Category: Countries & Regions

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Citi: Brace for global recession | MacroBusiness

David Llewellyn-Smith quotes Willem Buiter at Citi:

….The main ‘game changers’ in our view are the emerging belief that even the US economy is no longer bullet-proof and that policymakers (in the US and elsewhere) may not be there to come to the rescue of their own economies, let alone the world economy, by propping up asset prices and aggregate demand. It is likely, in our view, that global growth will this year once again underperform (against long-term trends and previous year forecasts). Citi’s latest forecasts are for global growth of 2.5% in 2016 (based on market exchange rates and official statistics) and around 2.2% (adjusted for probable Chinese mismeasurement). But in our view, the risk of a global growth recession (growth below 2%) is high and rising.

…..even though monetary policy is at the point of strongly diminishing returns, it is likely to remain the principal instrument through which authorities in a range of countries will try to boost growth and inflation.

…..In most countries, the hurdles for a major fiscal stimulus remain high.

There are no free lunches: “propping up asset prices and aggregate demand” reduces the severity of recessions but inhibits the recovery, leading to prolonged periods of low growth. The further asset prices are allowed to fall, the stronger the recovery as investors (eventually) snap up ‘cheap’ assets. Maintaining high prices is sometimes necessary, as in 2009, to prevent a 1930s-style collapse of the banking system but we may pay the price for another decade.

Source: Citi: Brace for global recession – MacroBusiness

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The Man Who Got Russia Right | Foreign Policy

Susan Glasser on George Kennan, author of the famous Long Telegram that formed American policy during the Cold War:

….Based in Moscow a few years later, Kennan saw the historical contradictions that undermined the foundation of the Soviet regime — while at the same time giving it a veneer of power. Russians were “used to extreme cold and extreme heat, prolonged sloth and sudden feats of energy, exaggerated cruelty and exaggerated kindness, ostentatious wealth and dismal squalor, violent xenophobia and uncontrollable yearning for contact with the foreign world, vast power and the most abject slavery, simultaneous love and hate for the same objects.” Looking for an insight into the forces competing for political supremacy in Russia today, you could do far worse than Kennan’s observations.

Today we would call that bi-polar.

……”The strength of the Kremlin lies largely in the fact that it knows how to wait,” Kennan wrote. “But the strength of the Russian people lies in the fact that they know how to wait longer.”

Source: The Man Who Got Russia Right | Foreign Policy

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Sigh…no, iron ore has not bottomed | MacroBusiness

From David Llewellyn-Smith:

…..restocking is the only thing going on here, enhanced by recent Chinese stimulus. It will pass in due course leaving enormous oversupply and far too large Chinese inventories.

….Not only is iron ore going below $30, it’s going below $20 soon enough. This year we’ll see more supply from Minas Rio, Sino, Roy Hill, India and Vale as Chinese demand falls sharply with a swing in the market of 100mt towards greater surplus.

Source: Sigh…no, iron ore has not bottomed – MacroBusiness

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S&P 500 still flaky

From Howard Silverblatt at S&P Indices:

“With almost 90% of the Q4 2015 earnings reported, 67.6% of the issues are beating estimates (the historical rate is two-thirds), but only 36.8% beat As Reported GAAP rule based earnings estimates and less than half, 46.8%, beat sales estimates.

Explained ‘responsibility’ for any short fall on the cost side includes currency costs and a growing list of special one-time items (never to be repeated, of course). On the income side, helping earnings, are the ‘difficult decisions made’ by companies under the heading of cost-cutting (as layoffs and location changes appear to be on the rise).”

As Reported 12-Month Earnings Per Share (EPS) for the S&P 500 has fallen 12.5% from its Q3 2014 high, with 88.5% of companies having reported.

S&P 500 EPS

While same-quarter sales will fall an estimated 2.6% in December 2015.

S&P 500 Quarterly Sales

Manufacturing activity is declining, with the PMI Composite index below 50 signaling contraction.

PMI Composite index

Growth in the Freight Transportation Services Index has also slowed.

Freight Transportation Services Index

But electricity production recovered from its alarming downward spike in December last year.

Freight Transport Index

The jobs market remains bouyant, with annual manufacturing earnings growth rising 2.5%.

Annual Change in Hourly Earnings

Inflation has kicked upwards as a result.

CPI and Core CPI

While profit margins are likely to remain under pressure.

Nonfinancial Profit Margins

Light vehicle and retail sales are holding their own.

Light Vehicle Sales

Retail Sales (ex-Gas and Automobiles)

And bank lending continues to post steady growth.

Bank Loans and Leases

But net interest margins have fallen below their 2007 lows.

Bank Interest Margins

With rising spreads warning of a credit squeeze.

10-year Baa minus Treasury Spreads

Conclusion

Sales levels are reasonably healthy, but rising wages and competition from imports is putting pressure on profits. Rising credit spreads and falling margins suggest all is not well in the banking sector, which could impact on broader economic activity.

Housing starts remain slow.

Housing Activity

Only when this sector (housing) eventually revives can we expect to see a full recovery.

Cement and Concrete Production

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A New Cold War? Russia’s Confrontation with the West

Michael A. McFaul, Stanford University professor of political science; director and senior fellow, Freeman Spogli Institute for International Studies; Peter and Helen Bing Senior Fellow, Hoover Institution; Stanford University, former ambassador to Russia (2012 – 2014).

Colin’s Comment:
Here is what I see as the big picture:

  • The current confrontation is more about the actors than about long-term strategy or geopolitical conflict
  • Russia is part of Europe, culturally and economically, and its destiny lies in the West
  • A strong Russia is in the West’s interest — a weak Russia invites encroachment from China in the East
  • The West has to build a strong deterrent to aggression from the current regime
  • While leaving the door open to long-term participation in European democratic structures, scientific cooperation and trade.
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Gold: PBOC makes its move

China’s PBOC made its move against the hedge funds on Monday, while many hedge fund managers were enjoying a long weekend in the Hamptons. With more than $3 Trillion of foreign reserves, this is a fight that the PBOC is likely to win, provided it stands firm. Hedge funds betting on a collapse of the Yuan can leverage their positions, but that makes them vulnerable to margin calls. Driving the Yuan below 6.50 to the Dollar may force some to cover their shorts, which would further strengthen the beleaguered currency.

USDCNY

China’s sell-off of foreign reserves has caused the Dollar to fall, in the midst of a flight to safety. Retracement that respects resistance at 97.50/98.00 would indicate a decline to test primary support at 93.00. Decline of 13-week Twiggs Momentum below zero warns of a primary down-trend.

Dollar Index

Flight to safety has spiked demand for Gold. Expect retracement to test support between $1150 and $1200/ounce. But respect of either level would confirm a trend reversal (after recovery above $1200 completes a higher trough).

Spot Gold

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BHP Billiton

I have seen a few advisers recommending BHP to clients but there are no signs that the commodity free-fall is ending.

Bulk Commodities

Bullish divergence on 13-week Twiggs Money Flow reflects medium-term buying pressure. Expect strong resistance at 16.50. Breach of short-term support at 14.00 remains likely and would signal another decline.

BHP

The weight of the market is on the sell-side and a knife-edge reversal is most unlikely.

BHP

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Janet Yellen on financial market turmoil

Federal Reserve chair Janet Yellen before the House Financial Services Committee:

Janet Yellen

“…..As is always the case, the economic outlook is uncertain. Foreign economic
developments, in particular, pose risks to U.S. economic growth. Most notably,
although recent economic indicators do not suggest a sharp slowdown in
Chinese growth, declines in the foreign exchange value of the renminbi have
intensified uncertainty about China’s exchange rate policy and the prospects for
its economy.

This uncertainty led to increased volatility in global financial markets and, against the
background of persistent weakness abroad, exacerbated concerns about the outlook for
global growth. These growth concerns, along with strong supply conditions and high
inventories, contributed to the recent fall in the prices of oil and other commodities. In
turn, low commodity prices could trigger financial stresses in commodity-exporting
economies, particularly in vulnerable emerging market economies, and for commodity-
producing firms in many countries. Should any of these downside risks materialize,
foreign activity and demand for U.S. exports could weaken and financial market
conditions could tighten further…..”

…No rate rises any time soon.

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