While the biggest winner of the ongoing political melodrama is C-SPAN, whose ratings have likely never been higher, and the broad audience is logically largely distracted by the hourly lack of development out of the White House, what we do know is that QE2 has failed to generate any growth in the economy, with both Q2 and Q1 GDP crashing spectacularly to a point where post another revision Q1 will be the inflection point where America re-entered another recession. Furthermore, we have seen a stark example of the economic snake eating its tail, whereby the more than proportional increase in the price of commodities, courtesy of Bernanke's policies, has offset any potential incipient growth germs that may have been lingering in the economy in Q3 2010 through Q2 2011. Yet all of these are backward looking indicators. The question is what happens to the global economy going forward? For the answer we again turn to Sean Corrigan, who remarks on some very disturbing developments in the global macro arena, which when tied in to core tenets of the Austrian Business Cycle theory, indicate that the global soft landing may be a mirage, and that the downslope we are already in, may convert into a stall from which the global airborne Titanic does not recover.
Market participants should not lose sight of the fact that, far beyond the twin, transatlantic farces, a rather darker drama is beginning to play out in terms of world economic activity.
The first warning signs come from the freight industry, where US West Coast container traffic has slowed appreciably. Imports, indeed, have decelerated to an extent only exceeded—and then by the smallest of margins—a handful of times in the past 15 years, sending the growth rate plunging from August 2010’s chart?topping 26.4% to a 17?month low of 2.2%.
More broadly, while US intermodal rail traffic is still setting records, its tally now stands a bare 2.5% above the reading recorded at the same juncture in 2010—a sharp deceleration from that earlier period’s 26% YOY increase.
Matching this, across the Pacific, Shenzhen port numbers are also barely in the plus column, as of May?June, while Shanghai has dropped from 18% yoy in the whole of 2010, to a 16?month low over the quarter, touching 7.4% in June itself.
Then we have the IATA air freight numbers, recording their first global decline since the crisis, paced by a swingeing 9.8% YOY drop in the crucial Asia?Pacific region—a drop only exceeded during the worldwide export slump between Sep?08 & Mar?09.
Adding to series of cautious statements emanating from the shipping industry, several key machinery makers have also struck a less optimistic note, among them Atlas Copco, Caterpillar, Sandvik, Alstom, Terex, and Siemens. For an Austrian, signs of stress among these higher?order goods manufacturers are a clear warning of the chance of stormy weather ahead.
All of these micro?trends have again been borne out with the decline seen in various regional PMIs—notably in China and Germany—in the last month, as well as in the slowing of Taiwanese export orders and industrial production.
A central tenet of Austrian Business Cycle Theory is that the first users’ advantage, conferred when an inflationary impulse is preferentially delivered within an economy, will eventually dissipate as relative prices adjust across the board. This implies that, to sustain their activity above the levels which would naturally prevail in the absence of that initial inflation, progressively larger (nominal) injections will be needed in what effectively becomes a Red Queen race to keep the productive structure extended beyond the length which voluntary saving alone would dictate.
In such circumstances, any slowdown—whether caused by an outright withdrawal of stimulus or simply a more rapid adaptation to its ongoing application—tends to a degenerative condition in which margins are first squeezed, before revenues themselves begin to decline in the previously favoured sectors and those of their immediate suppliers.
This sink?or?swim attribute of a modern, vertically?segmented economic system is one of the cardinal reasons why the fabled ’Soft Landing’ has historically proven so very hard to deliver. Given the unusual degree of structural elongation brought about by Asia’s investment?driven boom, it is all the more likely to prove to be beyond the capacity of the central planners this time around, too.
Which brings us to the topic at hand: with the Europe fixing already in the back view mirror, and Spanish and Italian spreads once again approaching all time records, the only remaining risk on rally will likely come in the middle of this week when the government "miraculously" finds a compromise, leading to a surge in the S&P, most likely to 2011 highs, coupled with a huge rout in bonds, particularly in the long-end. At that point the distractions will cease, and the market will finally look forward with a clear head, only to see nothing but stormy sailing. Alas, the resulting rout, which will be the catalyst for QE3 in some form (see Goldman on the topic) will likely lead to collateral call-satisfying liquidations in gold and other best performing asset classes, as managers seek to sell their best performing products first. The end result of all this will likely become apparent in late August as Bernanke either does another Jackson Hole or gradually changes his rhetoric to one contemplating more easing. Recall that Q3 is the make or break quarter for stimulus decisions (and forget fiscal stimulus unless it is a tax repatriation holiday in exchange for a another payroll tax extension, both utterly useless). With July down, there are just two more months in which the economy "can" pick up. So far we have yet to see even the faintest glimmer that in the absence of QEasing, any narrow or broad indicators are doing even remotely as expected.
Bottom line: just like last year, when the August NFP number was the catalyst for QE2, expect everyone to look for this number due in the same week as when the Treasury purportedly runs out of cash, with far more focus than what is happening in the House. A sub-zero print will practically guarantee the announcement of more monetary stimulus within several weeks.
As to what happens after that, well that web-based version of the Dying of Money is still floating around somewhere...