Lagarde is exhorting the central bank heads to work together as they attempt the return to “normal” monetary conditions. The problem is not what the central banks can control; it’s what they can’t. Despite the ongoing bond purchases of the Fed, interest rates have risen markedly since early May:
China, the other gorilla in the room, is also experiencing tightening conditions with overnight repo rates remaining above long-term averages despite the best efforts of the PBOC to provide liquidity to the financial system as needed.
The GFC has reached a dangerous, new phase. The IMF and the central bankers believe that they have everything under control.
From Friday’s Edition:
No one should be surprised by the drop in new home sales. Mortgage rates have skyrocketed since May raising monthly mortgage payments for the same house. What I find interesting about the chart is how far we are from recovering to a healthy market. Contrast the quick fall in new home sales from 2006 to 2009 as illustrated by the steep slope in the chart above with the slow, shallow rise from 2011 to 2013. If we discard August’s results as an anomaly, at the current rate of change it will take us until another three years or so of growth to reach the healthy levels of the past.
Amidst falling incomes, rising prices and higher rates, this rally does not appear to have three years left in it. QE4 anyone?
From Thursday’s Edition:
The reason why most people believe that the recession never ended is because it hasn’t. The traditional definition of a recession is two consecutive quarters of declining GDP. Actual people are not concerned with national income; rather, they are concerned with their own income. As today’s Chart of Truth illustrates, by this measure the vast majority of Americans are not doing so well Median income is still down 8% from its peak in early 2008 over four years after the official start of the “recovery.”
Jobless claims, confidence surveys, housing sales and any other figure used to support the recovery narrative do not matter. All that does is the chart. As long as Americans are not making the money they used to, the economy will remain depressed as evidenced by poor results first from Wal-Mart, now from TGT.
From Wednesday’s Edition:
The market swoon is not all about the Fed’s taper talk represented by the green arrow in the chart. China began having liquidity issues almost three weeks prior, the red arrow. The biggest loser in the last six months is surprisingly not India. The Brazilian real has had a tougher half-year. However, weak currencies have stoked inflation in all four of the countries represented in the chart with two, Turkey and Brazil, undergoing political instability. India will soon join them.
From Tuesday’s Edition:
Greece does not require a 3rd bailout, because it has already had three. The next will be the fourth.
The first bailout occurred in May of 2010, and everyone believed that the Greek problem was solved. Within a year, this aid package proved to be short, so the troika approved a new bailout plan that most economists outside the official halls of central banks, governments and the IMF deemed insufficient from the get-go. This plan, the second bailout, was eventually implemented in March of 2012.
By the summer, it was obvious that Greece was in need of more aid. ELA approved by the ECB kept the Greeks afloat until a third bailout package could be arranged in November of 2012. As you can see for yourself above, the same wildly optimistic projections of revenues from GDP growth and privatization doomed this plan from the start, but the troika’s goal here was not to save Greece but to keep it quiet until after German elections. They failed, and I wrote
The 3rd Greek bailout was not designed to place Greek finances on a sustainable path; rather, the troika was primarily concerned with kicking the can down the road past German elections. Once Angie was safely seated in the Chancellor’s throne, she could return to the Bundestag with a request for more German money to throw down the Hellenic Hole. (Greece Requires 4th Bailout | DARECONOMICS.)
The fourth bailout will occur sometime in the winter of 2013/2014. Additional German money will be politically covered with a deposit tax à la Cyprus. Anyone who is maintaining funds in a Greek bank deserves whatever happens to him.
From Monday’s Edition:
The PBOC’s head is confident joining a long list of confident central bank heads. It’s their job to exude confidence, so we’ll let them. In the meantime, we’ll examine the numbers. Chinese liquidity has yet to return to pre-crisis levels with the overnight repo rate stuck at 4%. Additionally, Chinese government bonds rates have been rising:
Money is slowly leaving the Chinese financial system. Unlike India’s RBI, the PBOC seems to be on top of the situation providing enough liquidity to maintain the health of the Chinese financial system. Only time will tell if its efforts will continue to be successful.