Imperfect indicators.

I always ascribe more weight to anecdotal evidence than economists - pilots, shippers, hauliers etc always know way before economists when things are slowing down simply because most economists rely entirely on government-issued data which takes weeks or months to assemble. It's old news by the time it's published. But economists are a lazy bunch. Years of being feted and pampered by media and bankers has made them sluggish, so they just sit back and wait for "hard data" to tell them what has already happened, instead of going out and getting a feel for what's really going on right now.

Sometimes though you don't even need to go looking for it. Anecdotal evidence can be right in front of your eyes

And on that note, here are some snaps taken from the Singapore coast this morning. This is the parking area, where boats wait until they have a shipment to load.

There sure are a lot of boats out there waiting.... and waiting..... and waiting....

Terminal Velocity

As I mentioned in an earlier post, the success or failure of the Fed and Bank of England strategies of quantitative easing (QE - essentially buying bonds with newly printed money to pump cash into the system - a modern version of turing the printing presses on) rests entirely on the velocity of money. In essence that is simply how fast it turns over - how fast consumers spend it and companies spend or invest it. I mentioned in that same post that without any velocity, QE is useless.

It seems that in Europe velocity has collapsed to the point of being negative.

This makes nonsense of any arguments in favour of QE. It would almost literally be pushing on a piece of string. The only way out of this for Europe is for the ECB to turn on the presses for government bonds and buy the governments some time to set their fiscal houses in order. Attempting "stimulus" through purchase of corporate, financial or mortgage-backed bonds is pointless.

It is strange that European Banks can rely on the ECB for unlimited liquidity, but European governments can't.

Eventually ideology has to give way to practicality. Might as well make it sooner rather than later.

Contagion - coming soon to a government near you

Has the Euro disease broken free of the constraints of the currency?

Japanese bond yields are climbing (prices falling) as investors start to question whether Japan is ever going to get to grips with what is the worlds biggest government debt pile relative to GDP at over 250% (italy is just over 100 for comparison).

For 20 years Japanese central bank rates have effectively ben 0%, dragging down the yields on Japanese Government bonds to typically between 1 and 1.50% depending on maturity. Now however they're climbing sharply as investors extrapolate the european disaster to other economies.

I recall hearing or reading somewhere a year or so ago that if Japanese Government bond yields go to 4%, then 100% of government revenues will go on servicing the existing debt stock.

Of course there is one other country out there too with large debt stock, a large budget deficit and no apparent plans to do anything about either....

10yr Japan Govt Bond yields

Neither a lender nor a borrower be (or whatever the quote is)

I see the world's politicians are having another go at the banks for "failing to lend". US, UK, Eurozone - the message is the same everywhere.

What they don't seem to have realised is that banks can only lend money that they have. Their only sources of that cash are either deposits or borrowing in the bond markets - either short or long term.

The new rules, instigated by regulators at the behest of politicians mean that corporate deposits and short term bond borrowings are no longer regarded as core funding as so effectively can't be used to make long term loans.

Only retail deposits and long term bond issues count.

Retail is a bit strapped for cash right now. And he bond markets are effectively shut thanks to those self same politicians failing to get to grips with the Eurozone sovereign crisis.

Net result - banks can't lend even if they want to. The fact that they probably don't want to lend merely compounds the problem.

Deleveraging is coming to everyone, whether you like it or not.

China - damned if they do, damned if they don't

Interesting comment overheard over the weekend.

Every Central Bank / sovereign wealth fund is busy selling every European sovereign and agency ( such as European Investment Bank and European Bank for Reconstruction and Development) bond they have except the Chinese.

This isn't some sort of support for Europe though. China has the same problem in Euro-denominated bonds as it has in $ bonds - it owns so much of the bonds out there that if it starts selling the market will collapse and it'll end up costing itself billions. All the Chinese can do is sit tight and pray for a miracle. They are effectively all in to both US and European solvency.

The solution is obvious to everyone except those who need to see it

It's becoming farcical. To believe that Europe can somehow extricate itself from it's predicament without some form of mass monetisation of European sovereign debts is borderline insane. The only way it is achievable is by inflicting a mammoth depression on the whole of Europe, and by extension the world - Europe is after all 25% of the world economy, roughly the same as the U.S.. And it's not as though the U.S. is going to be able to take up the slack.

The ECB needs to relieve the pressure by stepping into the bond markets. That will give governments time to put their fiscal houses in order. Otherwise it's going to be a mess.

Doesn't seem likely to happen though. The Germans are dug in hard and won't give an inch. Ultimately this will hurt them too - Germany is a big economy but it is nowhere near big enough to support the whole of Europe - but they seem to prefer to share the pain than sacrifice their ideologies.

So what to do?

This is basically a rerun of Japan's classic credit bubble explosion of the late 80's and early 90's, and interest rates there are still at effectively 0% 20 years later.

Asset prices there are still falling.

Inflation is net to non-existent, and frequently negative, because as I have mentioned before, when companies and individuals start saving hard the velocity of money collapses.

The U.S. is making the same mistake Japan has made for 20 years. Using Central Bank buying and huge government deficits to try to provoke growth, when all they are doing is pushing on a piece of string.

Europe has an opportunity to do the right thing. Use Central Bank financing as a tool to buy time, not as a tool to attempt to stimulate. Once government deficits and debt piles are shrinking then the huge drag they have become on the economies will fade and growth will restart naturally. It may take a few years, but the alternative is Japan and U.S. style attempts to throw ever more borrowed money at the problem, which has been shown time and again not to work. Both those countries have been lucky that their domestic Government bond markets have held up - Japan's because it is effectively closed and the BoJ and Post Office mop up the bonds, the U.S. because the $ is the reserve currency of the world so most major institutions have little option other than to buy the currency and the bonds.

Europe is not so lucky. As Germany has just discovered, austerity is going to be spreading fast as markets simply refuse to buy new bonds. Imposed austerity would be a disaster as it would likely be severe. The ECB can buy time by acting as a lender. The austerity pill will still have to be swallowed, but the dose won't need to be as big up front and the taste not as bitter.

It is time to stop believing another recession can be avoided. It can't, and in fact it shouldn't be. It should be welcomed as finally cleansing the system of the excess debt of the 90s and 00s and allowing true growth to reassert itself.

Meantime, what to do.... whether the ECB steps in or not, interest rates in Europe and the U.S. are going to stay lower for longer than anyone (except me apparently) thought, and the world economy is going into a major funk.

Equity analysts are micro-analysis morons who have no idea what is coming.

Economists seem to be finally getting it but it's taking time.

Stay out of equities, stay long bonds - but not ones denominated in Euros.

German bond auction “disaster”

Yesterday’s auction of 10 year Bunds has been described as a disaster, and led to sharp declines yesterday in Europe and the US and today and Asia.

While disaster is possibly overstating it, it’s certainly not good news, and hopefully is wake-up call the Germans need. Germany has been caught on the horns of a dilemma for the past few months. It is quite clear the only way to save the eurozone is for the ECB to step in and buy Government Bonds openly in the primary and secondary markets, so capping rising government interest costs and giving those governments a chance to get their financial houses in order and implement much needed austerity plans. The alternative is the expulsion of many current members of the Euro.

The Germans problems are both legal and ideological.

Legally no country can leave the Euro – there is no mechanism to allow for it.

Similarly the ECB cannot fund European governments. Of course the ECB is already playing fast and loose with this by buying on the secondary market, claiming that is somehow different to buying at new issue.

Ideologically Germany is opposed to monetisation of debt buy Central Bank buying. They are concerned with 1930s style hyperinflation. And well they might be to be concerned, seeing as that hyperinflation led to the rise of Hitler. But as I said yesterday, there is no chance of hyperinflation in the immediate term. Velocity of money has collapsed. Individuals, companies and banks are hoarding cash and not spending. That is why QE is hopeless as a stimulus tool, but it also why EB buying of Government debt makes sense. It takes the panicked market makers out of the equation and gives governments time.

Once confidence is restored the ECB can either simply sell the bonds or let them mature and be repaid by the relevant government, keeping the money out of the system and preventing an inflationary spiral.

Germany needs to finally face up to this reality.

It will still lead to at least a Europe-wide recession as austerity bites, and probably a nasty one, but the alternative is far worse.

It’s time for everyone to accept that there will be no recovery for many years. This is going to hurt.