Around the Globe: Weekend Edition 08.24.2013


Lagarde Calls for More Global Coordination as QE Exits Loom – Bloomberg.

Central banks told to cooperate on managing global liquidity.

Central banks told to cooperate on managing global liquidity | Reuters.

Lagarde calls for more crisis ‘lines of defence’ –

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:

US 10yr 08.24.2013

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:

Sales of New U.S. Homes Fell More Than Forecast in July – Bloomberg.

New-Home Sales Tumble –

U.S. new home sales fall sharply; house prices rise | Reuters.

New home sales hammered, prompting doubts about recovery.

Shiller: Rising rates will hurt home prices.

New Home Sales Since January 2006

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?

New Home Sales Since 1960

From Thursday’s Edition:

U.S. Jobless Claims Fell to Five-Year Low Over Past Month – Bloomberg.

Leading economic indicators rise 0.6 percent, top forecast.

U.S. labor market, factory data show economy firming | Reuters.

Target blames Canada and cautious shoppers as it warns on year | Reuters.

Report: Household income below end-of-recession.

Median Income Performance in the U.S. Since 2007

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:

Istanbul Skyline Reflects Cheap Dollars Now Growing Scarce.

Emerging Markets Take Renewed Currency Strain –

EM Currency Sampler 08.21.2013

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 will need third aid deal: German finance minister.

UPDATE 1-Greece will need third aid deal, German Finance Minister admits | Reuters.

Greece - with policy change

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:

China’s Central Bank Chief Confident on Outlook –

China 7 Day Repurchase Rate 08.19.2013

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:

Chinese T-Bill Index

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.


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