Well, my fellow Slope-a-Dopes, where to from here? The blizzard rages on, that much is clear/blurry. The whiteout will arrive as the storm's violent fury reaches peak strength. The only question that remains is will it bury us alive, or will we escape certain death by borrowing Ben's 300hp QE fuel injected turbocharged snow blower to dig our way out. Will the global economy rapidly descend into a deep freeze sending all financial thermometers to sub zero Centigrade, or will the coming coordinated round of massive global Central Bank snow blowing thaw all risk assets back up to Fahrenheit 451?
The image above shows Benny & Timmy having shoveled like mad men to free their Chevrolet buried in heavy snowfall piled 136.42 inches high. Great job, you sorry snowflakes! You have cleared the snow, but your Volt is still stuck, schmucks. Apparently your work was nothing but a snow job. Get my snowdrift? So now what, you senseless snowmen?
To get a clearer unobstructed view, let us suck on a few melting macro icicles:
Icicle 1.0: Spanish government bond yields, a measure of market confidence in the country's financial strength hit a euro-era high of 7.317 percent on Friday. The soaring of the risk premium "pushes Spain close to a total bailout", read the headline of the center-right newspaper El Mundo on Saturday. "Spain enters an extreme situation", warned the progressive paper El Pais. The alarmingly high unemployment rates are igniting intensifying daily riots in Spain, which are threatening to tear apart the nation's social fabric. European Parliament president Martin Schulz has warned that Spain's economic crisis could spark a "social explosion" across the continent.
This from Bloomberg online:
Six Spanish Regions May Seek Bailout After Valencia, Pais Says
The Balearic Islands and Catalonia are among six Spanish regions that may ask for aid from the central government after Valencia sought a bailout, El Pais reported.
Castilla-La-Mancha, Murcia, the Canary Islands and possibly Andalusia are also having difficulty funding themselves and some of these regions are studying plans to tap the recently created emergency-loan fund that Valencia said it would use yesterday, the newspaper said, without citing anyone.
Spain created the 18 billion-euro ($23 billion) bailout mechanism last week to help cash-strapped regions even as its own access to financial markets narrows.
This from the UK's Guardian:
Concerns that Madrid is running out of options to bring down the debts of its ailing banks and bankrupt regions sent the country's borrowing costs soaring above 7.2% – a rate seen as unsustainable for a country that cannot devalue its own currency and is suffering a lengthy double-dip recession.
The bank bailout had been supposed to push down the country's borrowing rates, but the country's problems continue to mount. On Friday the region of Valencia was forced to turn to the Spanish central government for cash help.
That move, together with a downgrade of Spanish bonds to junk status by the credit ratings agency Egan Jones, saw the Madrid stock market suffer its biggest one day fall for two years.
Markets in London, Paris and Frankfurt followed suit with the FTSE 100 falling 1% to 5651. The euro crashed to historic lows against several currencies. Against the pound it fell to 77.72 pence, marking its lowest since the aftermath of the Lehman Brothers collapse in October 2008.
The prospect of Spain standing near the exit to the eurozone with Greece and Portugal had seemed outlandish only a few weeks ago, after eurozone leaders agreed to press ahead with more co-operation and a rescue for Madrid that targeted its banks.
Icicle 2.0: Mounting hard evidence clearly points to the powerful U.S. economic engine stalling out. Retail sales fell in June for the third straight month, according to government data, which led many economists to downgrade growth estimates for the April-June quarter.
Manufacturing in the Federal Reserve's all-important Philadelphia region also contracted for a third straight month. Other than the skewed July 4th data, the weekly jobless claims have been steadily inching back towards the 400,000 red zone level. New Jobs growth slowed to a paltry 75,000 a month from April through June, significantly down from the healthier 226,000 pace achieved in the first three months of the year. Official unemployment is frozen at 8.2 percent. The actual unemployment rate is much higher of course, If you add back all the people who have stopped looking for work you get a "real" unemployment rate of almost 15 percent.
This from Bloomberg BusinessWeek:
Measures of the overall economy, though, suggest the recovery may be in danger of stalling. The Conference Board's index of leading economic indicators slipped in June. The index fell 0.3 percent after a 0.4 percent increase in May. It had dropped 0.1 percent in April, its first decline in seven months.Six of the 10 components of the board's index fell last month. The biggest driver was an index of new orders. Average consumer expectations also declined. So did building permits, stock prices and orders for long-lasting factory goods excluding defense and aircraft — a measure of business investment. And average applications for unemployment benefits rose.
Don't come out of your igloos just quite yet, signs of the violent ice storm clearing any time soon do not look very encouraging. There are nearly 50 million shivering citizens on food stamps now, and more Americans have been approved for SS disability payments in the past three months then new jobs have been created by the frozen-stiff U.S. economy. Not to mention the looming fiscal cliff, or should I say giant icicles hanging overhead that are about to impale us with sharp tax hikes, and swiftly melting government payrolls.
Icicle 3.0: The European Union, the largest economic block on the planet, is clearly undergoing a very sharp contraction, which has all the signs of developing into a long drawn out recession, or perhaps even worse, a severe depression. Nearly all economic data continues to deteriorate rapidly.
This From economic research group BBVA Bancomer:
Pessimism returned to Eurozone throughout Q2 (-4.6p), as evidenced by the Economic Sentiment Indicator (ESI) from the European Commission. There is a significant deterioration in all sub-indices, with consumer sentiment the sector less hit by the downturn. In May alone, the index fell by 2.4p to 90.5, while in June the drop was milder (-0.6p), with services suffering the most, followed by industry. By country, France (-1.5) and Germany (-1.4) reported the strongest drops in June.
Business climate, as tracked by the BCI index, was also down in June, for a fourth month in a row, losing 0.15 points to -0.94, driven by increased pessimism in all components.
The PMI surveys in Q2 contributed further to the negative atmosphere, with the Eurozone Composite index remaining in contractionary territory for the fifth month in a row in June. Neither the services sector managed to show resilience, with both ESI and PMI surveys pointing to a sharp deterioration. In particular, ESI services confidence decreased by 5.0p during the last two months (May and June), stemming from a marked deterioration in the assessment of past business, demand and expectations
The industrial sector made a bad start in Q2 taking the slump for a third month in 2012, with production falling by a revised -1.1% m/m in April and the only upward pressures coming from increased energy production, which however was not enough to offset the fall of the rest components, especially capital goods.
Sentiment among consumers deteriorated at the beginning of Q2, and then remained stable in negative territory in May and June (+0.6p in May, -0.5p in June), driven by increased unemployment fears and less optimism about the future economic situation. On average, in Q2 confidence was somewhat lower compared to the end of Q1 (by 0.6p).
The labour market stagnation continues. The unemployment rate reached a record high of 11.1% in May, after the unchanged 11.0% in April.
Bottom line: Incoming data for the Eurozone in Q2 suggests negative growth at -0.2% q/q, with downside risks, after a stagnated economy in Q1.
Icicle 4.0: The BRICS continue to crumble, brick by brick. Brazil, Russia, India and China, will comprise 20 percent of the world economy this year after growing more than four-fold in the past decade, International Monetary Fund data show.
At the same time, their combined stock-market value has dropped to a three-year low of 16 percent of the total invested in equities, according to data compiled by Bloomberg. Considering Europe is the largest customer for all of these export driven economies, this should really come as no surprise.
It is true, unlike the western industrialized nations which have pretty much tapped out heir economic stimulus options, that the BRICs still have significant monetary & fiscal fire power available for policy makers to attempt to reinvigorate growth. However, one has to question the effectiveness of traditional economic pump priming measures for economies predominantly based on outside demand abroad, and underdeveloped domestic consumption at home. Lowering internal interest rates will not do much for an economy primarily dependent on waning export demand, and you can only create so many phantom jobs to build empty ghost cities with increased domestic spending.
This from Sreeram Chaulia, professor and dean at the Jindal School of International Affairs:
Latest statistics show that China’s unstoppable juggernaut has slowed down to an annualised GDP growth rate of 7.6 per cent, the lowest since 1999. Even in the immediate aftermath of the global financial crisis of 2008, China had managed to churn out stellar growth averaging nine per cent or more. If the world is truly moving towards a “post-crisis economy”, as the Economist suggested in late 2011, China should be growing even faster, not cooling. But the converse is happening.
The dragon has lost some of its firepower and the government is not denying that this slide from a miraculous growth path is a lasting one.
According to the Chinese National Bureau of Statistics, China’s economy has begun conforming to a “universal rule” and is in “a period of transition after 30 years of vigorous growth”. As was the case with Japan and the Asian “Tiger” economies, which all peaked for a while and then declined, China’s sensational run of double-digit GDP growth appears to have finally halted. The government in Beijing is applying sheen on this lost glory by insisting that China is entering a more “mature” stage in its economic history.
This is a far cry from past celebrations of emerging economies as engines of growth, contrasted with sluggish “mature markets” of advanced economies. If the emerging economies are “maturing” or, in fact, slumping, then where is the dynamic source of recovery for the global economy? This economic crisis was understood to be different from the Great Depression because it’s occurring in a world where high growth has survived in one segment, i.e. the emerging economies, while the other segment of the West and Japan were down in the dumps.
But with the Brics now undergoing sharp dips of their own, it is time to accept that the world is in an extended, systemic economic crisis that is nowhere close to ending. The alarming estimation of Mervy King, the governor of the Bank of England, that we are “not yet halfway through” the current crisis is ringing truer as disappointing quarterly growth calculations and intractably dismal unemployment charts portend more suffering on a global scale.
If TARP, ZIRP, QE 1&2, Op-Twist, EFSF, ESM, FED/ECB currency swap lines, multiple EZ bank rescues, and four direct EU country bailouts have gotten us this far deep into the mire, stuck in such a sorry state of global economic mud, what in the world makes you think that even more additional easy money schemes will loosen things up? I'm thinking something more along the lines of those hazardous loose tiles on your booster jet packs is in order for you space cowboys.
And, for those of you that are all jacked-up on the reflation trade, still convinced that the coming reflation will lift paper assets to new all-time highs, I have another question for you: what are you smoking?
If our esteemed financial engineers should dare to go all in hyper-reflation mode, as many are predicting here, the fallout from the immediate spike in oil & basic commodity prices will stop the global economy dead in its tracks. The ensuing earnings contraction WILL NOT raise the price of stocks; never has, never will. You CANNOT print your way to prosperity, same as it ever was. Sure, we could see further steady money creation and subsequent inflation creep, as we have witnessed for the past century, but hyper-reflation is NOT a viable policy option, and the policy makers know this. The monetary tool kit is spent, and the fiscal tool kit is broke, it's Hammer-time!
As for the Weimar hyper-inflation argument, be advised that this has never happened in history on a global scale, it has always been confined to one currency at a time; it's a single country-specific phenomenon.
The reason for this is that the industrialized global economy as a whole, is an interdependent working system based on the constant flow of oil, and thus cannot function nor be sustained without oil prices at workable transactable operational levels. Hyper inflation would completely stifle the free flow of oil.
At the end of the day, the USD remains completely anchored to oil, not the other way around. Yes, Dopes, despite all our monetary shenanigans, we continue to live in the industrial age of the petro dollar. The USD is oil; sorry, Gold bugs your day in the sun may not come after all; no hyper-inflation for you; you're all greased/washed up.
It's still ALL about the oil! Why else do you think we are encircling Iran with flailing newly-formed so-called Arab "democracies", with restless youth and weak leaders, which have been covertly brought to existence by the CIA? Arab Spring, my ass!
We are doing our utmost to foment and encourage a huge regional conflict between the Persian Shias vs. Arab Sunnis. The evil plan is to let them annihilate each other, while the leader of the free world's awesome naval armada stands at the ready to do God's work.
We will eventually intervene so as to completely secure all the ME oil reserves, which is required for our existential future domestic petroleum consumption. Bombs away, let the American military industrial complex pull us out of this economic funk. There will be no direct pipe line from Persia to China allowed without our approval and control, no ifs, ands or buts. After all, the U.S. economy & military machine runs on cheap oil, and that is that!
The answer my friends, is more oil for us and less people for them. It's the ugly truth, so get used to the real Evil Plan.
The global economy will continue to contract, and the market will fall. They can't do anything about that now, but they will not hesitate to steal your money on the way down. We may get one last pop, but if we do, consider it a gift from the furious winter tempest Gods above, quickly lock & load the bindings on your downhill skis, and flee the vicious snow monster on the double.
Evil Plan 73.0…………now you know what's next………..S&P 1100 here we come!