Submitted by Maurice Pomery of Strategic Alpha
Looking at the US economic data it has to be said that Q/E has achieved little:
I am now of the opinion that the US will have to go back to fighting deflation soon and that Q/E (probably in a different form) will be needed. Massive inflationary impacts look to be delayed (for now):
Whilst I am happy to accept that Bernanke may have delayed or stopped a deep depression for now and that he has made a lot of Wall St. guys very rich, the whole idea of the Q/E programme was supposed to be, if we are to believe him, to create growth and set the economy back on a sustainable growth path, reduce unemployment and cure the housing problem by getting banks to lend and the consumer spending. Mate, you failed!
Unemployment is still at 9% (and a lot more if you look at the real stats), the participation rate is falling and the amount on food stamps is over 4mln! Housing is spiralling lower again as prices continue to fall and banks, whilst having their balance sheets ballooned by free money still sit on hidden toxic waste from the sub-prime issue and refuse to lend at competitive rates.
The housing data components yesterday were bad from top to toe as some blamed the weather but there were other fundamental factors. Single family starts, arguably the most important data point because it represents homeownership and mortgage creation, posted a print at -5.1% to 394,000. The tax credit expiry highlights that this economy is suffering without the drugs. Confidence is getting rather a concern here as few seem to think housing is a worthwhile investment, even at these levels. This data is dismal and coupled with the poor levels of employment I find it hard to understand why so many analysts suggest that the US economy is recovering!
Just because the S&P500 has rallied is NOT a sign of strength in the economy and the data supports the fact that growth is indeed slowing as inflation is starting to rise. Higher prices of essentials in the US will see further cutbacks by consumers and at some point soon they will surely have to face tax hikes and cuts to benefits to reduce the deficit at both national and state levels. This is a nightmare scenario that will not be missed by Bernanke and maybe that is why we have yet to hear from him about what he expects to do after Q/E2 runs out at the end of June.
Industrial production fell yet again if we take in last month’s revision lower and ended up a big miss on expectations and rather worryingly capacity utilisation also fell. This does not auger well for growth on any level. On top of all this there are going to be further investigations into US banks as the New York attorney general has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses. This is not going to go away and someone needs to open up this Pandora’s Box.
The debt issue and spending cuts are likely to become the biggest election campaign fight but will the US public vote for austerity? They better had or else the whole US system that relies on having the world’s reserve currency will end in a mighty implosion. I am already unsure if it will remain a safe haven if the roof falls in now! The question is will Bernanke see the economy as on a sustainable path and that the world can soak up all the issuance coming from the treasury without yields rising? I doubt it somehow so at best we get a pause but they will be back pretty soon I would imagine, as to honest it has yet to prove it has worked for anyone else but the top 0.1% of the population who work on Wall St. To me the economy is starting to trend lower and Q/E3 might still be on the cards in my view and so this rally in the Dollar, at some point may be a gift. I will keep you posted. New Q/E might be disguised and I hear there are discussions on Treasury puts. Listen out for this as it is still Q/E! Tonight’s minutes that are released by the Fed might just be worth a read as we rush towards the end of Q/E2.
UK inflation rises again but growth is still soft:
UK inflation rose again and was driven primarily by the shift in Easter holidays as air travel dominated with the recent rise in VAT. I said at the time the rise in VAT was bad timing and it seems to be the case. Worryingly inflation is set to rise further in the next few months but the Bank of England's Monetary Policy Committee believes it would cause undue output volatility if it tries to get CPI back to its 2.0% target rapidly, Bank of England Governor Mervyn King said in an open letter Tuesday. The BoE has continually warned of higher inflation but always countered this with the lack of growth in the economy. The point is will higher prices for essentials continue to undermine spending by the consumer on non-essentials? Surely it must and the influential ITEM club agree.
Are we facing stagflation and can the bank deal with this by adjusting monetary policy? Well no not really as one sacrifices the other and I am sure the government would be less than impressed if King and the MPC condemned the UK economy to years of recession or worse to hold onto an inflation mandate at a time when the government needs the consumer to help get rid of the deficit. I am afraid that King is going to have to fight off the press and hawks a bit longer even if some may question the Banks independence. Interestingly, in reply to King's letter the Chancellor said the government was committed to its fiscal tightening plan! Why does the bank not just set a higher target due to current circumstances? Stagflation is a great concern and the cost of living is soaring as real wages collapse. The public cannot take much more and something may snap as I am not sure that commodity rises are a transitory phase. Demand and consumption suggests that food commodities are on the rise for good.
It would appear to me that many a central bank needs to come clean and admit that its mandate needs more flexibility so it can deal with these complex times. Many seem rigid and out of date which gives the impression of bending the rules. The BoE is a prime example. Just let them do their job and stop forcing mandates on them. Do what is right! What else is there, politics? The minutes today may make interesting reading.
Will Greece be able to survive? In fact will the peripherals ever be competitive enough to live in a one currency, one policy environment?
Without any doubt, the answer to this question (with Spain the possible exception but even they will struggle) is NO. Central bankers are always going on about global imbalances but within the EU we see some of the biggest and it just does not appear conceivable that Europe can function properly as a whole whilst these imbalances are governed by a single monetary policy and one currency. It was a nice idea but it cannot work practically and at some point the weight of forced austerity measures will see a backlash from voters.
Even if the likes of Greece default and write of ALL of their debt, they still cannot survive in this environment and nor can Ireland or Portugal. The ECB will always set policy for Germany and the stronger nations and this is the point. It will never be of any benefit to the peripheral southern states. Greek yields look set to stay extremely restrictive and the chance of growing or exporting themselves out of this mess is zero. Greece IS insolvent.
Not only will the civil unrest and the political pressure on peripheral governments increase, the pressure on the likes of Merkel and Sarkozy will too as the northern European tax payers are getting fed up with paying for all this and not all these governments can afford to show any leniency towards the poorer nations so draconian measures will be attached to any concessions on future bail-outs. Is this what the electorate voted for from their leaders? Obviously not and Germany is going to find that out very soon as this problem is not solvable by just throwing money and buying time.
We know what impact Lehman had on markets so I guess the EU leaders fear that if Greece, Ireland and Portugal all went down, then the lights would go out. So for now they will continue to buy time and hope the problem goes away unless they are forced to act by unhappy voters. It happened in Finland! I am not sure what the EU leaders can do about this!