“There is nothing safe anymore, because the money-printing distorts all asset prices,” is the uncomfortable response Marc Faber gives to Thai TV during this interview when asked for investment ideas. Faber explains how we got here “massive money-printing and ZIRP creates a huge pool of liquidity that does not flow evenly,” as it washes from Nasdaq stocks to real estate to emerging markets and so on. Each time, “the bubble inflates and then is deflated as the capital (liquidity) floods out.” The Fed, based on the doubling of interest rates since they began QE3 “has lost control of the bond market,” Faber warns; adding that while he expects some “cosmetic tapering,” the Fed members and other neo-Keynesian clowns will react to a “weakening US and global economy,” and we will be a $150 billion QE by the end of next year, as the world is held hostage to US monetary policy.
The interview is interspersed with Thai translation but is well worth the time (starting at 1:25):
Surveys set to show global manufacturing on the rise
* Fed under fire for fumbling forward guidance
* U.S. Congress set for debt showdown
A clutch of surveys this week is likely to show the global economyslowly picking up even as new and old uncertainties combine to test the optimism of businesses and consumers alike.
Purchasing managers indexes (PMIs) for the euro zone, China and the United States are all forecast to climb further away from the boom-bust line of 50. Germany’s closely watched IFObusiness sentiment index is also expected to show a gain.
Gross domestic product in the euro zone remains 3 percent below its 2008 peak and unemployment is at a record high, but the 17-member bloc is set to expand for the second quarter in a row after 18 months of contraction, according to Bert Colijn, an economist with the Conference Board in Brussels.
Even the construction industry, which crashed when the financial crisis struck, appears to be bottoming out.
“The outlook continues to improve for Europe in general,” Colijn said. “The fact that we’re seeing a momentum change at the moment is a positive signal.”>> Read More
European and Asian equities and ‘risk-on’ currencies have all benefitted as the post-payroll asset rally gained momentum. I think the move has a decent chance to last till Christmas. Tapering will be announced next week, the ‘tapering isn’t tightening message’ will be repeated and policy uncertainty will decrease. The Fed is on hold until the second half of 2015, the ECB for even longer, the Chinese slowdown is having a vacation (thanks to some shadow banking) and it looks as though military action in Syria will be avoided. Have the global economy’s structural problems gone up in a puff of smoke? No, but that’s not the point right now.
The U.S. trade deficit widened 13.3% to $39.1 billion in July.
Economists expected it to have expanded to $38.6 billion.
The trade gap with China widened to a record $30.1 billion from $26.6 billion.
“The global economy showed signs of recovery in July, with business confidence and activity data surprising on the upside in both the euro area and in China,” wrote the economists at Bank of America Merrill Lynch before the report.
President Vladimir Putin warned the West against taking one-sided action in Syria but also said Russia “doesn’t exclude” supporting a U.N. resolution on punitive military strikes if it is proved that Damascus used poison gas on its own people.
In a wide-ranging interview with The Associated Press and Russia’s state Channel 1 television, Putin said Moscow has provided some components of the S-300 air defense missile system to Syria but has frozen further shipments. He suggested that Russia may sell the potent missile systems elsewhere if Western nations attack Syria without U.N. Security Council backing.
The interview Tuesday night at Putin’s country residence outside the Russian capital was the only one he granted prior to the summit of G-20 nations in St. Petersburg, which opens Thursday. The summit was supposed to concentrate on the global economy but now looks likely to be dominated by the international crisis over allegations that the Syrian government used chemical weapons in the country’s civil war.
Putin said he felt sorry that President Barack Obama canceled a one-on-one meeting in Moscow that was supposed to have happened before the summit. But he expressed hope the two would have serious discussions about Syria and other issues in St. Petersburg.
“President Obama hasn’t been elected by the American people in order to be pleasant to Russia. And your humble servant hasn’t been elected by the people of Russia to be pleasant to someone either,” he said of their relationship.>> Read More
September promises to be one hell of a month for the global economy.
Congress comes back from vacation this month to a full plate of fiscal time bombs that will need to be defused in a very short period of time.
This is a fight that Americans have gotten used to in recent years.
But economist Nouriel Roubini warns that investors are becoming too complacent. In a new piece for Project Syndicate, offers an interesting metaphor to describe the Republican party’s stance on the budget:
… yet another partisan struggle over America’s debt ceiling could increase the risk of a government shutdown if the Republican-controlled House of Representatives and President Barack Obama and his Democratic allies cannot agree on a budget.>> Read More
It has been a while since Albert Edwards updated the world on his macro and market thoughts. He finally does so today with a tour de force on the crash in the emerging markets, which for him exposes the “idiocy of one of the key investment themes since the 2008 Great Recession – namely that with developed economies burdened with excessive debt and in the throes of multi-year deleveraging, investing in emerging markets would not only produce superior returns but was also less risky. Regular readers will know we have long railed against this idea, having dubbed the BRIC story a Bloody Ridiculous Investment Concept.“
He links what is happening now to his “call at the end of last year that the EMs were heading for a balance of payments crisis and would see a currency debacle similar to 1997 was met with total indifference. We still find the same disregard to our call for a renminbi devaluation.”
Continuing the litany of vindication, Edwards next observes that the “global economy and markets have been far, far more vulnerable to a resumption of the 2008 crisis than the happy-clappy consensus would have us believe. At the moment, investors think that problems are isolated to a few EM countries that have allowed their current account deficits to get out of hand. I see this as the beginning of a process where the most wobbly domino falls and topples the whole precarious, rotten, risk-loving edifice that our policymakers have built.”
Naturally no crash prediction will be complete without some fond reminiscences on the most historic crash of all: 1987.>> Read More
The global economy could be hurt if the withdrawal of funds from emerging markets picks up ahead of an expected reduction in the U.S. Federal Reserve’s monetary stimulus, a Bank of Japan board member said on Thursday.
Yoshihisa Morimoto also signalled that Japan’s government needed to proceed with a planned two-stage hike in the sales tax as part of efforts to fix its tattered finances, or face a severe market backlash.
The former utility executive stuck to the BOJ’s assessment that Japan’s economy was headed for a moderate recovery, but noted headwinds such as geo-political risks in the Middle East and market volatility caused by expectations the Fed could start tapering its bond-buying programme as soon as next month.
“Market participants are withdrawing funds from emerging and resource-rich nations on expectations (of Fed’s tapering) and may continue to do so,” Morimoto said in a speech to business leaders in Morioka, northeastern Japan.
“The global economic recovery remains fragile, so there’s huge uncertainty on how a sharp outflow of funds could affect financial markets and global growth,” he said, in the starkest warning to date by a BOJ official on the potential risk for a bigger capital withdrawal from emerging economies.
The Indian rupee and Turkish lira have both hit record lows against the dollar, the Indonesian rupiah has fallen to four-year lows, and other currencies have fallen sharply as investor sentiment has soured on emerging markets.>> Read More
This has the makings of a grave policy error: a repeat of the dramatic events in the autumn of 1998 at best; a full-blown debacle and a slide into a second leg of the Long Slump at worst.
Emerging markets are now big enough to drag down the global economy. As Indonesia, India, Ukraine, Brazil, Turkey, Venezuela, South Africa, Russia, Thailand and Kazakhstan try to shore up their currencies, the effect is ricocheting back into the advanced world in higher borrowing costs. Even China felt compelled to sell $20bn of US Treasuries in July.
“They are running down reserves by selling US and European bonds, leading to a self-reinforcing feedback loop,” said Simon Derrick from BNY Mellon.
We are told that emerging markets are more resilient than in past crises because they have $9 trillion of reserves. But any use of that treasure to defend the exchange rate entails monetary tightening, and therefore inflicts a contractionary shock on countries already in trouble.
We are also told that they borrow in their own currencies these days, immune to the sort of dollar squeeze that caused such havoc in the early 1980s and the mid-1990s. This is true, but double-edged. India, Brazil and others will surely be tempted to stop fighting markets, let their currencies slide and inflict the pain on foreigners – that is to say, on your pension fund.>> Read More
If SocGen is right in its just released oil price forecast in a “Syrian war world”, then the global economy is about to undergo an apoplectic shock the likes of which have not been seen since the summer of 2008, when Lehman brothers had to be taken under to generate the deflationary shock sending crude from $130 to $30 in the matter of days. The French bank’s forecast in a nutshell: “Base case scenario: $125 for Brent. We believe that in the coming days, Brent could gain another $5-10, surging to $120-$125, either in anticipation of the attack or in reaction to the headlines that an attack had started. In our base case, we assume an attack begins in the next week. Upside scenario: $150 for Brent If the regional spill over results in a significant supply disruption in Iraq or elsewhere (from 0.5 – 2.0 Mb/d), Brent could spike briefly to $150.” And if indeed 2008 is coming back with a vengeance, the next question is who will be this year’s unlucky Lehman Brothers?
Send lawyers, guns, and money: what does Syria mean for the oil markets?