As the fifth anniversary of the disorderly collapse of the investment bank Lehman Brothers approaches, some analysts will revisit the causes of an historic global “sudden stop” that resulted in enormous economic and financial disruptions. Others will describe the consequences of an event that continues to produce considerable human suffering. And some will share personal experiences of a terrifying time for the global economy and for them personally (as policymakers, financial-market participants, and in their everyday lives).
As interesting as these contributions will be, I hope that we will also see another genre: analyses of the previously unthinkable outcomes that have become reality – with profound implications for current and future generations – and that our systems of governance have yet to address properly. With this in mind, let me offer four.
The first such outcome, and by far the most consequential, is the continuing difficulty that Western economies face in generating robust economic growth and sufficient job creation. Notwithstanding the initial sharp drop in GDP in the last quarter of 2008 and the first quarter of 2009, too many Western economies have yet to rebound properly, let alone sustain growth rates that would make up fully for lost jobs and income. More generally, only a few have decisively overcome the trifecta of maladies that the crisis exposed: inadequate and unbalanced aggregate demand, insufficient structural resilience and agility, and persistent debt overhangs.>> Read More
The global economy could be in the early stages of another crisis. Once again, the US Federal Reserve is in the eye of the storm.
As the Fed attempts to exit from so-called quantitative easing (QE) – its unprecedented policy of massive purchases of long-term assets – many high-flying emerging economies suddenly find themselves in a vise. Currency and stock markets in India and Indonesia are plunging, with collateral damage evident in Brazil, South Africa, and Turkey.
The Fed insists that it is blameless – the same absurd position that it took in the aftermath of the Great Crisis of 2008-2009, when it maintained that its excessive monetary accommodation had nothing to do with the property and credit bubbles that nearly pushed the world into the abyss. It remains steeped in denial: Were it not for the interest-rate suppression that QE has imposed on developed countries since 2009, the search for yield would not have flooded emerging economies with short-term “hot” money.>> Read More
The capital outflow from the emerging markets is proving as destabilizing as the previous inflows. Pundits can talk about currency wars all they want, but the real issue is the ability to cope with volatile capital flows, which is the price of integration in global economy.
In fact, the real surprise is the limited resort to outright protectionism, and surely nothing on the scale of Smoot-Hawley et.al. That fact that the World Trade Organization has been busy hearing cases is not as much a sign of insipid beggar-thy-neighbor policies as it is the functioning of a conflict-resolution mechanism to prevent a tit-for-tat escalation of a genuine trade war.
The pressure on capital markets in the emerging markets–currencies, equities and interest rates–may be eclipsing other developments at the moment. One of our key interpretive points has been that the European crisis may have enjoyed a respite, but come next month it will resurface and once again be a key element of the investment climate. >> Read More
The $9 trillion (£5.8 trillion) accumulation of foreign bonds by the rising powers of Asia, Latin America and the emerging world risks going into reverse as one country after another is forced to liquidate holdings to shore up its currency, threatening to inflict a credit shock on the global economy.
India’s rupee and Turkey’s lira both crashed to record lows on Thursday following the US Federal Reserve releasing minutes which signalled a wind-down of quantitative easing as soon as next month.
Dilma Rousseff, Brazil’s president, held an emergency meeting on Thursday with her top economic officials to halt the real’s slide after it hit a five-year low against the dollar. The central bank chief, Alexandre Tombini, cancelled his trip to the Fed’s Jackson Hole conclave in order “to monitor market activity” amid reports Brazil is preparing direct intervention to stem capital flight.
The country has so far relied on futures contracts to defend the real – disguising the erosion of Brazil’s $374bn reserves – but this has failed to deter speculators. “They are moving currency intervention off balance sheet, but the net position is deteriorating all the time,” said Danske Bank’s Lars Christensen.
A string of countries have been burning foreign reserves to defend exchange rates, with holdings down 8pc in Ecuador, 6pc in Kazakhstan and Kuwait, and 5.5pc in Indonesia in July alone. Turkey’s reserves have dropped 15pc this year.
“Emerging markets are in the eye of the storm,” said Stephen Jen at SLJ Macro Partners. “Their currencies are in grave danger. These things always overshoot.”>> Read More
India’s financial woes are rapidly approaching the critical stage. The rupee has depreciated by 44% in the past two years and hit a record low against the US dollar on Monday. The stock market is plunging, bond yields are nudging 10% and capital is flooding out of the country.
In a sense, this is a classic case of deja vu, a revisiting of the Asian crisis of 1997-98 that acted as an unheeded warning sign of what was in store for the global economy a decade later. An emerging economy exhibiting strong growth attracts the attention of foreign investors. Inward investment comes in together with hot money flows that circumvent capital controls. Capital inflows push up the exchange rate, making imports cheaper and exports dearer. The trade deficit balloons, growth slows, deep-seated structural flaws become more prominent and the hot money leaves.
The trigger for the run on the rupee has been the news from Washington that the Federal Reserve is considering scaling back – “tapering” – its bond-buying stimulus programme from next month. This has consequences for all emerging market economies: firstly, there is the fear that a reduced stimulus will mean weaker growth in the US, with a knock-on impact on exports from the developing world. Secondly, high-yielding currencies such as the rupee have benefited from a search for yield on the part of global investors. If policy is going to be tightened in the US, then the dollar becomes more attractive and the rupee less so.>> Read More
Iron ore prices have rallied to a three-month high amid increasingly bullish sentiment in China.
Benchmark Australian iron ore, with 62 per cent iron content, rose to $133.10 a tonne on Wednesday, the highest since April, according to The Steel Index, a price reporting agency. The steelmaking raw material has rallied 20 per cent since the start of June, defying pessimism in the broader investment community about the outlook for China’s economy.
China is the largest consumer of iron ore, accounting for some 60 per cent of the global seaborne market. The country’s construction boom triggered record prices for the commodity, which surged to a peak of close to $200 a tonne.
But as the Chinese economy cools and miners’ investments begin to raise supply, many traders and investors expect prices to fall significantly.
However, the market has remained supported at historically high levels this year, despite growing concerns about the outlook for China. Wednesday’s three-month high of $133.10, while down from 2011’s record high, is still more than three times 2007 prices.
The cost of iron ore is crucial for the global economy as it feeds through into the price of steel and therefore everyday goods such as cars and washing-machines. It is also critical for the profitability of two of the world’s largest heavy industries: mining and steelmaking. Major miners such as BHP Billiton, Vale and Rio Tinto have benefited from the strength in iron ore prices – especially as other commodities such as coal and aluminium are weak – even as steelmakers suffer.>> Read More
The conventional wisdom of the moment is that a weakening global economy will push the cost of commodities such as oil down as demand stagnates. This makes perfect sense in terms of physical supply and demand, but this ignores the consequences of financial demand and capital flows.
I wrote this essay for Peak Prosperity about three weeks ago, before the revelations of investment bank speculation in commodities became news. In my view, these revelations only confirm the basic story I describe here, of capital moving from asset bubbles nearing exhaustion to the open territory of commodities. I see this move as secular, i.e. not limited to a handful of big investment banks; they are the lead players in a much broader shift of capital.
On the Nature of Conspiracies
The human mind seeks a narrative explanation of events, a story that makes sense of the swirl of life’s interactions.
The simpler the story, the easier it is to understand. Thus the simple stories are the most attractive to us.
This is one reason behind the explanatory appeal of conspiracies: ‘Event X’ occurred because a secret group planned and executed it.>> Read More
European stock markets have closed sharply higher. The stream of decent news from the world’s manufacturing sectors, in the UK, US and across the eurozone, sent all the major indices up today on hopes that the global economy strengthened last month. • FTSE 100: up 60 points at 6681, +0.9% • German DAX: up 117 points at 8393, +1. • French CAC: up 42 points at 4035, +1.07% • Spanish IBEX: up 106 points at 8540, + 1.2% • Italian FTSE MIB: up 336 points at 16818, +2%
The demise of Britain’s leading website for oil dissidents has been seized on by critics as an admission that peak oil is just another malthusian myth like so many before. It comes amid a spate of reports from global banks announcing the death of the commodity supercycle, slain by creative technology and a surge of new supply.
Yet if you stand back, it is hardly evident that the world is again enjoying abundant sources of cheap energy, metals or indeed food. Commodity prices have held up remarkably well given that we are in a global trade depression, albeit one contained by monetary stimulus.
The eurozone is in the longest unbroken recession since the 1930s, with industrial production 13pc below the pre-Lehman peak. Average growth in the US has been 1.1pc over the past three quarters as it grapples with the most drastic fiscal tightening since demobilisation after the Korean War. The Economic Cycle Research Institute continues to insist that the US is in recession right now, a claim less absurd than it sounds.
Russia and Brazil have ground to a near halt. China is in its second “mini-recession” in two years, its growth rate near zero on a GDP deflator basis. China’s oil imports were down 1.4pc in June from a year earlier. Imports of iron ore were down 9.1pc.>> Read More
Investors will hear about almost every corner of the US and broader global economy today.
That’s because the following list of US multi-nationals are reporting second-quarter results:
They are the biggest names of the 48 companies in the S&P 500 which report today.
According to the latest data from Bloomberg, 72 per cent of the companies which have so far reported have beaten profits estimates. As the chart below from Barclays shows, that is in line with recent quarters.
There’s also a double shot of housing market data with the latest mortgage applications at 7:30am New York time, and then the more significant new homes sales figures for June at 10am.
Futures suggest that US stock markets will open higher on Wall Street, as better manufacturing figures in Europe offsets the weaker reading from China.
Bond prices were lower, with the yield on the US ten-year note up three basis points at 2.55 per cent.