More of the same

April 8, 2016

On Thursday, the Monetary Authority of Singapore (MAS) announced it was cutting interest rates on the Singaporean dollar. Analysts labelled this move ‘unexpected’.


Also on Thursday, the People’s Bank of China (PBOC) pushed the yuan down by 300 basis points in its daily price fixing, setting the Chinese currency at 6.49 /dollar. That represents the largest daily devaluation of the yuan since January 7 and the second largest since the surprise devaluation by the PBOC in August last year — a move that triggered a massive sell-off in financial markets.


Nothing of the sort happened this time (so far), rather the opposite. Asian markets were generally sharply higher on Thursday, continuing a surge that began earlier in the week, after China published trade data for March showing exports rising again and imports falling less than expected.


Meanwhile, back in the US of A, the Federal Reserve conducted two back-to-back “Advanced Expedited” meetings of its board of governors. This labelling is Fed-speak for unscheduled emergency meetings and, although this procedure is not so rare and hence not as dramatic as it might sound, to have to such meetings on successive days is extremely rare.


Highly unusual


Furthermore, between those meetings, Fed Chair Yellen had a meeting with President Obama at the White House. The prez meeting the chair is not so rare — although not very common either. But this meeting was also attended by the vice-president. Meetings, other than on national security issues, attended by both POTUS and vice POTUS are highly unusual.


By the way, the second Fed emergency meeting was devoted to — I quote the Fed’s announcement — “Periodic Briefing and Discussion on Financial Markets, Institutions and Infrastructure”. Since the meeting was closed, it is not known what they discussed, let alone what Obama and Yellen discussed. However, this flurry of meetings coincided with a global stock market rally which erased most or all of the year-to-date losses, led by the banking sector — which had led the slump in January.


Thus it was hardly surprising that many observers connected these dots, in an effort to construct a convincing conspiracy theory stretching from the White House to the Fed, from Washington to New York, from the US to Italy– where the banking sector is tottering — and from the Western financial centers to those of the Far East. Ten years ago, these efforts would have been dismissed as loony-fringe stuff; today, nothing is totally implausible, however wild and weird it sounds.


But it is not necessary to indulge in speculative conspiracies to conclude that something serious is happening, or threatening, and that the powers that be (TPTB) are engaged in preventing it happening or mitigating its development. That’s because anyone who follows the real data on the world economy and the main national economies is well aware that something very serious is happening and that, for the last decade, TPTB have been engaged — with declining success and increasing frustration — in mitigating it.


Lower growth again


Just for example, the IMF — the most important, powerful and influential body in the global economic firmament — once again lowered its forecasts for the rates of growth of the global, US, European and other economies, this year and next. And, just by the way, the IMF is holding its half-yearly meeting in Washington this week — another dot to be connected up, if you are that way inclined.


However, there are serious analysts who are neither weirdos concocting conspiracy theories nor mainstream economists working for the government apparatus. One such, highly respected for his professionalism and integrity, is a guy called Dr Lacy Hunt, who co-runs an outfit called Hoisington Investment Management. In his latest quarterly review (not yet available on their site, but published in full by John Mauldin in his “Outside the Box” free weekly newsletter), Hunt simply reviews the facts, without recourse to histrionics or exaggeration:

“The striking aspect of the U.S. economy’s 2015 performance was weaker economic growth coinciding with a massive advance in nonfinancial debt…[which] rose 3.5 times faster than GDP last year. This means that we can expect continued subpar growth for the U.S. economy.

“Credit standards were lowered considerably for households in 2015 making it easier to obtain funds. Delinquencies in household debt moved higher even as financial institutions continued to offer aggressive terms to consumers, implying falling credit standards.


“In the past eight quarters profits fell 6.6%, the steepest drop since the 2008-09 recession. On only one occasion since 1948 did a significant eight quarter profit contraction not precede a recession.

“…this discrepancy suggests that Chinese figures for economic growth are overstated, an argument made by major scholars on China’s economy.”


There is much more, but no apocalyptic stuff, because Hunt assumes that central banks will continue to pump money into their economies. But that critical assumption is now being undermined by a global debate over the efficacy and sustainability — and hence desirability — of open-ended monetary expansion. In Beijing and Singapore they are still pursuing more of the same of that policy, and it may well be that the behind-closed-doors discussions in DC were also focused on how to do more of the same, at least through the US election season.

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