To QE, or not to QE, that is the question

So the Fed is winding down QE3 and it has universally been declared a great success. Meanwhile in Japan the BoJ has shocked markets by announcing yet more QE - the world has lost count of how many rounds of QE that makes in Japan. It has clearly not been a great success there.

Why the difference?

I would suggest that the recoveries in the UK and US have much more to do with a swiftly recapitalised banking system then any effect from QE. QE may have helped, but non-zombie banks I would suggest are more crucial. Japan can keep on QEing as much as it wants, but until it sorts out its banks nothing will change. Except maybe the country going bust. 

Plus ca change....

It's been a while but  it's time to restart offering a few thoughts. But where to start? Sometimes it's depressing being right. Anyone who knows me knows that I've been saying for at least 5 years that Europe is Japan writ large. A failure to recapitalise the banks and hope they could muddle through has simply led to stagnation. It's finally coming home to roost.

The U.S. and the U.K. bit the bullet early, took the pain upfront and and are now benefitting from that. Europe has just gone nowhere, hoping that US growth would pull them up with it. It's not going to happen. The recent ECB stress tests seem more realistic than previous efforts but I think the markets are weary of the ECBs efforts to talk things up. They want to see some action. Of course the ECb can promise and threaten lots of things but it is hobbled by its council and the overarching reach of the Bundesbank behind the scenes. Anything that does happen is likely to be smaller in size and slower to arrive than markets hope and the economies need. 

European woes seem set for the long term

The calm after the storm

while an overnight bounce after my psoting yesterday is nice to see, I doubt the volatility will die down that quickly. But i think it does show that the underlying fundamentals in many of the world's major economies are strong enough to sustain this recovery. And the Central Banks won't be inactive - particularly in the US were the new Fed Chairman is a known dove. Rates will stay low long after tapering is done, and until the Fed raises, none of the other major central banks can - hence I remain very long GBP bonds and have a few equities thrown in for variety.

The Central Bank raises in some EM countries, however, are more worrying. Growth was already slowly in many developing countries, and rising rates will hurt them further. I fear they have given a short-term boost to their currencies at the expense of long-term economic pain - which will also be bad for their currencies further out. What most of them need is a weaker currency, but arrived at in an orderly fashion.

Other thoughts....?

Italy - looking like a basket case - it's likely to replace Spain as the major worry in Europe.
France - going to grind along the bottom until the lunatics in charge see sense. Doubt it will go into a tailspin though.
The Euro - as ever, it'll survive, because the ruling elites in Europe want it to. Nothing to do with economics or logic.
China - complete ponzi scheme but they have enough money to bail it all out when it starts to go pear-shaped. When the bust comes it will be a drag on the world's economy but I doubt the disaster everyone fears. Unless you're the Chinese Communist Party. A recession and a few investor haircuts could easily spell the end of their rein.

But for all the doom and gloom out there, somehow the world always seems to manage to bounce back - it has before and I expect it will again.

Here we go again...

Well 2013's feelgood factor didn't last long. So far in 2014 equity markets are well down and bond markets are well up - pretty much the 100% opposite of what every economist was forecasting. Why do banks pay fortunes for these guys - they're best used as a reverse indicator.

But my gut feel is this will pass. Yes there are potentially huge financial problems coming in China, Indonesia is wobbling, Thailand is shooting itself in the foot, India is going nowhere and Brazil is reporting record trade deficits. But, for all the talk of the importance of these places, 50% of the world economy is Europe and the US. Those areas are showing enough signs of recovery to think that there will be a global slowdown, but not a meltdown.

The Fed may or may not continue to reduce its stimulus, but for all the talk of tightening it is in fact still pumping $65bn a month into the US economy, and can increase that again if necessary. The ECB can and will cut rates to 0% if needed, and the Bank of Japan is still printing Yen like it's going out of fashion.

The current wobbles are an over-correction from excessive optimism late last year to excessive pessimism now, made worse by terrible weather in Europe and the US, and Lunar New Year slowdowns in Asia.

Hang tight - it'll come good.

China

Excellent article in today's Torygraph by our old friend Ambrose Evans-Pritchard on the China theme - http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10431582/Chinas-Communists-want-unattainable-goal-of-affluence-without-freedom.html - executive summary: it's all going to end in tears. Only surprise is he doesn't somehow conclude it's all the fault of the Euro.

Asian Financial Crisis, take 2 - A sense of deja vu

In the early 90s interest rates in the West were slashed - particularly in the US where rates fell to 3% in 1992 from as high as 8-9% in the late 80s. This was partly in repsonse to a housing bubble bursting and also in resonse to the Savings and Loan crisis in which many US Savings and Loan companies (basically a building society) went bust.

This dramatic drop in rates led to Asian borrowers overborrowing in what now appeared to be "cheap" US dollars. When US interest rates started to rise, and the currency went up with them, many of theses borrowers found themselves unable to pay the interest on their now expensive US dollar borrowings. Some of these borrowers were sovereigns, some major financials, some major corporates. The result was a spike in defaluts and ultimately the Asian Financial Crisis in the late 90s.

Fast forward 15 years or so and everywhere I look I see Asian borrowers issuing US$ denominated debt. My inbox is full of new issue offerings from a bewilbering array of names, many of which I've never heard of before. Lots are unrated, and trade on implicit support from governments (especially China, Singapore and Malaysia), los are property developers of one form or another. None of them are worth touching with a bargepole.

In the private sector, household debt levels have jumped in Singapore, Malaysia, Thailand and China in particular - again often fuelling property speculation

When US rates go up, and liquidity flows out of Asia back to the States, a lot of these companies and individuals will find themselves high and dry. And so many are property developers that a small fall in property values and demand could cause a snowball effect of failing developers and defaulted debt. They are all on the same side of the trade, and have no obvious protection. It may not be exactly the same as the US RMBS and sub-prime debacle, but it could easily end up the same way - a lot of borrowers, borrowing money they can't really afford, but they can manage as long as property prices keep going up. When that circle stops, and the developers are left with unsold inventory or forced to sell at a loss, then the game will be up.

It could be 2 years, 5 years, 10 years or tomorrow - it's a confidence game and who knows when the emperors new clothes will be pointed out for all to see - but it will come. Asia seems destined to repeat the mistakes of the past, only this time on a much bigger scale and with much bigger global ramifications.

China

Headline in the FT - China manufacturing data surges to strongest reading in 18 months.

And now supposedly Chinamis storming ahead. Really? The ever growing number of ships parked off the East Coast here in Singapore tells me otherwise.

Official China data isn't worth the paper it's printed on. They're trying to pretend all is well when it patently isn't.

I believe the Chinese economy is a huge Ponzi scheme relying on sucker westerners pouring in capital at the bottom. Once the west stops pouring the cash in as it finds cheaper places to make its cheap plastic rubbish (SE Asia, Africa, Bangladesh etc) the Chinese economy is going to be in real trouble.