I never thought I’d see the day that the US Federal Reserve would admit that the US economy may not recover for five or six years. But they confessed exactly that late last week, and it changed the positions on the stove-top – the US is now on the hot plate at the front and Europe has moved to simmer in the back corner – (at least until Friday when the results of European bank ‘stress tests’ are to be announced. With 34 of the world’s largest 50 banks domiciled in the Eurozone, they are the most over-banked region on the planet and if they come out looking good then it’s all lies!)
It seems the markets have developed the attention span of a goldfish and as David Bloom, currency chief at HSBC suggested, “We’re in a world of rotating sovereign crises. The market seems to become obsessed with one idea at a time, then violently swings towards another. People thought the Euro would break-up. Now we’re moving into a new phase because we’re hearing alarm bells of a US double dip.”
As I have pointed out many times, the US stimulus expenditure has been a complete failure, and rather than bringing quantitative easing to a halt as promised, they may be contemplating a super-charged burst as they seek to avoid a quick slide into outright Japanese-styled deflation.
“The Fed minutes warned of “significant downside risks” and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10% of GDP have so far failed to lift the economy out of a structural slump.”
Of course the talk of avoiding a double-dip recession is in itself somewhat imaginative as surely the real evidence is that they never left the first one – all the talk of ‘green shoots of recovery’ etc was hopeful talk based on the assumption that this was a cyclical recession, while all along avoiding dealing with the structural re-shaping of an economy drowning in its own debt levels.
But then all the previously dominant Western economies are struggling with their ability to pay down their debt built up over decades so it’s fallacious to pretend we were ever facing a common or garden variety recession.
This is the big one, and it’s structural not cyclical – any pretense to the contrary is far more dangerous than facing the truth. Along with a few others, I’ve been saying this for over five years and finally the big boys are admitting it.
The global economy has been gradually overcome by the inevitable reality that a complex organism cannot be persistently manipulated by a political system seeking election and re-election by seducing voters with their own money. We are spinning out of control as a direct result of being spun increasingly and thoroughly, multiplied by the vast gearing of the global banking system.
Of course we’re in trouble, it happens periodically and putting off the essential changes by replacing one political ideology with another won’t change the trajectory much, it’ll only waste scarce resources and time.
As it did prior to the collapse in September 2008, the Baltic Dry Index, (which measures global shipping costs), has plunged over 50% since May. This is an un-manipulated and very direct measure of what is actually happening in the world of international trade and clearly things are not good. It’s time to take heed.
So what have we seen so far and what can we now expect? What we’ve seen is Keynesian stimulus attempts from all the major economies – everyone’s had a go – US, Japan, China, Eurobloc, UK, Australia, etc, etc, even us; and beyond the initial expenditure impact no economic growth echo has resulted.
This confirms the point I made last time – the sovereign expenditure multiplier is now certainly less than one, and is increasingly acting as if it may even be effectively zero. Every individual sector on reaching the end of a stimulus package has slumped drastically, causing greater chaos than if they had been left alone. Not only has the stimulus had no lasting positive impact, it steals all the future activity from each of the chosen sectors, leaving them in a revenue vacuum.
In the major Western economies we’ve also seen a massive and seemingly unchallenged wealth transfer from the taxpayer to the banking system. I’ll talk more about this next time.
And what can we now expect? In the financial markets I fully expect the present difficult and volatile markets to continue. The slow grinding bull market is certainly a thing of the past but I don’t actually expect the extreme chaos of 2008/9 to return, despite the wild expectations of many commentators.
These are markets of low volume and fewer participants but they represent a fairly even balance of opinion, hence the sharp moves as confidence shifts. In the absence of political machinations it would be easy to conclude that the equity trend is down, and down only, but my experience tells me not to be too hasty in forming set opinions. It’s easy to be a bear about now, but any serious QE activity and the lack of alternatives may make equities the risk of choice for a bounce. Patience will be important.
Trading too often or too certain won’t be the right style. They’re markets to be stalked, and not fought with! (I wrote this Wednesday before the US jump).
Remember politicians won’t be giving up their fiddling just because I think they’re a bunch of power-crazy clowns – nope, they’ll be getting themselves elected any way they can, and there are US elections coming, for just about all but the President.
My understanding of economics comes from having a modest amount of formal study a long time ago, but mainly from the cauldron of being a professional trader for over 20 years.
Of the two I think it is the trading experience that taught me more. By and large I use economists as contrary indicators and the more of them in agreement, the greater the chance they’ll be wrong, just like any other group in the market. Top traders have a much more urgent need to be right, and timely, and the very best economic analysis I heard was generally from the best thinkers in the trading pits. This wasn’t theoretical – this was economics with the bets on!
Anyway, seems the US Congress are having their two cents worth – The Subcommittee on Investigations and Oversight will hold a hearing on July 20, 2010, to examine the promise and limits of modern macroeconomic theory in light of the current economic crisis.
On another matter entirely, for over 18 years I have been working on understanding a grid pattern I first saw in the markets in December 1992.
I’ve been playing around with the angularity of markets and nature since then and have bit by bit found some answers that are pretty amazing.
I am now extremely certain I’m right, the evidence is just too dense for me to be wrong; so it’s now time to share my findings with others.
I will certainly continue to write these blogs, but nothing I say can be as unique or valuable as teaching you what I have found.
It took me over six years to even know where I was heading with this and since then I have gradually built up my understanding, observation by observation.
I’ve pushed it far enough to know it now deserves attention by others. So readers, here’s you chance for a free test of something I’ve staked my life on!
I promise – this will blow you away – with an acetate grid I’ve developed I am able to show you a new dimension to markets (and nature) you never knew existed. Once you learn how to use my discovery you will be light years ahead of the average market participant – just where you want to be! Or if you just want to understand nature more deeply then do reply – you’ll be pleased.
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Special offer to Sharechat readers: You can check out my discovery for FREE – for the cost and trouble of sending me a self-addressed envelope. I’ll send you back a simple grid that will change the way you see the markets and the world around you. Do it!
My address is: W Lochore
Driving Creek Road
Coromandel 3506
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Finally – there were a few responses to my suggestion last week that fresh fish should be cheaper etc. and so should healthy food. Where did this comment come from? Basically with fishing it came from the desire to see a better outcome for such a valuable resource.
The one budgetary item globally that never seems to be pruned is the health vote, and aging boomers and growing obesity guarantee a major surge in costs. The market simply doesn’t deliver the appropriate solution here, for some weird reason and so direct encouragement may be a better idea, as we are facing an inevitable explosion in health costs without an attendant growth in tax revenue.
We have to get a higher proportion of activity to the top of the cliff and diet is the best place to start – we can do that immediately. (As it happens I hadn’t at that point seen the Maori Party/Labour Party proposal to do away with GST on fresh food, but why not? I’m not convinced this can be shoved away quite so neatly as National would like.)
In New Zealand the health budget is around $13.5 billion per year and wet fish exports about $1.2 billion.
I often buy farmed salmon at 50% of the price of trawled snapper and this doesn’t make sense to me. Further, I guess the Japanese and Taiwanese come all this way to catch our fish because they understand how valuable a resource we have – but our attitude is not to eat it but to sell it to the highest bidder. Crazy!
Go and look at what’s happening in the average hospital ward and see who’s there – it’s the old and the overweight people who are taking a higher and higher proportion of the beds and we are going to have lots more of both. Yet we expect a good result from actually eating mutton flaps, and exporting the balance to our island neighbours – we should be ashamed of ourselves.
This is not entrepreneurial, it’s predatory. Making certain our poorer folk had some decent food would be a far-sighted non-dogma view that is easily available to us – I just don’t understand why a country that produces enough for 55 million doesn’t feed its own citizens well first and then export the rest.
Wayne Lochore
Most of your finance speak is is unreadable and non disernable to those not in the business of finance, that is part of the game though to confuse… although I well understand what has been done with the Fed as a tool, to deliberately design a crash and then bail out the bankers and unfailable institutions like Goldman an co.. and leave ordinary folk homeless on the streets,and their is more to come… and with the deregulating of finance from Greenspan and the Bush administration and inventing scams like deriavitives which even flumix bankers and economists into how they work.. then along with a fraudulent ratings scheme to back them up like S&P and their triple AAAs , also you mention quantatative eassing, let us know it means printing money out of thin air of printing presses or a click on a computer screen and presto there is new money. Oh and also when the Fed does that it charges interests to the US govt before it goes into circulation…..