Monthly Archives: October 2011

The startling recovery in risk assets in October – global equities rose by 11 per cent during the month - was triggered mainly by reduced pessimism on the eurozone’s debt crisis, but was probably also helped by easier monetary policy from several of the major central banks. As usual, the Federal Reserve has been in the vanguard of this action, and further measures are expected from the FOMC when it meets on  Tuesday and Wednesday.

There have been calls for major innovations, such as the introduction of a target for the level of nominal GDP, but the Fed has given little indication that it is ready for anything quite so drastic. Much more likely are some further modest steps to improve the communication of the Fed’s thinking on the future path of short rates, with the aim of keeping long rates as low as possible. And there might also be some more purchases of mortgage backed securities. Read more

In typical European fashion, a summit deal which seemed out of reach at midnight last night was triumphantly unveiled at 4am. The deal does not, and was not intended to, have any effect on the core problems facing the eurozone. There is still an urgent need to restore growth to economies which are hamstrung by uncompetitive business sectors, and continuous fiscal tightening. Recession still looms, especially in the southern economies.

What the deal is intended to provide is adequate medium term financing for sovereigns and banks which have been facing urgent liquidity problems. On that, it is notable that the summit has not really raised any new money, apart from an increase in the private sector’s write-down of Greek debt by some €80bn.

All of the remaining “new” money, including €106bn to recapitalise the banks and over €800bn to be added to the firepower of the EFSF through leverage, has yet to be raised from the private sector, from sovereign lenders outside the eurozone, and conceivably from the ECB.

There is no guarantee that this can be done. The eventual out-turn of this summit will depend on whether this missing €1,000bn can actually be raised. Read more

It has become commonplace for economists to attempt to “nowcast” the growth rate of real GDP from the dozens of sources of activity data which appear during the quarter. Lately, most of these estimates have suggested that US real GDP has risen at a fairly healthy rate during Q3. For example, Dave Altig at the Atlanta Fed “nowcasts” that the growth rate may be as high as 3.2 per cent when the official estimate appears next Thursday.

This compares to an average growth rate of only 0.8 per cent in the first half of the year. Although much or all of the rebound has probably been due to temporary factors (notably the improvement in Japanese component supply after the earthquake damage in Q2), it will support the Fed’s expectation that growth will recover somewhat from now on.

However, we need to view this small improvement in the context of the much less satisfactory picture which emerges from a longer term perspective. The Wall Street Journal points out that the level of US GDP remains 6.7 per cent below the CBO’s estimate of potential GDP, which means that the economy could be producing $900 billion more per annum without risking higher core inflation rates. Furthermore, Dave Altig reckons that, at the current pace of job creation, the unemployment rate will remain in a 9-10 per cent range until at least 2017. Read more

Read Gavyn’s latest piece for the FT’s A-List site:

As this weekend’s eurozone summit looms into view, the key question for markets is whether the new financing arrangements will be sufficient to handle three separate problems: the necessary writedown of Greek debt; the recapitalisation of eurozone banks; and the restoration of private funding for Italian and Spanish budget deficits.

It has been clear for a long while that the €440bn currently available to the European financial stability facility is far from sufficient to do the job. Consequently, it seems that the summit will agree to “leverage” the bail-out fund to give it much greater scale. This has triggered optimistic talk about a “big bazooka”, but achieving the right order of magnitude still looks to be a very tall order.

 Read more

The outline of a package to “save the eurozone” began to emerge at the G20 meeting last weekend. Although the main components of the package are now apparent, the details remain hazy. The big questions surround Greek government solvency, the recapitalisation of the eurozone’s banking system and the leveraging of the resources of the EFSF. Expectations are now running high that Germany and France plan to deploy the “big bazooka”, but German sources suggest that the package will not be finalised this week. Based on past performance, there will be serious implementation risks and the devil will be in the detail. Read more

No-one can deny that the weakness of the housing market remains at the heart of the economic crisis in the US. In fact, it is the American equivalent of the sovereign debt crisis in the eurozone. The overhang of housing debt is forcing US households to run large financial surpluses in order to pay down their liabilities, just as the the overhang of sovereign debt in the eurozone is forcing governments to improve their financial balances. And that is resulting in weak economic activity on both sides of the Atlantic. The question of what should be done about it is now coming to the centre of the economic debate in the US. Diagnosing the problem is relatively straightforward. Solving it is not. Read more

What is the four letter word which best defines our era? Undoubtedly, debt. An unprecedented build up of debt – mainly private, not public, it should be noted – was the force behind the global boom which ended in 2008. And now the difficulty of escaping from debt threatens to become the dominant problem of the present decade. Read more

An overseas friend asked me last week: “How is the guinea pig doing?” He meant the UK economy, which has embarked on an extreme version of the tight fiscal/easy monetary mix which all other developed economies are trying in varying doses. The answer I gave him was that Plan A was severely fraying around the edges, but that it just about remained intact.

That has become clearer with the decision by the Bank of England to re-launch QE in much larger size than anyone expected. While this is consistent with Plan A, there do seem to be differences between the Treasury and the Bank over the nature of the quantitative easing which the Bank is pursuing. These revolve around the question of whether unconventional QE should now be on the agenda.  Read more

Risk assets fell sharply in the month of September, with equities generally down by between 5 and 10 per cent, and commodities falling by even more than that. The best performing asset in the month was the US dollar effective rate, a clear symptom of the widespread flight to safety. The worst performers were equities in the BRICs, and cyclical commodities like copper. (See charts on asset performance here.)

What had appeared to be mainly a problem for European markets in August has therefore broadened considerably in the past few weeks. The financial markets have started to price in a global recession. They will be very sensitive to the next move in the economic data. So far, it is hard to tell whether a renewed recession has  been triggered, or whether the developed world has “only” become stuck in a period of prolonged stagnation. Either outcome would be bad enough for labour markets, and risk assets – but there would still be a large difference between them, which is why the question matters a lot.  Read more