Macro Storm Clouds Gathering
First Macro Cloud
As we all know, The bernanke's most cherished policy measure QE2 comes to a screeching halt at the end of this month. Assuming that the program ends as planned, the Fed will have bought about $600 billion of various Treasury securities since late 2010, in addition to whatever agency debt proceeds were “re-invested” into Treasurys. Once the cruthches are removed from the patient, will he stand on his own two feet? I should think not, afterall, his arms (unemployment) & his legs (Housing values) have not heeled at all. Ask SHJ what happens when crutches are removed prematurely;-)
"The Standard & Poor's 500, the US stock market's benchmark index, could fall roughly 10% from its current level, partly due to the upcoming end of the Federal Reserve's bond-buying program, Credit Suisse's US equity strategist said on Wednesday." Doug Cliggott, of Credit Suisse, told the Reuters 2011 Investment Outlook Summit in New York. "We are of the opinion it is still a big deal," Cliggott said. "We would think an index between 1,170 and 1,200 would be a realistic estimate of where we might be headed."
Although a third round of QE, namely QE3 has been heralded by the lame street media, as a possibility. We all know that inflationary price pressures created by QE1 & QE2 make a new round of QE very remote for now, and most politically controversial, as it is now perceived to have mainly helped the very same bankers whom are largely responsible for the mess we find ourselves in. Of course, the stealth QE of re-investing the interest earned on the hugh amount of crap currently held on the Fed's balance sheet will continue unabated. However, all in, this stealth QE only adds up to a little more than a third of the current monthly POMO. Hardly enough to keep grossly inflated asset prices from rapidly deflating.
Second Macro Cloud
The ever growing amount of discouraging economic data points released over the past month are alarming to say the least. The jobs report was a “disaster”, the housing numbers are dismal, manufacturing has slowed way down and consumer confidence is dropping like a rock. The bad economic news just keeps rolling in. It is almost as if someone has slammed on the economic brakes. The Institute for Supply Management (ISM) said its index of national factory activity fell to 53.5 in May from 60.4 the month before. The reading missed economists’ expectations by a long shot!
Mike Riddell, a fund manager at M&G Investments in London, recently explained to CNBS why he is so alarmed right now….“Initially, we just had bad news from the weekly jobless claims data, but now we’re starting to see a broad-based economic slump. US house prices have fallen by more than 5 percent year on year, pending home sales have collapsed and existing home sales disappointed, the trend of improving jobless claims has arrested, first quarter GDP wasn’t revised upwards by the 0.4 percent forecast, durables goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed and Chicago Fed were very disappointing.”
Earlier this week it was announced that U.S. home prices have declined 5.1% from a year ago. Sadly, U.S. home prices have now fallen more than they did during the entire Great Depression.
Third Macro Cloud
Federal, State & local budgets are now squarely on the choping block. Only two choices before us, raise taxes or cut spending, both will adversely effect economic growth.
As Treasury Secretary Geithner warned, on May 16 a recent Treasury auction of U.S. debt will clear, putting the nation at its $14.294 trillion legal debt limit. With even the most aggressive plans taking years to balance the budget and end deficit spending, the U.S. will need to raise the legal debt ceiling to prevent economic calamity. Geithner has warned that he can only keep things running until July through “extraordinary measures” before the crisis reaches a state of overload.
The federal government today is taking in revenue equal to about 15 percent of the GDP. It hasn’t been that low since the 1950s, before programs like Medicaid and Medicare existed. To keep revenue that low as Baby Boomers retire is simply not realistic.
The housing market downturn, financial crisis and recession created a collapse in state and local revenues, which caused many states, cities and counties to raise taxes, slash spending and turn to the federal government for help. Almost all state and local governments must end their fiscal years with balanced budgets. As their costs rise in one area, they will have to cut spending in another or raise taxes to cover the new demands. Investors in the $2.9 trillion municipal bond market have been spooked by the budget crisis and have been pulling their money out of muni mutual funds for nearly five months.
China is certainly concerned about our fiscal woes, this from AFP Yesterday:
A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order. "In our opinion, the United States has already been defaulting," Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying. Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies — eroding the wealth of creditors including China, Guan said
Forth Macro Cloud
China slow down becoming more & more pronounced.
China has been called the “savior” of the world’s economy as its massive $586 billion Government Stimulus and Easy Money policies sustained over 10% GDP growth in 2009 even as the world GDP was contracting for the first time in recent history. However China’s huge stimulus has created problems of inflation and asset bubbles which threaten to slow down the world’s “Growth Engine” .
Seven very compelling reasons outlined by noted economic journalist Abhishek Shah as to why China's growth is now in serious question:
- Real Estate is a Bubble – The Chinese real estate is in a bubble with real estate prices growing far in excess of Chinese income levels. Though the real estate is not driven by a debt fueled boom like the US and other developed countries, nonetheless avg real estate prices / average income levels would suggest that the real estate prices are poised to come down sharply. Chinese authorities are using both monetary and non-monetary tools to bring sanity to this market
- US and European Export markets are slowing down – China’s growth has been a export driven growth like those of other Asian Tigers. However its main export markets of Europe and US are going to see sub-par growth in the next few years due to a debt driven excess. Europe’s Austerity measures and a low Euro is not an ideal situation for China’s export industries .
- Pressures on Yuan growing – China is facing an ever increasing chorus from countries around the world to appreciate the yuan which is artificially suppressed through currency controls. Some think tanks suggest that the yuan is 40% undervalued to its fair value against the dollar. With countries seeing their domestic markets shrink,everyone wants to export more and import less to repower their economies. An undervalued yuan is a trigger for trade wars.
- Foreign MNCs feeling discriminated against – China’s protectionist policies has led to an alienation amongst the foreign companies doing business in the country. Rio Tinto’s much publicized China corruption case and the Google abandonment of China has brought this issue into the limelight. Foreign countries are reevaluating whether China’s huge market is worth the discrimination they face vis-a-vis domestic companies
- Banks and Local Government have huge unaccounted liabilities – China’s corporate structure runs large based on patronage networks of government owned banks, state owned companies and provincial authorities. This frequently leads to misallocation in capital which shows up in the forms of NPAs. Local governments compete with each other for projects giving out huge subsidies and incentives which are funded mainly through local land sales. With real estate prices crashing and profits of export industries being pressurized, this is another bubble that may crack.
- Chinese Stock Market is down the most among major markets in 2010 – The Chinese stock market has been the worst performer among major economies with the interest rate increases and real estate bubbles making investors wary. Note this by itself is a poor indicator of economic health as stock markets are generally poor predictors of economy in the short run
- Chinese wages are going up – There has been a lot of social unrest and suicides in China as wages fail to keep in sync with the rising productivity. Recent suicides at Electronics Giant Foxconn and strikes at Honda are indicative of this trend. Low wages which are China’s biggest competitive advantages may no longer remain one for much longer.
Fifth Macro Cloud
European soverign debt / EU banking crisis is clearly coming to a rapid head, and about to take on a much more ominous direction. Should the Syntagma square Greeks in the street of Athens obtain the plebiscite / national referendum they are clamoring for…watch out below! The fuse is now lit, and this could well be the first domino to fall, causing the anticipated chain reaction setting off the $600 trillion in CDSs (you know….Warren Buffet's weapons of mass financial destruction), which would unravel the entire EU / Western World banking system as we know it…….
Prime Minister George Papandreou said Monday he would consider holding a referendum on the government's reform agenda, if necessary, to shore up popular support for the measures. Papou used the word referendum last week and again this week. Referendum is not a word that goes down easily in the corridors of power in Brussels.
From Israel news – Arutz Sheva:
Yet it is hard to see what other choice the Greek Prime Minister has. His popularity rating is hovering around 30%; he faces growing dissent within his own Greek Socialist PASOK party and Greece is ablaze with strikes as workers who see themselves victimized by privatization vent their anger. The economy has contracted more than expected. Further austerity is a hard sell to the Greek population because it appears to be all pain no gain. This is particularly true for the young who are living with 42% unemployment. The Greek politicians show no desire to emulate the Portuguese and therefore somebody must give in real soon – the European governments, the banks, the bondholders or all of them.
Here is how John Maudlin sums things up in the old world continent:
There are just so many risks in Europe that it is hard to make a list long enough. I think the risk to the world markets is higher than the subprime risk, at least from what I can see today. I know that the leaders of Europe think they can “contain” the risk. So did Bernanke in the summer of 2007. You cannot contain this until you actually admit the problem. Our credit institutions are so intertwined that a repeat of the 2008 credit crisis is entirely possible. Who plays the role of Lehman? Let me count the candidates. Greece. Ireland. Portugal. Spain.
Sixth Macro Cloud
Middle East mayhem shows no signs of abating….Stalemate in Libya, Upheaval in Syria, Yemen bedlum, Supression in Bahrain, Saudi Arabia paying off dissent, Iranian sponsored medling, Egypt turnover turmoil, Renewed Iraeli / Palestinian clashes, Hamas & Hesbullah brotherhood,…….the beat goes on.
The Arab Spring seems to have disolved into the Winter of discontent. Oh, and let's not forget the trillions spent keeping us safe from the boogeyman in the ongoing Iraq /Afghan / Pakistan clusterphuck.