MacroScope

The latest International Monetary Fund meeting ended with emerging market powers getting a pledge from the organisation for stronger and “more even-handed” scrutiny of what is going on in large advanced economies.

As Reuters correspondents Lesley Wroughton and Emily Kaiser report here, the decision is a response to long-running frustrations among emerging economies, which reckon the Fund has  not been tough enough on its biggest shareholders, led by the United States.

The move reflects a number of things. First, it shows the growing clout of emerging economies within international institutions. The G-20, for example, is arguably now more influential than the old , richer G7. Secondly, it graphically underlines the current world-turned-upside-down state of the global economy, in which profligate rich economies are struggling to keep above water while supposedly poorer and less-developed ones enjoy solid growth and relatively stable finances. This graph makes the point:

One question  that has been raised, meanwhile, is whether the IMF is capable of taking rich countries — its primary paymasters — to task.  A comment from a craigbhill on the Reuters story encapsulates the issue:

This is like the bankers to the Mafia being politely asked to “give scrutiny” to the Mafia.

And the Nobel laureate for economics in 2010 is?

Thomson Reuters expert David Pendlebury might have an idea. At least one of the picks from his annual predictions of winners (economics, chemisty, and so on) has won a Nobel prize over the years. Here is his short-list for economics this year.

* Alberto Alesina of Harvard University in Massachusetts for research on the relationship between politics and macroeconomics, especially politico-economic cycles.

* Nobuhiro Kiyotaki of Princeton University and John Moore of Britain’s University of Edinburgh and the London School of Economics for their Kiyotaki-Moore model, which describes how small shocks to an economy may lead to a cycle of lower output. It described Japan’s real-estate crisis in the 1990s and could describe some of the causes of the recent U.S. recession.

This week’s rehashing of European banking concerns – related variously to the Basel III impact on German banks, the ongoing morass re Anglo Irish Bank or any other scare story you want to exhume — provided the latest excuse for a global markets wobble as September kicked off. Yet, with some justified head-scratching over what really was new to the world this week as opposed to last week, price moves showed little conviction. Most losses were quickly recouped and decibel level of the commentariat, still frantically competing to warn you of the next disaster, toned down.

The world’s major sovereigns and banks have big financial problems, no doubt, and Europe more than its fair share. The rescues of the Spring did not provide a silver bullet and genuine repair will likely take a painfully-long time. But we’ve also had a lot of time to adequately discount these risks and the marketplace at large is already positioned extremely cautiously. That’s why the idea of sudden, blind panic on these long-running sagas seems just a little OTT – especially against a relatively stable, if bruised, economic backdrop. The bigger issue many investors are grappling with is the growing difficulty in making money in a hyper-cautious, low-growth environment. Ask Stanley Druckenmiller. If he threw in the towel because money-making conditions are just lousy, then you can be sure others see the same. Anecdotally at least, pressurised hedge funds – who faced rising redemptions through the summer – are ultra-cautious about open positions and seem quick to cut and run on even the slightest gain, long or short. (A bit like continually shouting ‘bank!’ on reaching £100 pounds on The Weakest Link!) Big institutional funds, meantime, are sufficiently uncertain about the market and economic direction that many are already keen to lock down for the remainder of the year and are hugging benchmarks to preserve whatever capital they have without resorting to zero-yielding cash or barely-more-attractive TBonds. U.S. midterms in November only add the caution. In short, it will take a pretty major positive or negative surprise to truly set these markets alight and there is every chance we won’t get a decisive one for some time.  We already have historically high vol and caution – but relative steady, unspectacular conditions for all that. The smart money may simply be tempted to buy or sell any hysterical extremes. Is may even be possible that some are tempted to foster a long-absent patience gene?

As to next week? There’s welter of new economic data to maybe add some flavour. The biggest potential movers are August China production and investment stats (now, oddly, being released Saturday rather than Monday) and then US retail sales, Philly Fed and German ZEW indices later in the week. On the issue du jour re European banks/sovereigns, an informal EU summit on Thursday provides the main set-piece – but BIS central bankers meeting in Basel this weekend and Spanish and Italian debt auctions next week may add their own spice.

The economic blogosphere has spoken — and it is not too happy with what it sees. The Kauffman Foundation has just published a survey of 68 economic (but not necessarily economist) bloggers showing that they are pretty gloomy about the U.S. economy’s progress.

Feedback from the likes of  Oregon University’s Mark Thoma and UC San Diego’s James Hamilton suggests the U.S. is at some kind of tipping point with a good number expecting it to fall rather than maintain balance:

68 percent (said) that conditions are mixed, and the rest split three to one toward weakness rather than growth. For an economy in which growth is the norm, 47 percent of respondents think that the U.S. economy is worse than official statistics indicate, and only 5 percent believe it is better.

There is little doubt that the latest U.S. earnings season has been a good one for long-equity  investors. Thomson Reuters Proprietary Research calculates that with 67 percent of S&P 500 companies having reported, EPS growth -- both actual and that still forecast for those who have not filed yet -- has come in at 36 percent.

Furthermore, a large majority of the reports have surprised on the upside, as they like to say on Wall Street.  Some 75 percent of  reports have been better than expected.  Not surprisingly, the S&P index gained around 6.9 percent in July and is up another 1.7 percent in the first two trading days of August.

But given what looks like at least a faltering U.S. economy with little consumer confidence, some analysts  have begun asking what there is to get excited about. Philipp Baertschi, chief strategist at wealth manager Bank Sarasin, for example, calls it a case of micro bulls versus macro bears and warns that it won't last.

It is beginning to look like financial markets cannot handle more than three risks. First we have, as MacroScope reported earlier,  Barclays Wealth worrying about U.S. consumers, euro zone debt and Asian overheating.

Now comes Jim O'Neill and his economic team at Goldman Sachs, with three slightly different notions about risks in the second half, this time in the form of questions. To whit:

1) How deep will the U.S. economic slowdown be and what will  the policy response be? (That's two questions, actually, but let's not nitpick).

Markets are getting used to volatile swings in economic data since the financial crisis set in three years ago. But UK GDP figures for Q2 were so eye-poppingly strong they caused confusion on trading floors.   

“Should have gone to Specsavers??” wrote Philip Shaw, chief economist at Investec, referring to British television commercials lampooning myopic citizens who desperately need a new pair of corrective lenses.

“Perhaps critics will suggest that the ONS has got it wrong again, but traders’ initial suggestions, calling into question the accuracy of the newswire reports — and this author’s eyesight — proved to be misplaced,” wrote Shaw.

Mike Dicks, chief economist and blogger at Barclays Wealth, has identified what he sees as the three biggest problems facing the global economy, and conveniently found that they are linked with three separate regions.

First, there is the risk that U.S., t consumers won’t increase spending. Dicks notes that the increase in U.S. consumption has been “extremely moderate” and far less than after previous recessions. His firm has lowered is U.S. GDP forecast for 2011 to 2.7 percent from a bit over 3 percent.

Next comes the euro zone. While the wealth manager is not looking for any immediate collapse in EMU, Dicks reckons that without the ability to devalue, Greece and other struggling countries won’t see any great improvement in competitiveness. Germany, in the meantime, has sped up plans to cut its own deficit.  It leaves the Barclays Wealth’s euro zone GDP forecast at just 1 percent for next year.

Bank of America-Merrill Lynch's monthly poll of around 200 fund managers had a few nuggets in the June version, aside from the usual mood-taking.

Gold is too expensive.  A net 27 percent of respondent thought it overvalued, up from 13 percent in May. Then again, the respondents to this poll have reckoned gold is too pricey since September 2009.

The fall in the euro should be tailing off. A net 14 percent reckon the single currency is still overvalued, but that is way down from the net 45 percent who thought so in the May poll.

Far from being lauded as a virtue, China’s high savings rate has been blamed for the economic imbalances underlying the global financial crisis. The criticism being that the Chinese spend too little and rely too much on exporting to Western consumers.

The IMF and World Bank have long called for Beijing to ramp up social spending so its citizens will feel less need to save for a rainy day and instead consume more.

But in their intriguingly named paper,  ‘A Sexually Unbalanced Model of Current Account Imbalances‘, New York-based researchers Du Qingyuan and Wei Shang-Jin suggest China’s gender imbalance could also be a significant factor in the persistence of its high savings rate.