Sparring with Central Banks
Just one look at the whoosh higher in global markets in January and you’d be forgiven smug faith in the hoary old market adage of “Don’t fight the Fed” — or to update the phrase less pithily for the modern, globalised marketplace: “Don’t fight the world’s central banks”. (or “Don’t Battle the Banks”, maybe?)
In tandem with this month’s Federal Reserve forecast of near-zero U.S. official interest rates for the next two years, the European Central Bank provided its banking sector nearly half a trillion euros of cheap 3-year loans in late December (and may do almost as much again on Feb 29). Add to that ongoing bouts of money printing by the Bank of England, Swiss National Bank, Bank of Japan and more than 40 expected acts of monetary easing by central banks around the world in the first half of this year and that’s a lot of additional central bank support behind the market rebound. So is betting against this firepower a mug’s game? Well, some investors caution against the chance that the Banks are firing duds.
According to giant bond fund manager Pimco, the post-credit crisis process of household, corporate and sovereign deleveraging is so intense and loaded with risk that central banks may just be keeping up with events and even then are doing so at very different speeds. What’s more the solution to the problem is not a monetary one anyway and all they can do is ease the pain.
Low interest rates and liquidity schemes can’t solve what ails the developed world. Societies must accept that in order to alter their current perilous course they must undergo great change, moving away from entitlements to which they have become accustomed. The alternative is weak economic growth, a loss of competitiveness and negative external balances — a loss of face and place in the global hierarchy.
As if to reinforce the underlying point that the developed world faces a protracted reform period that tests political, economic and social priorities, credit rating firm Standard & Poors’ — not the most popular company in corridors of power over the past year — warned on Tuesday that it may downgrade the debt of “a number of highly-rated” Group of 20 countries from 2015 if their governments fail to enact reforms to curb rising healthcare spending and other costs related to ageing populations.
For Pimco, the political and social resistance to this sort of change is already showing itself to be significant both in Europe and the United States. People clearly don’t want to see pensions and benefits cut but politicians have already grown government and sovereign indebtedness close to their maximum. Accommodative central banks that helped them get there only ended up fueling credit, consumption and housing bubbles and distorting the balance of the economy away from production and into an increasingly bloated financial sector. That, clearly, ended in tears as finance itself needed bailing out and compounded the sovereign debt burden.
So if harder, longer-term choices and reforms are now needed, central banks ability to continually reflate the world economy by monetary means alone is at best uncertain, Pimco argues. The risk of major upheavals along the way in Europe, for example, has the potential for major market volatility and economic seizures.
from Mike Dolan:
Sparring with central banks
Just one look at the whoosh higher in global markets in January and you'd be forgiven smug faith in the hoary old market adage of "Don't fight the Fed" -- or to update the phrase less pithily for the modern, globalised marketplace: "Don't fight the world's central banks". (or "Don't Battle the Banks", maybe?)
In tandem with this month's Federal Reserve forecast of near-zero U.S. official interest rates for the next two years, the European Central Bank provided its banking sector nearly half a trillion euros of cheap 3-year loans in late December (and may do almost as much again on Feb 29). Add to that ongoing bouts of money printing by the Bank of England, Swiss National Bank, Bank of Japan and more than 40 expected acts of monetary easing by central banks around the world in the first half of this year and that's a lot of additional central bank support behind the market rebound. So is betting against this firepower a mug's game? Well, some investors caution against the chance that the Banks are firing duds.
According to giant bond fund manager Pimco, the post-credit crisis process of household, corporate and sovereign deleveraging is so intense and loaded with risk that central banks may just be keeping up with events and even then are doing so at very different speeds. What's more the solution to the problem is not a monetary one anyway and all they can do is ease the pain.
Low interest rates and liquidity schemes can't solve what ails the developed world. Societies must accept that in order to alter their current perilous course they must undergo great change, moving away from entitlements to which they have become accustomed. The alternative is weak economic growth, a loss of competitiveness and negative external balances -- a loss of face and place in the global hierarchy.
As if to reinforce the underlying point that the developed world faces a protracted reform period that tests political, economic and social priorities, credit rating firm Standard & Poors' -- not the most popular company in corridors of power over the past year -- warned on Tuesday that it may downgrade the debt of "a number of highly-rated" Group of 20 countries from 2015 if their governments fail to enact reforms to curb rising healthcare spending and other costs related to ageing populations.
For Pimco, the political and social resistance to this sort of change is already showing itself to be significant both in Europe and the United States. People clearly don't want to see pensions and benefits cut but politicians have already grown government and sovereign indebtedness close to their maximum. Accommodative central banks that helped them get there only ended up fueling credit, consumption and housing bubbles and distorting the balance of the economy away from production and into an increasingly bloated financial sector. That, clearly, ended in tears as finance itself needed bailing out and compounded the sovereign debt burden.
So if harder, longer-term choices and reforms are now needed, central banks ability to continually reflate the world economy by monetary means alone is at best uncertain, Pimco argues. The risk of major upheavals along the way in Europe, for example, has the potential for major market volatility and economic seizures.
EM growth is passport out of West’s mess but has a price, says “Mr BRIC”
Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O’Neill. O’Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China’s economy is growing by $1 trillion a year and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece? Italy’s economy was surpassed in size last year by Brazil, another of the BRICs, O’Neill counters, adding:
“How Italy plays out will be important but people should not exaggerate its global importance. In the next 12 months the four BRICs will create the equivalent of another Italy.”
Emerging economies are cooling now after years of turbo-charged growth. But according to O’Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent, a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.
“Post-crisis, these countries will be our passport out of this mess.”
But there has to be a payoff for this kind of increased financial clout, he warns. Developing countries are increasingly disgruntled about the the richer world’s strangehold on global policies via the International Monetary Fund and the World Bank and most have responded coolly to the call for additional funds for the IMF which is fighting to stem the euro zone malaise. An attempt last year to install a representative of the developing world at the helm of the IMF for the first time ever fell apart, with Europe retaining the position. But emerging countries could make a bid for the World Bank chief’s position this year, a position traditionally held by a U.S. citizen. O’Neill said the West had to bow to the new reality:
“You can’t have it both ways…This game of ‘You have the IMF and I have the World Bank’ has to stop or these institutions are going to lose their relevance.”
He is also dismissive of fears China is headed for a so-called hard landing, a sharp slowdown of growth, potentially leading to unemployment, a property crash and social unrest in the world’s No. 2 economy. ”A lot of people (in the West) want China to have a hard landing, ” he said. “And that’s because it isnt us.”
Japan fires latest FX wars salvo; other Asians to follow
Emerging central banks that sold billions of dollars over the summer in defence of their currencies might soon be forced to do the opposite. Japan’s massive currency intervention on Monday knocked the yen substantially lower not only versus the dollar but also against other Asian currencies. The action is unlikely to sit well with other central banks struggling to boost economic growth and raises the prospect of a fresh round of tit-for-tat currency depreciations. Already on Monday, central banks from South Korea and Singapore were suspected of wading into currency markets to buy dollars and push down their currencies which have recovered strongly from September’s selloff. The won for instance is up 6.9 percent in October against the dollar — its biggest monthly gain since April 2009. The Singapore dollar is up 4.5 percent, the result of a huge improvement in risk appetite.
Despite the interventions, the yen ended the session more than 2 percent lower against both the won and the Singapore dollar, and most analysts reckon Japan’s latest intervention is by no means its last. That’s bad news for companies that compete with Japan on export markets and will keep neighbouring central banks watching for the BOJ’s next move. “Asian central banks are likely to play in the same game, and keep currencies competitive via regular interventions,” BNP Paribas analysts said.
But the race to the bottom has been underway for some time. After all central banks in the West have cut rates, as in the euro zone, and embarked on more quantitative easing, as in the UK. One bank, Switzerland’s, has gone as far as to effectively establish a ceiling for its currency. And in Asia, Indonesia surprised markets with an interest rate cut this month while Singapore eased monetary policy. Many expect South Korea’s next move also to be a rate cut even though inflation is running well above target. Analysts at Credit Agricole predicted this week’s G20 meeting to yield no fruitful discussion on what they termed “currency manipulation”. “This lack of co-ordinated policy could trigger an escalation in ongoing currency wars,” Credit Agricole analyst Adam Myers told clients. That would in turn lead to a renewed acceleration in central banks’ dollar reserves, he added.
Indian stocks — buyers trickling back?
Last week snapped a three-week winning streak for Indian stocks — the first since last September for this year’s emerging markets laggard. India, an oil importer and a domestic demand play with high inflation, has languished this year in comparison with fellow-BRIC Russia which has returned 14 percent so far, thanks to the $125/barrel oil price. But could the market be turning? Indian stocks, down 20 percent at one point in February, have cut their losses to 6 percent so far this year. And there are signs fund managers are piling back in.
ING Investment Management started buying Indian equities earlier this month for the first time since mid-2010. Inflation may have peaked and with state elections out of the way, politics may be less of an issue, they say. And Indian valuations, always expensive, are back in line with long term averages, the fund’s strategist Maarten-Jan Bakkum notes. He is overweight Russia too but says that is driven by a tactical play on the oil price rather than any long-term conviction.
HSBC‘s head of emerging equities, John Lomax, says commodity and food price inflation may have peaked after a massive run and sees that leading to a change of tone within emerging markets. “We want to be a less exposed to the commodity themes now so we are less positive on Russia. But we like Turkey and we recently upgraded India and China, which are domestic demand plays.”
It is too early to say if the corner has been turned. March inflation was higher than expected at almost 9 percent. With markets pricing in more aggessive policy action from the central bank, that has — at least for now — spelled a halt in the recent fragile rally.
Russia’s babushka time-bomb
The babushka, that embodiment of Russian grandmotherly goodness that has spawned iconic dolls and inspired a Kate Bush song, poses one of the gravest threat to the Russian economy.
Moscow-based investment bank Renaissance Capital also expects this segment of the demography to spur politically risky pension reforms.
Russia’s pension system is coming under increasing strain thanks to growing life expectancy — particularly among women — and a shrinking labour force due to the collapse in birth rates in the 1990s.
Since the introduction of the current system, the average life span of the Russian man has risen to 63.4 years, up from 58.7. Over the same period of time, the life expectancy for the country’s women has risen to 75.4 years, up from 71.9.
Russian women are thus likely to claim a pension for 20 years after retirement at 55. Compare this to the three to four years that the average Russian man gets.
Little wonder that it’s the babushka segment of the demographic that is giving Russian policymakers cause for pause.
“This is becoming expensive. Russia spends 6 percent of GDP on pensions compared to just 1 percent of GDP in Mexico.” writes Renaissance Capital Chief Economist Charles Robertson in a note.
Without getting too complicated, surely it is possible to look at the issue of ‘Gradfathering’-no pun intended-
the entitlement date an individual will recieve the pension. This would act to ensure individuals who will be entitled to a pension in year 2012 receive the benefit, but all others entitlement is pushed back one year based on the individuals year of birth in 2012.
As an example, an invididual aged 55 in year 2012 will receive the benefit in 2012.
An individual aged 48 in 2012 will now receive the pension in 2026, a deferral of the entitlement from age 55 to age 62.
There is no denying we all want to retire earlier. The reality is financial, neither we as individuals or the Government elect can afford the cost.
As individuals, we and the government we elect need to
speak the brutal truth, and accept the need to both work and save a little longer for our retirement.
It would also help if the goverment took a long term view of retirement savings, and ensure financial fees did not operate as gravy trains for the privelede by charging fees as a percentage of assets under management, and also look at extending tax exempt status to retirement savings. Who knows, this may work to reduce the goverment’s cost of borrowing, depending on how structured.
from Davos Notebook:
Groundhog Day in Davos
The programme may strike a different note -- this year's Davos is apparently all about Shared Norms for the New Reality -- but much of the discussion at the 41st World Economic Forum annual meeting in Davos this month will have a distinctly familiar ring to it.
Last January, the five-day talkfest in the Swiss Alps was dominated by Greece's near-death experience at the hands of the bond market and recriminations over the role of bankers in the financial crisis, as well as worries about China's rapid economic ascent and a lot of calls for a new trade deal.
Fast forward 12 months and not much has changed.
Ireland has joined Greece in the euro zone's intensive care unit and Portugal and Spain are getting round-the-clock monitoring. The annual round of bankers' bonuses is once again stirring up trouble. China looms larger than ever on the global stage, after overtaking Japan in 2010 to become the world's second-biggest economy. And trade ministers who signally failed to make headway last year say they really must get down to business when they meet on the sidelines of Davos this time round.
For a sense of the deja vu, take a look at the WEF's latest hot-off-the-press report on Global Risks -- a 50-page tome on the spider's web of interconnected threats now facing the world. Not much progress in addressing them has been made, it seems. Government debt and the danger of sovereign default remains top of the risk hit-list, alongside macroeconomic imbalances, the fragility of the economic recovery and resource limits. It is a very similar litany as a year ago.
Worryingly, while the threats remain all too visible, the report's authors conclude that the world is now uniquely vulnerable to any further shocks in the wake of the financial crisis.
from MacroScope:
APEC’s robots stealing the show
A guide at the "Japanese Experience" exhibition talks to Miim, the Karaoke pal robot, on the sidelines of the APEC meetings in Yokohama, Japan on Nov. 10. REUTERS/Yuriko Nakao
Miim is one of the more popular delegates at the APEC meetings in Yokohama Japan. She sings. She dances. She tosses her shoulder length hair. She may not be able to spout an alphabet soup of APEC acronyms like the other Asia-Pacific delegates. But she's still pretty lively. For a robot.
This week's meetings of the Asia-Pacific Economic Cooperation forum have been earnest and most comprehensive . Foreign and trade ministers issued a 20-page statement about all the things they talked about -- a giant free trade zone, protectionism, the Doha round, easing restrictions on businesses, simplifying customs procedures, promoting green industries, cooperating on health and security, you name it. They also have been, and pardon my French here, excruciatingly dull. So far, the meetings and their stupefying statements have been a testimonial to Japan's skill at stating the ambiguous. Call it the opaque meetings. Journalists from around the Pacific rim have been desperately trying to find news as the 21 APEC leaders gather for their annual pow-wow this weekend.
The annual "silly shirts" photo shoot, in which leaders don native attire for the class picture of their summit is usually good news fodder, but is going to be a big let-down this year. The leaders are merely being asked to show up wearing "smart casual" for the photo shoot on Saturday night, before they head inside for a Kabuki show.
Which brings us back to Miim, the karaoke robot. She, er it, is one of 130 exhibits on display at "Japan Experience", a government-sponsored exhibition in the Pacific Yokohama convention center where the APEC meetings are taking place. The exhibit also features "personal mobility vehicles", a cyborg suit named HAL that enables the wearer to lift really heavy stuff and perform heroically in disaster relief, a talking delivery robot, cute robotic seal pets for use in pediatric therapy, and much other cool stuff .
"Welcome to APEC Japan 2010," the anatomically correct Miim says. "This exhibition shows Japan's strengths and attractions. Please see, feel and touch advanced technology and initiatives of Japan."
from MacroScope:
The word on Gordon Brown from Cayman
Gordon Brown is truly having a rough time. Rebuffed by the United States, International Monetary Fund and others for floating the idea of a tax on financial transactions at this weekend's G20 meeting, he has now got short shrift from the Cayman Islands.
McKeeva Bush, the veteran Caymanian politican who is now premier of the British Overseas Territory, popped in to the Reuters London headquarters for a chat this week. His main concern was to explain plans for making the islands an easier place for financial services personnel to live in. He would like some of those 8,000 hedge nearly 10,000 funds that are registered there to be more than just brass plaques. But, when asked, he also had time to dismiss the idea of a transaction tax out of hand.
"That's an old hat. I have been hearing about it for 25 years. It's just not practicable. It will not work."
And just in case the point was missed:
"We have looked at it and we do not think this is something that would work."
Bush would not be drawn on the idea that a tax on transactions could, metaphorically speaking, sink his Caribbean island homeland under the waves. But Paul Byles, a government financial services consultant who accompanied the premier, did touch on the liquid nature of the issue:
"Tax flows, and they will move somewhere else."
from MacroScope:
G20 dilemmas amongst the golf balls
Interesting dilemmas facing G20 countries as their finance ministers and central bankers get together on the golf ball strewn Scottish coast ( a meeting in St Andrews we will be Live Blogging on MacroScope, by the way).
First, you have the Brazilians who are worried about hot money and have already slapped a tax on foreign investments in domestic bonds and stocks in order to cool down capital inflows. They want the G20 to take action against what their central bank chief calls "imbalance- and bubble-building".
Next you have the Americans and other big economies who know that the huge amounts of stimulus they have put into the world economy have to be removed eventually. They are not ready to do it yet, but expect the G20 countries to discuss how they are going to "sequence" the great unwinding.
And then there is Argentina, which is not alone in noticing that talk of unwinding tends to put investors on edge. Its central bank governor wants the big countries to be careful, fearing a rapid reversal of stimulus policies could mean big outflows in emerging market countries such as, er, Argentina.
So a tricky balance, a super-sensitive investor audience, and plenty of domestic politics. Fore!
