside control or accountability.  Indeed, this attitude has become so widespread that he and his speck-eyed peers now appear to be engaged in some kind of juvenile, mine's-bigger-than-yours contest to push the boundaries of what both historical record and theoretical understanding tell us to be advisable.

In the last few days we have seen reports suggesting Brazilian household debt and service payments are weighing on growth, that Southeast Asia’s commercial credit is approaching its pre-1997 financial crisis peak of 75% GDP, and that South Korea’s household debt has reached 164% of disposable income compared with 138% in the US at the start of the housing crisis. Chinese debt rose 15% in excess of GDP last year from 191% to 206%. Its corporate cash flow is around 50% of profitability whilst loan growth is way in excess of the banks’ return on equity meaning the growth is dependent on a continual supply of new capital to the banks. Over the last few years whilst the developed economies have struggled to reduce their debt relative to GDP – (the most successful of the major economies has probably been the US which has taken non-financial sector debt down from a high of 253.15% GDP to 248.18% GDP) – the developing economies have taken advantage of cheap funding to inflate their debt levels dramatically, leaving the global debt position worse than in 2007.. Some of the emerging market debt is relatively small and the necessary rebalancing of the economy should be relatively easy to achieve, but even if it is only a cyclical limit as oppose to the structural limits of the developed economies, it is coinciding at the same time and will add to the global problem. As data on world GDP growth would suggest, it is not just Brazil where the numbers show “the exhaustion of a growth model based on consumption”.

While Abenomics has failed in spurring exports, while the rise in the Nikkei has benefited some 1-2% of the population, the most direct consequence of crushing the yen some 20% is that energy costs, virtually all of them imported, are if not surging, then about to soar to all time highs.  In other words, our sincerest condolences to Japan, for whom this winter will be a very cold one (and a very hot summer follows), unless of course in Japan, like in the US, energy costs don't matter when calculating CPI and inflation and the consumer can spend any amount to keep themelves warm, or cold as the case may be.

In the aftermath of yesterday's surge in German hopium measured by the ZEW Economic Survey which took out all expectations to the upside, it was inevitable that the other double-dipping country, France, telegraphed some optimism despite a contracting economy and would follow suit with a big  confidence beat, and sure enough the French INSEE reported that February business sentiment rose from 87 to 90, on expectations of an unchanged number. And the subsequent prompt smash of investor expectations in Switzerland, where the ZEW soared from -6.9 to +10.0 tells us that something is very wrong in the Alpine country if it too is trying so hard to distract from the here and now. And while one can manipulate future optimism metrics to infinity, it is reality that is proving far more troublesome for Europe, as could be seen by the Italian Industrial Orders print which crashed -15.3% Y/Y on expectations of a smooth -9.5% drop, down from -6.7% previously. Since industrial orders are a proxy for future demand, a critical issue as Italy enters 2013 after six consecutive quarters of economic contraction and with no relief on the horizon, it is only fitting that Italy should shock the world with an off the chart confidence beat next.

Sterling is has eclipsed the yen as the main focus in the foreign exchange market. The surprising news that has kicked it to fresh multi-month low was that the BOE is closer to easing policy than has been suspected. While it was a unanimous decision to leave rates on hold as expected, it was a tighter 6-3 vote on new asset purchases.

The market had expected a 8-1 vote. Of particular interest, it is the fourth time Governor King has been outvoted.

We may have this centrally-planned, currency-debasement driven economic stimulus thing backwards, but unless we are very wrong, in January, Japan was not supposed to post a record unadjusted trade deficit, amounting to some ¥1,628.4 billion, or nearly ¥300 billion more than the expected ¥1,379 billion deficit. And while exports did rise more than the 5.6 expected, at 6.4%, it was imports which printed at 7.3%, that destroyed expectations of a modest 2.1% rise, and which were likely all energy related.  Which means that Japan is happily importing the rest of the world's inflation and getting precisely nothing to show for it. Then again, the central planners are smart folks. They have PhD's. They are certainly on top of this.

While the rest of the developed (read trade deficit) world's foray into the currency wars was completely predictable and expected, there was one country that had so far kept very silent on the topic of Japan's attempts to crush its currency: its main export competitor, South Korea. Recall that for this Asian nation exports are everything, and as Yonhap reminds us, "exports of goods and services amounted to 538.5 trillion won (US$506 billion) in the January-September period, or 57.3 percent of the nation's gross domestic product (GDP), according to the data by the Bank of Korea. The reading was higher than 56.2 percent tallied for all of 2011 and the highest since the central bank began compiling related data in 1970, and South Korea's exports accounted for 13.2 percent of its GDP." The reason for South Korea's relative silence is that, as we showed yesterday, in the global race to debase launched with the end of the Bretton Woods, it was the undisputed leader, outdoing even the US. Moments ago South Korea may have just had enough and broke the seal on its code of silence. As Reuters reports, "South Korea said that while the Group of 20 nations at their meeting last weekend did not single out Japan for monetary and fiscal measures that have weakened the yen, the group did not exactly endorse Japan's quantitative easing policy, which in fact stirred controversy."

2012 Q4 GDP has been weak in G3 and indeed Europe more broadly, (however it has generally surprised to the upside in Asia), consequently, the momentum of business sentiment will be key to watch. The Euro area flash PMI, German Ifo and the Philadelphia Fed survey are released this week (the China flash PMI will be released on Feb 25). The consensus expects a further small rise in the Euro area services and manufacturing readings. The week also brings a batch of central bank commentary, where the focus will be on references to currency strength; these include the RBA minutes followed by testimony, a speech by RBNZ governor Wheeler, Bank of Thailand policy decision and Bank of England minutes. The Federal Reserve will release the minutes from the last meeting and they may contain important clues on the bias of the Committee with respect to how long it expects the current QE program to last. Additionally, the Committee may have discussed the potential merits of outcome-based guidance for balance sheet policy, which may be reflected in the minutes.

Curious why nobody at the G-7 or G-20 had the gall to outright accuse Japan of currency manipulation? Simple: because everyone else in the G-7 and G-20 has been doing precisely what Japan only recently started doing a few months ago. As such, it would be outright "glass house" hypocrisy if there was a formal Japanese condemnation by the group of overlevered nations, which moments ago released its draft communique not naming the island nation outright as was widely expected. Of course, that the G-20 did not accuse Japan of engaging in what everyone clearly knows is currency war, does not mean that everyone else is not doing this. To the contrary: they are, and the lack of a stern rebuke of Japan simply means the currency wars will now intensify, devolving into the same protectionism and trade wars as the first Great Depression was so familiar with, which to borrow a parallel from history again, will end with the kind of war that ultimately ended the first Great Depression.

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.

The economic collapse is not a single event.  The economic collapse has been happening, it is is happening right now, and it will continue to happen.  Yes, there will be times when our decline will be punctuated by moments of great crisis, but that will be the exception rather than the rule.  A lot of people that write about "the economic collapse" hype it up as if it will be some huge "event" that will happen very rapidly and then once it is all over we will rebuild.  Unfortunately, that is not how the real world works.  We are living in the greatest debt bubble in the history of the world, and once it completely bursts there will be no going back to how things were before. But other than that, everything is rainbows and lollipops, right?

In what has been a quiet start to week dominated by the G-20 meeting whose only purpose is to put Japan and its upstart currency destruction in its place, many are expecting a formal G-7 statement on currencies and what is and isn't allowed in currency warfare according to the "New Normal" non-Geneva convention. Because while there may not have been much overnight news, both the EURUSD and USDJPY just waited for Europe to open, to surge right out of the gates, and while the former has been somewhat subdued in the aftermath of the ECB's surprising entry into currency wars last week, it was the latter that was helped by statements from Haruhiko Kuroda (not to be confused with a Yankee's pitcher) who many believe will be the next head of the BOJ, who said that additional BOJ easing can be justified for 2013. He didn't add if that would happen only if he is elected. Expect much more volatility in various FX pairs as the topic of global thermonuclear currency war dominates the airwaves in the coming days.