Last month, the world mourned the death of beloved actor Leonard Nimoy. Mr. Nimoy, of course, was renowned for his portrayal of the iconic character Mr. Spock on the 1960s television series Star Trek. One of the most memorable Star Trek inventions was the transporter that allowed human beings to be beamed through space and time like light and energy. Investors expecting central bankers to solve the world’s economic problems might as well believe that Janet Yellen is capable of beaming them straight into the Marriner S. Eccles Building in Washington, D.C. Their failure to acknowledge that the Fed is failing to generate sustainable economic growth while contributing to income inequality and crushing debt burdens is inexplicable. Central banks that purport to be promoting financial stability are actually undermining it – with the able assistance of regulators who have drained liquidity from the world’s most important markets.
Negative interest rates on $3 trillion of European debt are an obvious sign of policy failure, yet the policy elite stands mute. Actually that’s not correct – the cognoscenti is cheering on Mario Draghi as he destroys the European bond markets just as they celebrated Janet Yellen’s demolition of the Treasury market. Negative interest rates are not some curiosity; they represent a symptom of policy failure and a violation of the very tenets of capitalist economics. The same is true of persistent near-zero interest rates in the United States and Japan. Zero gravity renders it impossible for fiduciaries to generate positive returns for their clients, insurance companies to issue policies, and savers to entrust their money to banks. They are a byproduct of failed economic policies, not some clever device to defeat deflation and stimulate economic growth. They are mathematically doomed to fail regardless of what economists, who are merely failed monetary philosophers practicing a soft social science, purport to tell us. The fact that European and American central banks are following the path of Japan with virtually no objection represents one of the most profound intellectual failures in the history of economic policy history. While the global economy is facing a solvency problem linked to excessive debt accumulation, the world’s central banks are pursuing policies designed for a liquidity problem. That is like treating cancer with a Tylenol. The only solutions in this known universe for a solvency problem are inflation, currency devaluation or default. Maybe Spock has a different solution but he’s been beamed up to a better place and is no longer on call to save us. Since none of these real-world solutions are politically palatable – no leader on today’s world stage has the courage to propose them and would be voted out of office by selfish and short-sighted constituents if he/she did – central banks are left offering huge doses of debt since equity can’t be conjured out of thin air. But all of this debt is just exacerbating the solvency problem and failing to solve the liquidity problem, pushing global markets closer to the brink.
The eurozone’s current account surplus has dropped back from the record high it hit in September. That should ease concerns about the “euroglut” in the global economy that has been created by chronically weak consumer demand in Europe.
The surplus was €20.5bn in October, down from a record €32bn in September. Economists polled by Reuters had expected a €28bn surplus.
A nation’s current account is the broadest measure of its financial relationships with the rest of the world, and tracks its exports and imports well as savings and investments.
Deutsche Bank came up with the term “euroglut” to illustrate how chronically weak demand and the resultant lack of imports to Europe was causing stress for other countries and holding back global recovery.
The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire.
They have collectively borrowed $5.7 trillion in US dollars, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries.
Much of the debt was taken out at real interest rates of 1pc on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are “short dollars”, in trading parlance. They now face the margin call from Hell as the global monetary hegemon pivots.
The Fed dashed all lingering hopes for leniency on Wednesday. The pledge to keep uber-stimulus for a “considerable time” has gone, and so has the market’s security blanket, or the Fed Put as it is called. Such tweaks of language have multiplied potency in a world of zero rates.
China’s trade surplus swelled to the highest on record in November, as imports unexpectedly tumbled.
Both sides of this report were negative, calling into question some recent reports suggesting the economy had stabilised in the fourth quarter.
Chinese exports increased just 4.7 per cent from a year ago last month, missing estimates for an 8 per cent increase and slowing from an 11.6 per cent pace in October. The weak print reflects a weak recovery in the global economy.
Imports fell 6.7 per cent from a year ago, versus expectations that they would rise 3.8 per cent. This is the more dramatic news, indicating consumption in the world’s second largest economy could be much lower than thought.
As a result of falling imports, the monthly trade surplus rose to $54.47bn – the highest in 14 years of Bloomberg data – from $45.4bn the month before.
“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