Snatching defeat from the jaws of victory

Unbelievable as it may seem, US politicians seem determined to derail the nascent and weak recovery in the US. The two sides of the political spectrum are so far apart that I can't see how they will resolve the budget and debt ceiling issues before tonight and the 17th respectively. Republicans believe that because they control one of the US legislative chambers they have a mandate to effectively try to repeal Obamacare. Democrats believe that because they have the other chamber and the presidency they have a mandate to tell the Republicans to get stuffed. 

To the non-American world, it is quite astounding that it could come to this. How can a budget system allow one side to tie defunding of already passed legislation to a budget? How can a constitution allow that to happen?

Anyway, leaving the lunacy of the American political system aside, a shutdown of government and potentially a technical default on treasuries loom. While the default may be purely technical, it will cause havoc in the repo market, and knock on to other markets very quickly. It will ultimately get resolved of course, but in the meantime it can't help the US economy, and that is still 25% of the global economy.

Stocks to fall, $ to fall, bonds to rise (except defaulted treasuries of course).....  everywhere.

Hold your nerve

The Fed is not going to raise rates. Nor is the Bank of England, or the ECB, or the BoJ or anyone that matters.

The back-up in long term rates is already having an impact on US house sales, and e same will happen  everywhere else. They'll scale back, but then hold at close to 0% for quite a while as the markets get used again to the "old normal" - ie no QE distorting long term interest rates.

And we're back

From a few weeks in Europe. It wasn't all sun, food, rosé and warm but not humid weather. I actually did do a spot of observing along the way, and here is the result....

France - most of southern France is for sale, except no-one is buying, because the semi-communist M Hollande's new tax regime has scared them off. Capital gains tax through the roof, exemptions withdrawn, and wealth taxes being increased.The place is a mess. The only holiday makers appear to be Belgians and Dutch who seem to still be loaded. There were a few Germans too, but relatively few French compared to previous years. Lots of horror stories of people with houses they can't sell or rent, boats that have been for sale for well over a year, in many cases over 2 years, restaurants you normally can't get into for love or money that this year you could just walk up to without a booking and sit down, and generally a pretty depressed feel to the place.

And the restaurants thigh lighted one of France's continuing problems. Total labour inflexibility. The ones with customers were woefully understaffed because under French law you can't just hire someone for a summer season and then fire the, when you don't need them. So instead of hiring, restaurant owners operate with skeleton staff, as does everyone else. Labour inflexibility and tax rates will keep France at the bottom of the European league tables for years to come.

UK - admittedly I was in the London bubble, but that is a place that has a buzz. Streets are full, people are shopping, eating out, having fun and enjoying the summer. There was no feel at all of a recession or even a slowdown.

In short, buy GBP vs sell EUR.

And back to Asia - as many ships as ever parked up out there. Singapore city is a bubble like London, but outside of Singapore I think the slowdown is continuing, Not looking to go long Asia at any time soon.

A Credit Crunch with Chinese Characteristics

Great article today in the FT by Simon Rabinovitch in Beijing on the recent spike in short term RMB interest rates. No doubt man will fail to spot the significance of this, but for those with short memories, a spike in USD short rates is what killed Lehman. Why? Because banks borrow short and lend long, running a maturity mismatch between assets and liabilities. For Chinese banks right now any loan they haves de at less than 8% (and that's likely to be most of them) is losing them money.

This is unlikely to end well. 

I've said all along that governments splurging cash they don't have to alleviate the credit crunch will only put off the day of reckoning, not avoid it altogether. And when it arrives, the bigger the splurge the bigger, the headache.

(Before anyone says these are the Chinese banks not the government, they are majority government owned and went on a huge lending spree from 09-11 under government orders, mostly to local government special purpose vehicles with no assets to their name to finance questionable infrastructure projects. When the collapse comes it'll be as fast as you can spell Ponzi).

UK

Car sales are up, inflation is low, employment seems to be holding up, growth is grinding higher, Mervyn King has successfully kept sterling down, trade and exports seem to be growing, the labour market is the most flexible in Europe, and many Europeans are running to the UK from rising taxes at home. Cautious optimism is warranted.

China. I hate to say I told you so, but....

From Bloomberg.  "China’s trade, inflation and lending data for May all trailed estimates, signaling weaker global and domestic demand that will test the nation’s leaders’ resolve to forgo short-term stimulus for slower, more-sustainable growth.

Industrial production rose a less-than-forecast 9.2 percent from a year earlier and factory-gate prices fell for a 15th month, National Bureau of Statistics data showed today in Beijing. Export gains were at a 10-month low and imports dropped after a crackdown on fake trade invoices while fixed-asset investment growth slowed and new yuan loans declined."

Why would you believe anything unless it comes from a truly independent statistical organisation, and especially when the numbers come from a one party state whose government has explicitly stated that they aim to maintain power for all eternity.

Conspiracy theory. BOE, MPC, ECB, QE, £, € and other acronyms

In the corridor outside the Bank of England Monetary Policy Committee meeting room. 

Mervyn: right guys, before we go in and the recorder gets switched on I'd like to have a quick word. The economy is still clearly a mess, though maybe slightly less of a mess than it was. It's certainly not ready for any tightening - it'd kill the bond markets and  the currency would rally if anyone thought we were going to do anything rash, but we're already pretty much maxed out on bond buying and cutting rates when no one is lending anyway is just pushing on a piece of string. The only help we can really provide is to keep the currency weak, but we're not allowed to say that out loud and unfortunately the yanks and the japs have had the same idea - and both have more firepower than us. Fortunately Europe's still refusing to play the QE game, and they're our biggest trade partner, so we can certainly target them. So here's the plan. 

I'm going to propose we do more QE and claim its to support the recovery. You and you (points at random at two of the others), you vote with me. Everyone else votes against. Then we appear to still have an easing bias, the currency stays down against the Euro and everyone wins without us actually having to do anything. 

Everyone except the Europeans obviously (cue evil laughter from all). 

Ok. Everyone clear? In we go then.