Around the Globe 05.08.2013

Fed’s credibility tested as inflation drifts below target | Reuters.

US CPI 05.01.2013

The Fed wishes to continue its money printing experiment to maintain the asset price bubbles that the world central banks have inflated since the onset of the GFC.  The problem that they are experiencing in implementing this policy is the decreasing marginal returns of each new round.  $85bn a month may no longer be enough, so  the organization leaks stories about the labor market and low inflation to justify moar.

Not only will the current program be continued, but I bet that the amount will be raised to $100bn per month.

BofA Traders Have Perfect Quarter as Morgan Stanley Lags – Bloomberg.

Fed QE versus SP500

Res ipsa loquitor.  The thing speaks for itself.   Lest one have any doubts that the market is rigged, note this piece.  A firm should not have quarter long winning streaks in efficient markets.  The TBTF firms are the beneficiaries of the Fed’s $3tr+ in purchases since 2009.  They sell bonds to the Fed and buy stock realizing profits and inflating the value of their inventories.

When this madness ends, it will not be the Fed that lost billions of dollars but the taxpayer.  Will the banks give the profits back to help recapitalize the Fed when the time comes?

Poland Cuts Interest Rates to Record Amid Lack of Recovery – Bloomberg.

Polish Benchmark Interest Rate

A few days ago, the Polish government began selling euro membership to its wary citizens.  If the government gets it way, Poland will surrender its independence and monetary policy for nothing, and the country will no longer be able to cut interest rates to offset an economic slowdown.

China Trade Surplus Draws Doubts – WSJ.com.

China opens new front in war as yuan speculation distorts export data | Reuters.

China Export Gains Spur Renewed Skepticism of Figures – Bloomberg.

Chinese Export Growth

How do exports continue rising dramatically when China’s key trading partners reported small or flat increases in Chinese imports? Exporters are adding to invoices, particularly in Hong Kong, so that they have more clean capital that they can use to speculate in Chinese markets.

These massaged export numbers are significant.  Chinese GDP is probably not growing at the official rate of 7.7%, and this slower growth will continue to sap world demand particularly in the commodities space.

Asian Governments Take Measures to Battle Strong Currencies – WSJ.com.

JPM Asia Dollar Index

When the major central banks print money, the effect ripples throughout the world.  The initial rounds in 2009 led to food price inflation that in part caused the Arab Spring.  Currently, cheap central bank money is finding its way to every corner of the globe in its quest for yield.  This dynamic raises the demand for emerging market currencies, which appreciate slowing economic growth.  In response, EM central banks are forced to cut interest rates and sell their own currency in the markets to hold down exchange rates.  And the bubble continues to inflate.

Call to End Troika in Europe Crises – WSJ.com.

Unsustainable Bailouts

Now we all know that everyone has two reasons for adopting a course of action: the reason that they say and the real reason.  You can read all about the reasons for ejecting the IMF from the European bailout regime that the Eurocrats say in this article.

The real reason is that the IMF has begun insisting that debt restructurings are sustainable after remaining silent throughout the Portuguese, Irish and first Greek bailouts.  While the IMF supported sustainability in the third Greek bailout and the first Cyprus one, it quickly caved.

Nevertheless, the IMF seems less willing to pretend that 170% debt to GDP ratios are okay, and the rich countries refuse to any form of debt forgiveness.  If you think this policy will change after German elections, then ask yourself why the IMF is being retired.

EU Commission or ESM could wind down ailing banks: report | Reuters.

Italy, Spain NPLs as of 03.2013

This article reports more talk from the eurocrats.  In order for there to be a banking union, the rich countries must decide to become joint and severally liable for the banking systems of countries like Spain and Italy.  When the rich countries put up about €1trn to start a resolution and deposit guarantee system, then you have a banking union.  Until then, you just have talk.

McDonald’s Sales Slip 0.6% on China, Europe Weakness – WSJ.com.

McDonald’s Sales Slip 0.6% in April.

McD 05.08.2013

McDonald’s sales worldwide sales performance confirms slackening international demand led by Europe and anemic growth in the U.S.  A barely positive 0.7% rise in American sales was more than offset by a 2.4% drop in Europe, McD’s second largest market, and smaller decreases in Asia and Africa.  This has been the McD story for the last year or so, but that has not stopped the stock price from appreciating over 20% since November.  I wonder what could cause a stock with falling revenues and profits to rise so much.

Portugal Marks Return to Bond Market – WSJ.com.

Portugal 10yr Bond 05.08.2013

Portugal managed to sell bonds today in what the mainstream media has decided is an important step for the country to regain independence. Unfortunately, there is no regaining independence in the Eurozone.  A country with a tremendous debt pile and no growth is only able to sell bonds because the ECB has made vague promises about supporting the price and cheap money allows TBTF European banks to speculate in this debt free of charge.

 

 

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Poland Considers Euro Membership

Poland Warily Revives Debate on Adopting the Euro – WSJ.com.

This is not a Polish joke.  Poland is actually considering euro membership.  Fortunately, the stupid Pole is just a stereotype propagated by years of inappropriate comments, and  Poles are actually against euro adoption by over a two to one margin.  Despite the lack of political support, ill-suited economic fundamentals, and depressions and recessions caused by euro membership in countries with similar economies, Polish politicians are attempting to sell euro membership to the country.

The article states,

The emerging consensus is that for the common currency to regain its allure, euro-zone institutions from regional bank supervision to the fund set up to rescue countries in trouble need to be significantly strengthened.

My question is emerging consensus among whom? The people are strongly opposed to euro membership, so the implication must be the elite.  The good news is that the Germans will not pay any more money to strengthen European institutions, so the currency may not regain its allure for the elite for quite some time.

Fundamentally, Poland is ill-suited to join a currency union with Germany.  Then again, so were Italy, Spain, Greece and Portugal, but that didn’t stop them.

Poland runs  a consistent current account deficit with its own currency subject to its own monetary policy tailored for the peculiarities of its economy.  What will happen when it begins using a Teutonic-strong euro?

poland-current-account-to-gdp

Moreover, its labor market is uncompetitive with its own currency.  Disaster will result if Polish workers are forced to compete with the uber-productive Germans.  Polish unemployment is almost triple the German rate, and this number will get worse if the Poles are forced to compete against the Germans within the same currency zone.

poland-unemployment-rate

Poland needs to retain its own currency and the freedom to set a monetary policy for Poles, not be forced to adhere to the ECB’s policy for Germans.

Poland Prepares 2015 Referendum on Euro Membership

Poland GDP Growth

Poland opens way to euro referendum – FT.com.

You would think that there’s gotta be a Polish joke in here somewhere, but that is not the case.

Poland has endured years of insecurity due to its precarious geographic position in the middle of Europe.  Since the end of the Cold War, Poland has been slowly coming into its own by joining the multinational organizations of the West.  A minority of Poles wish to continue the journey by joining the eurozone.

Prime Minister Tusk is gambling that this minority will grow into a majority by the time elections roll around in 2015. Basically, his actions reveal that he believes that Europe will have overcome the Eurocrisis by the time Poles go to the polls for the euro-referendum.

With Eurozone GDP continuing to decrease while more countries join the bailout dole, his gamble is either audacious or delusional.  Only time will tell which.