The Slog argues that most 2015 forecasters have got it wrong
Interest rate contagion, a new currency bloc, the dive into deflation, and chaos in Europe all make the cheaper Buck a Must
There are two possibilities that terrify the debt-ridden West: rapid deflationary moves, and rising interest rates. Deflation is already a fact, and is set to worsen. I have been posting for three years now to say interest rates must rise in the end – because even in a so-called ‘global’ world economy, different blocs have different problems and priorities. Two new events have hugely increased the likelihood of that latter change.
1. China’s vow to intervene as and when necessary to support the Rouble.The continuing pressure – produced by the US – on the Russian economy has seen the Russian currency slump 20% since Christmas.
2. The Russian central bank decided to up its interest rates again yesterday. In short order, interest rates there have shot up from 10% to 17%.
Nobody is as yet clear about how or when the much-vaunted ‘alternative Sino-Russian currency bloc’ will materialise. But if it does, most of those keen to join it will have a vested interest in upping their rates – to protect valuations slaughtered by the QE tailoff – at least in the short term. Cheaper exports are all very well, but not much good if all market confidence in the Sovereign is lost.
Based on Sion-Russian deals already completed, a large chunk of hydrocarbons are no longer traded in US (petro) dollars, but in rubles and yuans and their partners respective local currencies. This will reduce worldwide demand for the petro dollar….and interfere with American maintenance of pressure on Sovereign doubters and opponents (like Venezuela and Iran) via so-called ‘Dollar Diplomacy’.
The US is now perilously close to the Fed’s longstanding fear of checkmate: the doubly diabolical combination of a deflation that makes its debt mathematically bigger – and higher borrowing costs in a transactional world it no longer controls. It can leave the Dollar at its current expensive level – and suffer loss of world trade share and inflated borrowing costs alongside mass unemployment…or it can risk much higher inflation and an eroded Dollar to reduce its real debt.
It’s little more than the lesser of two evils, but for me this points very strongly at a resumption of bigtime QE-rationalised Dollar printing in 2015. Furthermore, events elsewhere make this not so much an option as an imperative.
Over in Europe, the Draghi From Wall Street he wanna say yes, but the man from Germany, er sagt “Nein, nein, nein”. On one side of Frankfurt, the ECB mouths off about huge dollops of QE. Across town, the BundesBank slices the predicted stimulation in half. But far from spotting the the euro is going down in flames while two kids in short trousers bicker about what to do, the markets say “Wow! Great! Here comes more QE!” Are they stupid? No, of course they aren’t:deep liquidity pools (or puddles in Europe) allow for SOL trading and algorhythmic trading to thrive. Stupid has nothing to do with it: this is bankers jumping into the sea off the Lusitania with all the gold they can carry.
Payrolls data emerges in the US showing levels that can’t be explained away by demographic change: they say what I and millions have been saying since early 2011: America is struggling still…and the debt just keeps on getting bigger. Orders to U.S. factories fell for the fourth consecutive month in November, but opinion leaders remain optimistic that the drop in orders is a temporary soft patch and a stronger economy with increased consumer spending will trigger a rebound in demand in 2015. Is everyone mad? No, of course they aren’t: the right climate is being created for one last boulder of QE to be thrown at the wall of the Boulder Dam in 2015. “Yippee! More QE! Look, there’s a lifeboat – we’re saved! Let’s go back and get some more gold while we can!”
Santander wants a whopping sum of money “to realise opportunities”. “That sounds good – let’s pile into Italian banks!” As the Syriza/EC/Berlin stand-off rumbles to a climax, Greek December bank account withdrawals leap 14 times to €3 billion from November’s €222 million. “But the ECB and Germany say Greece is a pimple on the ass of eurodebt and Draghi’s going to deliver on the QE – Yippee! Get ready to pile in and hoover up those stocks while they’re at rock bottom!” Are they all hopeless naifs? No, of course they aren’t: the ECB’s now you see it now you don’t QE farting about will produce zero effect on the firmly established EU slump…”But that’s not the point, dummy. The point is, OK, that we can’t lose on stock prices! Yippee! Lashings of cream on the jam!”
I’m never really sure – even roughly – how many lay men and women of reasonable intelligence understand two things (among many others) that make the current econo-fiscal situation surreal:
1. The almost total disconnect between stock markets and currencies on the one hand, and economic performance plus fiscal rectitude on the other.
2. The view clearly held by the main shovers and makers in the banking sector that, while they understand that perfectly well, we are confusing them with folks who give a sh*t: they’re alrght Jack, so we can go screw ourselves: they are Masters of the Universe who have banished The Fundamentals forever.
Except that they haven’t…and people with psychopathic over-confidence always fail in the end because they don’t receive the ramification warnings like the rest of us do.
To furnish just a few examples, the Samaras election hiccup was a left field event, the Italians are hurtling towards default, the emptiness and toxicity of Spanish banks are increasingly out in the open, Draghi’s political maneouvres at the ECB have failed in the face of Weidmann’s intransigence, China’s economic deceleration and structural banking problems look horrific, Osborne’s feeble attempt to stoke up the UK property market has stalled – and the oil price manipulation changed everything. The window through which central banks can further attack the gold price is sliding down onto desperate fingers below.
A number of people I spoke to today think any eurozone bank account is now unsafe – and I note that Mish over at Global Analysis is of the same view. He rightly thinks a Greek bailin is extremely likely. Here in southern France, I’ve run my euro account down to almost nothing: the euro may be cheap, but where to hold a euro-denominated account?
Brent crude oil dipped below $50 today. That’s reflected in France by the fact that diesel is now just €1.10 a litre. I wonder why the manipulators on Wall Street and in Saudi think this is not going to accelerate deflation. In a return to its usual level of nonsense, the Guardian opines that ‘the dramatic fall in the price of crude should provide the global economy with a huge boost. The International Monetary Fund (IMF) has put a number on it, estimating that each $10 a barrel fall in the price lifts world growth by 0.2%.’ Oh dear – what utter tosh: another econometric model working on old assumptions.
How do the media think people with eroded salaries and weaker job security are going to consume? Well, France is already providing some answers: post-Christmas retail sales here are disastrous – 50,60 and 70% discounts are everywhere…but still the shops are half empty. That too is fueling deflation. Pretty soon, it’s going to become desperation. And as we’ve seen in the UK, Christmas was bloody for most of the multiple chains. There is going to be shake-out, make no mistake. But what there isn’t going to be is a recovery…or a return to the Good Old Days.
Whatever the future holds, the US today is the main driver that counts. It has no choice but to bash out more of the same. I’m betting on a weaker Dollar. And thinking once again about gold.