Over the weekend I read this excellent piece by Anatole Kaletsky.
It sums up very succinctly the economic challenges facing us all today and is a must read.
Friday’s rally in markets, in response to the immediate sell-off after a very disappointing US jobs’ report, further reveals the growing disconnect between stock market performance and real economic performance.
Wherever I look there are signs that economies are treading water at the moment. Some immediate examples which spring to mind include;
- Ongoing turbulence in Europe
- The Baltic Dry Index continues to struggle
- Copper looks like it is heading to the bottom of its recent range
- This interesting analysis from Zerohedge has adjusted the principle of monitoring power usage as an economic indicator (first used to assess the strength/weakness of China) to monitoring fuel usage in the US
All the while, corporate earnings apparently remain robust and the “fundamentals are sound”. Continue reading
I should write about the Sequester today, but I am short of time. I also just came across a fascinating piece in the FT.
Paul Tucker, of the Bank of England, has apparently suggested to MPs that banks could be charged negative interest rates for holding reserves at the central bank.
The “money on the sidelines” has been a big challenge in Britain, Europe and America. Quantitative Easing has not resulted in extra bank lending and is viewed by many as the single biggest failure of the policy. I’ll ignore for the moment the issues of too much debt and the obvious inflationary implications of freeing the liquidity which has been pumped into the financial system out into the real world. The idea itself is very revealing.
For a long time I’ve supported the view that the monetary rules as we know them no longer count. Certain fundamental laws of economics will still apply, but those are bridges to cross another day.
In the blog I wrote last week how the Fed can exit QE, I brought up the o the QE-created reserves will pose when interest rates start to go up. One solution is to encourage the banks to withdraw the reserves and start using them.
If they do this, this will surely have to have an inflationary effect.
After recent actions by the Fed and BoJ, this Great Global Monetary Experiment looks like it is going to get even more interesting this year.
I’m delighted to be long gold.
I’ve just finished writing an article about the prospect of the introduction of an oil-backed currency. It’s taken me a long time to research and write. It has also been a quite shocking experience.
I knew that the state of the Global Financial System was bad. I also knew that the debt burden was growing.
What I didn’t know was the scale of the problem.
The US debt clock is a famous site. It is inaccurate at the moment as it puts the Federal Debt at $16.5trillion so hasn’t been adjusted for the accounting sleight of hand performed at the start of the year, which gives Congress and the White House until the end of March to reach a deal.
I’ve seen this site several times before. I just haven’t look at it properly.
Excluding financial-sector debt and off-balance sheet (but real) liabilities, such as future pension commitments and Medicare-costs, the total US debt/GDP ratio is 370% and rising. American consumers and corporations, US State and Local Government organisations and the Federal Government owe $58.5trillion.
What is even more trouble is in terms of total debt/GDP ratios America’s is by no means the worst. During my research I came across this 2012 report from the McKinsey Global Institute. I have made some effort to cross-reference the figures with latest available data and this report seems to me to be the most accurate in assessing the global situation, even though it is a year old.
The headline figures have to be that Japan and Great Britain’s total debt/GDP ratios are both in excess of 500%.
This is staggering. Continue reading
I still find I don’t have much time at the moment, but I have been pondering the muted reaction to QE3. Just how much of this was already priced in?
The Fed and ECB have really fired up the printing presses with their commitment to open ended monetary easing. Logic and history suggest the outcome of these policies will be highly inflationary, which will be positive for stocks and gold.
However with recession biting home in Europe and forecast in America, the fiscal cliff looming and a gridlocked political system there is so much pessimism out there.
The Technical Take and the MoneyWeek Trader have both published their views of tops being in, in both equities and gold. The sentiment gauges they use have been pretty accurate barometers for market direction.
Even so everything just feels so off at the moment. We live in a world where up is down and black is white. Nothing makes much sense. Continue reading
So, like the ECB now the Fed has announced open ended Quantitative Easing.
We can now look forward to the purchase of $40billion a month of mortgage backed securities, an extension to Operation Twist and 0% interest rates until 2015. If the economy worsens they may even buy more MBSs.
Unsurprisingly markets have shot up.
Part of me is quite happy about this. I’ve been adding to my gold mining stocks so think I am well positioned to take advantage of this lunacy.
However this all masks quite how near to the end of the road we are.
Given that neither QE1 nor QE2 solved the fundamental economic problems of the Credit Crisis, this latest move by the Fed feels very much like a desperate last charge. After all what else can they now do?
To do adopt a different course would be to admit the failure of the previous plan (which no-one will do) and short of handing out wads of Dollar bills on street corners they can’t really do much more to flood the system with liquidity.
I feel very sad tonight.