Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Wednesday, May 1, 2013
May Day - not just Europe but global protests ! Protests from Greece and Turkey in focus... Overnight Sentiment ( Buy ,Buy , Buy... what are fundaments again ? ) .... Bill Gross discusses " Haircuts "
May Day Protests globally........
May Day protests draw thousands of workers across Europe and Asia
Bangladeshi workers demand safer conditions after building collapse, while thousands call for end to austerity in Europe
Bangladeshi protesters in Dhaka call for better working conditions – one of scores of May Day rallies across Asia and Europe. Photograph: Wong Maye-E/AP
As authorities buried 18 unidentified workers killed in the collapse, Pope Francis criticised working conditions in Bangladesh's $20bn-a-year (£13bn) garment industry, which supplies many European and American retailers.
Francis said he was shocked that some of the workers in collapsed building were paid €38 (£32) a month.
"This was the payment of these people who have died ... this is called 'slave labour'," he said. Vatican Radio said the pope made the remarks during a private mass on Wednesday at the Vatican.
Elsewhere in Asia, tens of thousands of low-paid workers took to the streets on International Workers' Day calling for better wages and benefits and improved working conditions, while in Europe workers protested against low living standards and record levels of unemployment, hoping to persuade eurozone governments to ease austerity measures and boost growth:
• Thousands of protesters marched in Madrid, snaking up the Gran Via central shopping street, waving flags and carrying placards reading "austerity ruins and kills" and "reforms are robbery". The Spanish economy has shrunk for seven consecutive quarters, and unemployment is at a record 27%.
"The future of Spain looks terrible; we're going backwards with this government," said Alicia Candelas, 54, a former civil servant who has been out of work for two years.
• Trains and ferries were cancelled in Greece, and bank and hospital staff walked out after the main public and private-sector unions there called a 24-hour strike, the latest in a string of protests in a country in its sixth year of recession.
About 1,000 police officers were deployed in Athens but the protest passed off peacefully, with about 5,000 striking workers, pensioners and students marching to parliament with banners reading: "We won't become slaves – take to the streets!"
• Tens of thousands marched in Italian cities demanding government action to tackle unemployment – at 11.5% overall and 40% among the young – and an end to austerity and tax evasion. Most marches were peaceful but demonstrators in Turin threw hollowed eggs filled with black paint at police.
• Turkish riot police in Istanbul fired water cannons and teargas to disperse tens of thousands of union May Day protesters, some of whom threw stones at security forces as they tried to breach barricades to reach the city's main square. The city's governor, Huseyin Avni Mutlu, said 22 police officers and three civilians were wounded in the clashes.
Roughly half of Istanbul's 40,000-strong police force was drafted in to the city centre to block access to Taksim Square, which was barred to the trade union march by authorities.
Avni said the clashes had been instigated by "radical" groups numbering a total of 3,500 people who threw stones, metal objects and Molotov cocktails at police lines. A total of 72 arrests were made during the day, he added.
Workers across the world hold demonstrations calling for better pay and conditions, with clashes reported in Turkey.
Last Modified: 01 May 2013 13:02
In the Philippines, thousands of contract workers banned from forming unions marched through Manila [EPA]
Demonstrations are taking place across the world as protesters gather to mark May Day, the traditional date for demanding better workers' rights.
Protests first began in Asia, with tens of thousands of workers in Jakarta calling for improved conditions and mobilising against government plans to cut fuel subsidies.
Al Jazeera's Step Vaessen, reporting from Jarakata, said: "Everywhere I look I see demonstrating workers; this is the biggest rally I've seen here.
"The president [Susilo Bambang Yudhoyono], announced yesterday that the fuel price will go up as it is heavily subsidesed.
"A recent increase in the minimum wage would simply disappear with the fuel price increase."
Vaessen estimated that 150,000 people could flood the capital by the day's end.
The president has said the fuel price measures will not be implemented until parliament approves compensation for those likely to be affected. Istanbul clashes
With 80 countries around the world marking May 1 as a public holiday, Istanbul's Taksim Square was in lockdown on Wednesday, after the Turkish government banned May Day protests there.
The square is the site of a 1977 May Day massacre in which dozens of people died under disputed circumstances.
Al Jazeera's Hashem Ahelbarra, reporting from Istanbul, said: "There have been scuffles, particularly in areas that lead to Taksim Square, which has been sealed off.
"Protesters say they should be given access to celebrate May 1 in a place of symbolic importance; they want to honour the memory of those who were killed here. There is a tug of war under way between the government and people."
Earlier images showed police spraying water at protesters who threw objects at their vehicles. Cambodia workers
In Phnom Pehn, the Cambodian capital, garment factory workers demanded higher wages and better working conditions.
Organisers said about 5,000 demonstrators, including union workers, gathered for the rally, chanting slogans and holding banners.
Protesters came from 16 unions and associations in Cambodia to mark International Labour Day and urge whoever wins the general election in July to meet their demands.
"I demand that my pay is increased to $150 per month," said garment worker Neang Leakena, from the Chinese-owned Deum Por garment factory.
In the Philippines, thousands of contract workers marched through the streets of the capital, Manila.
Banned from forming labour unions, the workers demanded that the government strengthen their rights. European protests
In Athens, Greece's capital, the main public and private sector unions called a 24-hour strike to protest against the government's austerity policies.
Greece has had to enforce tax rises and spending cuts as part of deals with the International Monetary Fund and its eurozone partners to overcome a crippling debt crisis.
On Sunday, parliament approved a bill which will leave 15,000 civil servants out of work by the end of next year.
In Moscow, the Russian capital, authorities sanctioned 16 separate rallies, including one led by Vladimir Putin's ruling United Russia party.
Other groups, including the Communist Party, are holding gatherings of their own. Up to 90,000 people are expected.
Source:
Greece.....
Communist-affiliated protesters and foreign workers gathered at a central Athens square during today's May Day rally. Photograph: LOUISA GOULIAMAKI/AFP/Getty Images
Live stream from Athens
You can watch the May Day demonstrations in Athens live, on Zougla's website.
Photograph: Zougla
FT: May Day protests show despair and powerlessness
There's a powerful piece in the Financial Times this morning about today's May Day rallies, and the political implications of the ongoing struggle with growth and austerity:
Here's a flavour:
A collective howl of protest and despair will resound through Europe’s streets and squares on Wednesday at the annual May 1 rallies, which, in happier times, celebrate the dignity of human labour.
It is difficult to be festive when 26m Europeans are jobless and economic recession blights the continent. For the first time in generations, numerous parents fear that the future living standards of their children will be lower than their own. Their sense of powerlessness is all the greater because, in or out of government, Europe’s centre-left parties – once the formidable political voice of the organised working classes – no longer appear capable of fulfilling their historical mission as protectors of jobs, welfare and social cohesion.
Tony Barber goes on to argue that the left is struggling to present a clear alternative in these straitened times (in the UK, Labour's Ed Miliband came unstuck on BBC radio this week when quizzed over his proposal for a tax cut to stimulate spending).
But the wheel of politics keeps moving, Barber argues:
The shortcomings of centre-right governments doubtless guarantee that the centre-left will one day return to power in economically struggling European countries, just as the Socialists did one year ago in France thanks to depleted public confidence in Nicolas Sarkozy, the former president.
Unless, of course, voters turn to the new wave of parties offering a change to the status quo -- such as Italy's Five Star Movement, Germany's Alternative For Deutschland, and UKIP in Britain.
These photos from Istanbul show the clashes between protesters and police (see also 12.02pm)
Riot police and protestros clash at a May Day demonstration on May 1, 2013, in Istanbul.Riot police fire tear gas during clashes at a May Day demonstration on May 1, 2013, in Istanbul. Photograph: OZAN KOSE/AFP/Getty ImagesA demonstrator uses a slingshot as clashes erupt between police and protesters during May Day celebrations in Istanbul, Turkey, Wednesday May 1, 2013. Photograph: AP
And here's AFP's latest report:
Several people were injured on Wednesday as Turkish riot police used water canon and tear gas to disperse hundreds of protesters who defied a May Day ban on demonstrations in a central part of Istanbul.
About a dozen people were hospitalized after exposure to tear gas which clogged the air around the symbolic Taksim square, according to AFP journalists.
Two policemen were among those injured as well as an AFP photographer who was assaulted by protesters wearing balaclavas who broke one of his cameras.
The Istanbul governor’s office said 20 protesters had been arrested.
The Turkish government decided to ban May Day gatherings on Taksim Square — a traditional rallying point — saying that because of renovations begun in November, security could not be assured for the tens of thousands of demonstrators expected.
But the leftist Disk union vowed to ignore the ban. Turkey has mobilised 22,000 police to provide security throughout the day.
Protesters threw stones at the police who tried to prevent the protest in the Besiktas neighborhood of Istanbul, which is about two kilometers (a mile) from Taksim square.
“Death to fascism. Long live May 1,” shouted the protesters who were rallying to calls from leftist parties and unions.
Europe's workers cry MayDay against austerity
Good morning, and welcome to our rolling coverage of the latest events in the eurozone crisis, and across the world economy.
It's May Day. Traditionally a time when European workers would pause to celebrate labour rights and the reforms which were won from employers and governments in earlier days,
Strikes are taking place in Greece, where the main unions will hold marches to Syntagma Square to demonstrate outside the parliament building.
And there will be rallies in major cities across Europe -- including inSpain, where the record unemployment and ongoing recession is likely to drive many people onto the streets.
It comes as Italy's new prime minister, Enrico Letta, visits Brussels and Paris to discuss the financial crisis. Letta has made economic growth the cornerstone of his new government's programme, criticising Europe's focus on austerity and deficit reduction.
Letta met with Angela Merkel in Berlin last night, where he told reporters that:
We want to see Europe show the same determination to pursue growth as it does to maintain sound public finances.
Many of those on the streets of Athens and Madrid today might agree....
Elsewhere today, some disappointing manufacturing data from China hasadded to fears that the world economy is slowing down... and concern is growing that Slovenia may need international help after it was downgraded to Junk status by Moody's last night.
Meanwhile fundamentals mean nothing in the face of 160 billion of global central bank liquidity...... http://www.zerohedge.com/news/2013-05-01/overnight-sentiment-buy-may-and-buy-every-day
Overnight Sentiment: "Buy In May, And Buy Every Day"
Submitted by Tyler Durden on 05/01/2013 06:59 -0400
While it is the labor day holiday in most of the world, and as a result volumes will be more subdued than ever (meaning at least a 10 point algorithmic levitation on no volume for the S&P), let's not forget that Benny and the Inkjets are doing their best to make everyone into a professional day trader (the only "wealth effect" transmission mechanism left) so markets being open seems somewhat counterproductive. That said, futures are already up on the usual atrocious economic data out of Asia this time. First China's official manufacturing PMI slipped 0.3pt to 50.6, coming below expectations, suggesting weak momentum going into Q2. Meanwhile, Korea trade data indicated weaker momentum in exports than expected, rising 0.4% on expectations of a 2% bounce courtesy of Abenomics, and hence a lower trade surplus, while inflation defied median expectations of a rise and slowed yet further. Finally, Australia PMI was an absolute disaster printing even worse than the Chicago PMI, plunging from 44.4 to 36.7, meaning that the RBA is about to join the global "reflation effort." Given that most markets in Asia are closed today, there is no market reaction worth mentioning, aside from the fact that the yen which was logically weaker overnight then ramped up into the European open and US pre-trading as it is, after all, the primary source of "beta" for the global stock markets.
May Day has delayed the release of global PMI data until tomorrow, however the Manufacturing ISM will be released today as scheduled. If the leading Chicago PMI is any indication, it is very likely that we will see a sub-50 number, likely plunging to levels not seen since June of 2009 (45.8) - the worst in four years. If that doesn't send the S&P over 1600 we don't know what will. And just to make sure the S&P is well on its way to 1700 on onward too, the ADP Private payrolls number today should be a huge miss sending the ES limit up.
Also later today Ben Bernanke will release the latest FOMC statement however without a following press conference this time, which is even more reason to not expect the Fed to say or do anything notable, and will most likely highlight the recent weakness seen in the economy, thus cementing QE4EVA well into 2016-2017.
Finally, while some are dreading the start of "sell in May and go away" season, what most have forgotten is that never before has May been accompanied by $160 billion per month in central bank de novo liquidity (a number which will only go up- you know, for the wealth effect). Which is why our redefinition of this infamous phrase is "buy in May and buy every day."
The full bulletin summary of the few things taking place today, via Bloomberg:
Treasuries little changed before Fed statement, rate decision at 2pm in Washington; 10Y yields yesterday touched lowest level since Dec. 12 before reversing higher amid gains in stocks, Apple’s record $17b debt offering.
Fed not likely to change $85b/mo. in asset purchases, will probably put off any decision to taper buying, based on review of selected research
ECB rate decision and Draghi press conference tomorrow; U.S. nonfarm payrolls Friday
China’s manufacturing expanded at a weaker pace in April in a sign that the slowdown in the world’s second-largest economy is extending into the second quarter; crude and copper decline
A U.K. factory index rose more than economists forecast in April, indicating that manufacturing barely shrank
Central bank veterans are lining up to highlight the Achilles’ heel of Prime Minister Shinzo Abe’s economic revival plan: the world’s fastest aging society
Denmark’s government says it has exhausted all avenues for adding stimulus as the economy shows signs of sinking into its third recession since the global financial crisis started
Most European markets, China closed for May Day holiday
Nikkei -0.4%, FTSE +0.5%, U.S. stock-index futures gain
As stated not much going on today, but here is what is on the macro list from SocGen:
The European economic calendar will be light today with most markets shut for the May Day holiday and positions light in any case as participants trim positions ahead of tomorrow's ECB meeting. Market attention will essentially focus on UK and US manufacturing PMI and ISM: the release last week of higher-than-expected UK Q1 GDP figures (and better lending data to small businesses) has reassured GBP-based investors and encouraged our UK economists to postpone their call for more BoE QE. An increase in the UK manufacturing PMI today would reinforce such a scenario, but echoes of weaker PMI trends cannot be ruled out (weaker China data overnight and a terrible Australian print of '36.7') . A better number would be all the more GBP-positive should the ECB embark on more accommodative measures tomorrow and so the squeeze higher could have further to run. EUR/GBP-wise, the 0.8400 area remains a key support area. A dovish FOMC statement should help to underpin GBP/USD too, with a close above the 100d ma (1.5561) likely to draw fresh buying.
The US economic calendar will be heavier than that of Europe today with all the attention centred on the FOMC. Before that, the ADP report will give some colour ahead of Friday's NFP. Although the correlation between the two reports is not very strong on a long historical series comparison, both indicators ran out of steam last month with the ADP dropping back from 237k to 158k. Can they both edge back north this month? The gradual improvement in the labour market, subdued inflation and a slight softening in the manufacturing ISM (latest report also due today) are three messages the Fed has factored in its economic scenario and so a reaffirmation of its dovish stance can be expected this evening when the FOMC meeting concludes. Overall, we do not think the policy stance should alter significantly compared with the previous meeting, and thus impact on global financial markets should be limited. The ECB meeting (tomorrow) and the NFP (on Friday) are likely to be the main market movers over the closing stages of the week where light liquidity has the capacity of magnifying intra-day moves.
* * *
And the comprehensive overnight summary courtesy of DB's Jim Reid
Today will likely be fairly quiet as it seems like most of Asia and much of Europe are on holiday. This is delaying Global PMI day until tomorrow. We do have US ISM though (previewed below) and this morning we've already seen China's official PMI manufacturing falling slightly to 50.6 in April from 50.9 the month before. This is broadly consistent with market expectations (50.7) as the series continues to move sideways (range: 50.1-50.9 in the past 7 months). One of the few Asian markets open - the Nikkei - is a little softer (-0.2%) but credit continues to rally with the Aus iTraxx a little over 1bp tighter on the day.
Those who (like us) are in the office today will see an important day for US data. The ADP Employment report will be the first main release to hit the wires today (1.15pm London) ahead of April’s ISM manufacturing print (3pm London). The latter will be followed closely especially after the very disappointing Chicago PMI print (49.0 v 52.5 expected) yesterday. Given the recent weakness in regional activity data our economists have lowered their ISM call to 49.5 from 51.0 previously (market at 50.6). The last time the ISM dipped below 50 was in November 2012 (49.9) and before that in July 2009 (49.9), June 2009 (45.8) and May 2009 (41.7). So if Joe Lavorgna is correct then we could be looking at the poorest ISM report in nearly four years (for details see Data Flash - US: Chicago PMI is a downer; confidence is stronger dated Apr 30). The ADP report may serve as an interesting preview of Friday’s payroll. Will it be another weaker than expected report? Even ahead of this, DB has revised down the headline payrolls forecast for April by 50k to 140k.
After the data we have the FOMC meeting statement at 7pm London time. Markets will have to read between the lines as there won’t be a Bernanke press conference to follow this time. In short, DB’s Peter Hooper is not expecting much out of the statement today and the Fed will most likely pass on making any major changes in their guidance to markets. The tone will likely be slightly more dovish given the recent softening in activity and inflation data but with things not yet weak enough to warrant a change in their policy stance.
Indeed the data weakness yesterday failed to deter another record high close for the S&P 500 (+0.25%). Credit spreads also edged tighter but the focus was on Apple’s $17bn jumbo bond issue across 6 different tranches. The deal size managed to top Roche’s $16.5bn 9-part deal seen in February 2009. In Europe, equity markets were mostly softer across the board although OATs performed strongly with its 10-year yield dipping to a fresh record low of 1.7%.
Staying in Europe, Slovenia’s delayed bond offer was one of the interesting market stories yesterday. The government had initially planned to issue 5-year and 10-year US$ bonds after having received good feedback from bond investor meetings but at the end decided to delay the offering following Moody’s negative rating action. The agency downgraded Slovenia’s sovereign rating to Ba1 from Baa2 and the outlook remains Negative. Moody’s said the action reflects the state of Slovenia’s banking sector, the marked deterioration of Slovenia’s government balance sheet and uncertain funding prospects that heighten the probability that external assistance will be needed. Moody’s two notch downgrade means its rating on Slovenia is now multiple notches below S&P’s A-/Stable and Fitch’s A-/Neg.
According to a Bloomberg article, the said 5-year and 10-year debt were initially being offered in the region of 5% and 6.12% respectively, according to Bloomberg. Staying in the region, yesterday was a mixed day for European data with the most recent retail sales and unemployment numbers in Germany as well as Euro area CPI all coming below expectations. Spain’s economy contracted 0.5% in Q1 as expected although on a positive note Italian unemployment surprisingly fell in March while French consumer spending also rose much stronger than expected. That said all these are perhaps seen as a side show for now as all eyes will be what the ECB does tomorrow and Draghi’s performance at the post-meeting press event.
Fundaments ? What are those again and what do they mean in relation to stock prices ?
ADP Private Jobs Plunge, Miss; Fall For Fifth Month In A Row
Submitted by Tyler Durden on 05/01/2013 08:33 -0400
With the March Payroll number printing at a miserable 88K compared to ADP's 158K print, it was only a matter of time before Mark Zandi, still furious from getting the news he won't be the next GSE Tzar, revised the last month's data to 131K as he just did. Concurrently he also announced that the just released April ADP was a huge miss to expectations of 150K, printing at just 119K, or a 31K miss. This was the 5th month in a row of declines excluding the small bounce in February data. It also means that the combined miss to expectations including March (original estimate +200K) and April(estimate 150K) is precisely 100K. This excludes whatever revisions ADP will do to the April number following the even bigger looming NFP miss. Manufacturing jobs? -10,000. Oh yes, anyone looking for seasonally unadjusted ADP data, good luck - keep on looking. In short: yet another atrocious economic data point which however may need the support of the equally horrible sub-49 Mfg ISM due out shortly to take out 1600 in the S&P.
Aside for the tiny bounce in February, this would be the 5th consecutive drop in the ADP number starting with the November 276K surge, driven purely by the QE4EVA euphoria.
Broken down by job category:
Where the jobs are(n't): anyone still paying attention to Obama's promise to add however many million manufacturing jobs in five years or whatever?
The bulk of jobs created in ultra small and mega large companies. Supposedly. At least until the revision.
For the second miss (amassing a 100k miss overall in two months thanks to the revision) in a row...
Service-providing jobs increased by 113,000, the weakest pace of growth in seven months. Among the service industries reported by the ADP National Employment Report, trade/transportation/utilities had the largest gain with 29,000 jobs added over the month.
"During the month of April 2013, U.S. private sector employment increased by 119,000 jobs, representing the slowest pace of expansion since September 2012," said Carlos A. Rodriguez, president and chief executive officer of ADP. "The services sector generated the overwhelming majority of new jobs in April, contributing a total of 113,000, which helped to offset overall softness in the goods-producing sector, which was marked by a loss of 10,000 manufacturing jobs."
Mark Zandi, chief economist of Moody’s Analytics, said, “Job growth appears to be slowing in response to very significant fiscal headwinds. Tax increases and government spending cuts are beginning to hit the job market. Job growth has slowed across all industries and most significantly among companies that employ between 20 and 499 workers.”
And the best thing of all: the social-media friendly ADP infographic:
And the future for the depositors in Western Banks can be gleaned from what transpired in Cyprus..... http://www.zerohedge.com/news/2013-05-01/bill-gross-there-will-be-haircuts
Bill Gross: "There Will Be Haircuts"
Submitted by Tyler Durden on 05/01/2013 07:46 -0400
The highlights from Bill Gross' monthly outlook letter: "The past decade has proved that houses were merely homes and not ATM machines. They were not “good as money.” Likewise, the Fed’s modern day liquid wealth creations such as bonds and stocks may suffer a similar fate at a future bubbled price whether it be 1.50% for a 10-year Treasury or Dow 16,000.... if there are no spending cuts or asset price write-offs, then it’s hard to see how deficits and outstanding debt as a percentage of GDP can ever be reduced.... Current policies come with a cost even as they act to magically float asset prices higher, making many of them to appear “good as money”.
And the take away: "PIMCO’s advice is to continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond. While this Outlook has indeed claimed that Treasuries are money good but not “good money,” they are better than the alternative (cash) as long as central banks and dollar reserve countries (China, Japan) continue to participate....a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing."
Said otherwise: continue to frontrun the Fed, but one finger on the sell button. The problem with at strategy is that everyone is doing it. And for a glaring example of what happens when everyone hits the sell button at the same time, see what happened to stocks last week following the hacked AP twitter account - that's what a bidless market, if only for a few seconds, looks like. Now extend those "few seconds" indefinitely.
“Good as Money,” proclaimed the ad forTwenty Grand Cognac. Being a beer drinker, and never having cashed in a Budweiser to pay for a fill-up at the local gas station, I said to myself “Man, that must be really good stuff!” Even in a financial meltdown I thought, you could use it in place of cash, diamonds, gold or Bitcoins! And if the Mongol hordes descend upon us during a future revolution, who wouldn’t prefer a few belts of Twenty Grand on the way out, instead of some shiny rocks and a slingshot?
Well, not being inebriated at that moment I immediately shifted focus to a more serious topic. What IS money? A medium of exchange and a store of value is a rather succinct definition, but we generally think of it as cash or perhaps checks that reflect some balance of “ready” cash at a friendly bank. Yet as technology and financial innovation have progressed over the past few decades, and as central banks have tenuously validated the liquidity and price of various forms of credit, it seems that the definition of money has been extended; not perhaps to a bottle ofTwenty Grand Cognac, but at least to some other rather liquid forms of near currency such as money market funds, institutional “repo” and short-term Treasuries “guaranteed” by the Fed to trade at par over the next few years.
All of the above are close to serving as a “medium of exchange” because they presumably can be converted overnight at the holder’s whim without loss and then transferred to a savings or checking account. It has been the objective of the Fed over the past few years to make even more innovative forms of money by supporting stock and bond prices at cost on an ever ascending scale, thereby assuring holders via a “Bernanke put” that they might just as well own stocks as the cash in their purses. Gosh, a decade or so ago a house almost became a money substitute. MEW – or mortgage equity withdrawal – could be liquefied instantaneously based on a “never go down” housing market. You could equitize your home and go sailing off into the sunset on a new 28-foot skiff on any day but Sunday.
So as long as liquid assets can hold par/cost with an option to increase in price, then these new forms of credit or equity might be considered “money” or something better! They might therefore represent a “store of value” in addition to serving as a convertible medium of exchange. But then, that phrase “Good as Money” on the cognac bottle kept coming back to haunt me. Is all this newfangled money actually “money good?” Technology and Fed liquidity may have allowed them to serve as modern “mediums of exchange,” but are they legitimate “stores of value?” Well, the past decade has proved that houses were merely homes and not ATM machines. They were not “good as money.” Likewise, the Fed’s modern day liquid wealth creations such as bonds and stocks may suffer a similar fate at a future bubbled price whether it be 1.50% for a 10-year Treasury or Dow 16,000.
But let’s not go there and speak of a bubble popping. Let’s perhaps more immediately speak about current and future haircuts when we question the “goodness of money.”Carmen Reinhart has said with historical observation that we are in an environment where politicians and central bankers are reluctant to allow write-offs: limited entitlement cuts fiscally, no asset price sink holes monetarily. Yet if there are no spending cuts or asset price write-offs, then it’s hard to see how deficits and outstanding debt as a percentage of GDP can ever be reduced. Granted, the ability of central banks to avoid a debt deflation in recent years has been critical to stabilizing global economies. And too, there have been write-offs, in home mortgages in the U.S., for example, and sovereign debt in Greece. But the cost of these strategies, which avoid what I simplistically call “haircuts,” has been high, and their ability to reduce overall debt/GDP ratios is questionable. Chairman Bernanke has admitted that the cost of zero-bound interest rates, for instance, extracts a toll on pension funds and individual savers. Some of his Fed colleagues have spoken out about the negative aspects of QE and future difficulties of exit strategies should they ever take place. (They won’t!) So current policies come with a cost even as they act to magically float asset prices higher, making many of them to appear “good as money” – shots of cognac notwithstanding.
But the point of this Outlook is that even IF… even IF QEs and near zero-bound yields are able to refloat global economies and generate a semblance of old normal real growth, they will do so utilizing historically tried and true “haircuts” that rather surreptitiously “trim” an asset holder’s money without them really knowing they had entered a barbershop.These haircuts are hidden forms of taxes that reduce an investor’s purchasing power as manipulated interest rates lag inflation. In the process, governments and their central banks theoretically reduce real debt levels as well as the excessive liabilities of levered corporations and households. But they represent a hidden wealth transfer that belies the vaunted phrase “good as money.”
Before drinking up, let’s examine these haircuts to see why they do not represent an authentic store of value even if their bubbly prices never pop. I will give each haircut a symbolic name – I welcome your suggestions as well via e-mail reply: outlook@pimco.com
(1) Negative Real Interest Rates – “Trimming the Bangs”
During and after World War II most countries with high debt overloads resorted to artificially capping interest rates below the rate of inflation. They forced savers to accept negative real interest rates which lowered the cost of government debt but prevented savers from keeping up with the cost of living. Long Treasuries, for instance, were capped at 2½% while inflation was soaring towards double-digits. The resulting negativereal rates together with an accelerating economy allowed the U.S. economy to lower its Depression-era debt/GDP from 250% to a number almost half as much years later, but at a cost of capital market distortions.
Today, central banks are doing the same thing with near zero-bound yields and effective caps on higher rates via quantitative easing. The Treasury’s average cost of money is steadily grinding lower than 2%. If current policies continue to be enforced in future years it will eventually be less than 1% because of the inclusion of T-bill and short maturity financing. The government’s gain, however, is the saver’s loss. Investors are being haircutted by at least 200 basis points judged by historical standards, which in the past offered no QE and priced Fed Funds close to the level of inflation.Large holders of U.S. government bonds, including China and Japan, will be repaid, but in the interim they will be implicitly defaulted on or haircutted via negative real interest rates.
Are Treasuries money good? Yes. But are they good money? Most assuredly not, when current and future haircuts are considered. These rather innocuous seeming (-1%) and
(-2%) real rate haircuts are not a bob or a mullet in hairstyle parlance. More like a “trimming of the bangs.” But at the cut’s conclusion, there’s a lot of hair left on the floor.
(2) Inflation / Currency Devaluation – “the “Don Draper”
Inflation’s sort of like your everyday “Mad Men – Don Draper” type of haircut. It’s been around for a long time and we don’t really give it a second thought except when it’s on top of a handsome head like Jon Hamm’s. 2% ± a year – some say more – but what the heck, inflation’s just like breathing air … you just gotta have it for a modern-day levered economy to survive. Sometimes, though, it gets out of control, and when it is unexpected, a decent size hit to your bond and stock portfolio is a possibility. If our TV idol Don Draper lives another decade or so on the airwaves, he’ll find out in the inflationary 70s. Such was the example as well in the Weimar Republic in the 1920s and in modern day Zimbabwe with its One Hundred Trillion Dollar bill shown below. As central banks surreptitiously inflate, they also devalue their currency and purchasing power relative to other “hard money” countries. Either way – historical bouts of inflation or currency devaluation suggest that your investment portfolio may not be “good as the money” you might be banking on.
(3) Capital Controls – the “Uncle Sam Cut”
Uncle Sam with his rather dapper white hair and trimmed beard serves as a good example for this type of haircut, if only to show that even the U.S. can latch on to your money or capital. Back in the 1930s, FDR instituted a rather blatant form of expropriation shown above. All private ownership of gold was forbidden (and subject to a $10,000 fine and 10 years in prison!) if it wasn’t turned into the government. Today we have less obvious but similar forms of capital controls – currency pegging (China and many others), taxes on incoming capital (Brazil) and outright taxation/embargos of bank deposits (Cyprus). Governments use these methods to keep money out or to keep money in, the net result of which is a haircut on your capital or your potential return on capital. Future haircuts might even include a wealth tax. Are gold and/or AA+ sovereign bonds good as money? Usually, but capital controls can clip you if you’re not careful.
(4) Outright Default – the “Dobbins”
Ah, here’s my favorite haircut, and I’ve named it the “Dobbins” in honor of this 5-year bond issued in the 1920s with a beautiful gold seal and payable, in dollars or machine guns! Bond holders got neither and so it represents the historical example of the ultimate haircut – the buzz, the shaved head, the “Dobbins.” As suggested earlier, the objective of central banks is to prevent your portfolio from resembling a “Dobbins.” I have tweeted in the past that the Fed is where all bad bonds go to die. That is half figurative and half literal, because central banks are typically limited from purchasing bonds payable in machine guns or subprime mortgages (there have been exceptions and Bloomberg reported that nearly 25% of global central banks are now buying stocks believe it or not)! But by purchasing Treasuries and Agency mortgages they have rather successfully incented the private sector to do their bidding. This behavior reflects the admission that modern-day developed economies are asset-priced supported. Unless prices can continuously be floated upward, defaults and debt deflation may emerge. Don’t buy a Dobbins bond or a Dobbins-like asset or a bond from a country whose central bank is buying stocks. They probably aren’t “good as money!”
Investment Strategy
So it seems as if the barber has you cornered, doesn’t it? Sort of like Sweeney Todd! Let’s acknowledge that possibility, along with the observation that all of these haircuts imply lower-than-average future returns for bonds, stocks, and other financial assets. If so, the rather mixed metaphor of “money’s goodness” and “avoiding haircuts” is still the question of our modern investment age. The easiest answer to the question of what to buy is to simply take your ball and go home. If the rules aren’t fair, don’t play. That endgame however, results in a Treasury bill rate of 10 basis points or a negative yield in Germany, France and Northern EU markets. So a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing. PIMCO’s advice is to continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond. While this Outlook has indeed claimed that Treasuries are money good but not “good money,” they are better than the alternative (cash) as long as central banks and dollar reserve countries (China, Japan) continue to participate.
The same conclusion applies to credit risk alternatives such as corporate bonds and stocks. Granted, this sounds a little like Chuck Prince and his dance floor metaphor does it not? His example proved that dancing, and full heads of hair are not forever. So give your own portfolio a trim as the year goes on. In doing so, you will give up some higher returns upfront in order to avoid the swift hand of Sweeney Todd. There will be haircuts. Make sure your head doesn’t go with it.
Quick Read
1) Central banks and policymakers are acting like barbers. They haircut your investments.
2) Negative real interest rates, inflation, currency devaluation, capital controls and outright default are the barber’s scissors.
3) Gradually reduce duration, risk positions and “carry” as the year proceeds.
The Franco-German axis that has driven EU affairs ever since Schuman and Adenauer in the early 1950s is collapsing before our eyes.
This was inevitable. Their interests have become incompatible under monetary union. The currency that was supposed to bind them is turning them into enemies, as this newspaper long warned.
The latest argument gaining traction – advanced by Prof Bernd Lücke and the German eurosceptic party AfD among others – is that the onlyway to save the Franco-German relationship and therefore the EU is to break up the euro before it does more damage. Interesting twist.
In the thirty or so years that I have been following EU affairs – or is it nearer 35 years now since I studied in French literature in Paris, and German philosophy in Mainz – I have never seen ties between Europe’s two great land states reduced so low.
The French Socialist Party crossed a line by lashing out at Chancellor Angela Merkel in person. It is one thing to protest “German austerity”, it is quite another to rebuke the “selfish intransigence of Mrs Merkel, who thinks of nothing but the deposits of German savers, the trade balance recorded by Berlin and her electoral future”.
There is no justification for such an ad hominem attack. German policy is indeed destructive, but that is structural. It is built into the mechanisms of EMU and the anthropological make-up of the enterprise.
The policy would not be greatly different even if a Social-Democrat/Green coalition were to win the elections in September, though this did not stop these two parties describing the French outburst as “legitimate and justified”.
German Vice-Chancellor Phillip Rösler has retaliated in kind against Paris. An internal paper by his Free Democrat Party (FDP) more or less ridicules France as a basket case, clinging to a statist welfare model doomed to failure in a Chinese world.
“France’s industry is losing competitiveness. Companies are continuing to relocate abroad. Corporate profit margins are thin,” it says.
The paper said France has “highest tax and social security burden in the euro zone,” the “second lowest annual working time,” and has seen a “sharp rise in unit labour costs”.
A second FDP report entitled “France: Europe’s biggest problem child” said French President Francois Hollande was trifling with reform, scarcely making a dent on the sclerotic labour market.
All this is true of course. Hollande was elected in May 2012 on a campaign to preserve the status quo and protect the privileges of the French public services. The Socialist Party was in a dreamland. So were the French people.
As Jean Peyrelevade, ex-head of Credit Lyonnais, said at the time: “France is coddled with illusions. Economic decline is the brutal, hard, undeniable reality. We are consuming the leftovers of a past prosperity.”
The IMF’s Article IV Report on France published before the elections draws up the indictment charges: a state share of GDP above 55pc (or 56pc this year), higher than in Scandinavia, but without Nordic labour flexibility.
One of the rich world’s highest life expectancies but earliest retirement ages, a costly mix. Just 39.7pc of those aged 55 to 64 are working, compared with 56.7pc in the UK and 57.7pc in Germany. “French workers spend the longest time in retirement among advanced countries,” it said.
Professional services have become “more regulated” not less over the past decade. France’s “tax wedge” – or tax as a share of labour costs – is among the world’s highest near 50pc. France has raised job protection over the past 20 years, while Germany, Holland and Belgium have cut back.
The minimum wage is 60pc of the median wage, much higher than most OECD states. “These rigidities have led to loss of efficiency, inability to make a breakthrough in new markets and loss of technological edge,” it said.
So yes, Germany’s critique of the French Model is correct. But that merely complicates the politics of these pre-divorce tensions, allowing Berlin to persist with the self-serving illusion that the problem with EMU is the failure of others carry out reform.
The essence EMU crisis is the chasm in competitiveness that has arisen over fifteen years between North and South, and between Germany and the rest, and that is a much bigger and more complex story.
Professor Paul De Grauwe from the London School of Economics has largely debunked the myth that Germany achieved its miracle by carrying out the Hartz IV reforms under Chancellor Gerhard Schröder. These labour reforms helped, but they were marginal. In some key respects Germany’s labour markets are more rigid today that those of Italy or Spain.
Germany’s gain in competitiveness was due to wage compression and higher productivity growth, compounded year after year. Unit labour costs in German manufacturing fell 4.4pc in the single year of 2005.
I see that EU employment commissioner Laszlo Andor accused Germany yesterday of “wage dumping” to gain export share. Others call it beggar-thy-neighbour policy.
As always in economics, there were many things going on. The euro was very weak a decade ago. The rise of China et al played to Germany’s strengths, since it was and still is producing the machinery that China needs for its catch-up growth. It played to Club Med weakness since Italy, Spain, and Portugal competed toe to toe with mid-tech Asian imports.
But the point is that Germany was able to turn itself around during a global boom, never losing the advantage of the lowest borrowing costs in EMU, and with no fiscal austerity – indeed Schröder said it was NECESSARY for Germany to violate the Stability Pact’s deficit limits in order to smooth the way for supply-side reforms.
To argue that the rest of the eurozone can replicate what Germany did in the midst of gruelling recession, debt-deflation, a credit crunch for small business, much higher corporate borrowing costs (than Germany today), and a strong euro, is to bark at the moon.
It always comes back to the same point. The North-South gap cannot be closed within EMU by imposing all the burden of adjustment on the deficit states, forcing them into “internal devaluations” without an “internal revaluation” Germany to meet them half way.
Such a policy has a contractionary bias and eventually drags everybody into vortex, as is now happening.
It happened in the early 1930s under the Gold Standard, when US creditors did to Germany, what Germany is now doing to Spain. And yes, crass American bankers and journalists even accused the Germans of being “lazy”, the sort of conclusion people reach when they when they don’t understand the structure of the global payments system and the power of credit cycles.
French and German leaders are now talking past each other. There is little common ground left on which they can find an understanding.
The French Socialist elites are lashing out because they at last grasp that there will be no cyclical recovery this time akin to Jospin years of the late 1990s. Unemployment will ratchet up to fresh records.
The penny has dropped that France is trapped in policy regime that will cripple the socialist party, just as it crippled Zapatero’s PSOE in Spain, or PASOK in Greece, and they will not take it meekly.
Germany’s rulers are in turn cleaving rigidly to their certitudes, unwilling to even start to analyse the core problems of EMU through any prism other than their own.
In 1992-1993, Germany ultimately blinked to save the Franco-German axis. It intervened to shore up the franc in the ERM in a way that it had refused to do for the lira and sterling.
Whether they will do so again when the time comes after the gratuitous insults of the French Socialists is an open question.
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