Age of Wisdom, Age of Foolishness (12)
Last week, the American Jury delivered its verdict on the economic recovery and the European Jury was asked to reconsider by the Judge. Juries on both sides of the Atlantic had been considering the parochial evidence of their own domestic economies in isolation from each other. The American economy seemed to be reaching escape velocity. Europe had allegedly escaped. The bond markets were open again for Peripheral borrowers; and to underline this Spain formally emerged from its bailout. The European verdict seemed easy, whilst the American verdict was difficult and even more so based on the fact that the impact of the “Taper” needed to be factored in going forward.
The annual platform to push global agendas arrived at Davos, just in time to remind both Trans-Atlantic juries that the global law of the jungle takes precedence over domestic courts. This reminder was then reinforced by the seemingly coincident emergence of the next economic crisis and the apocryphal words of George Soros that it was 2008 all over again. Sapient observers of this new global courtroom drama should be in no doubt that this seemingly coincident confluence of events is being carefully orchestrated to prepare public opinion for the next phase of global macroeconomic policy.
For some time China has been signalling that it is addressing its Shadow Banking Bubble; and that this will have negative consequences for economic growth there. Observers have already been primed to expect economic growth sub-10% circa 7%. Observers have also been primed to expect the new Premier to eradicate corruption and waste from the economy. Observers however assumed that all this would be executed with precision, so that they could then start discounting the positive growth impacts in Chinese asset prices immediately. Chinese asset prices therefore discounted the result rather than the process of getting there. Evidence from booming property prices suggested that the adjustment process had not even begun, however said observers took these rising prices to be signals of the success of the policy adjustment.
ICBC = “CPWP”= “Can’t Pay, Won’t Pay”
When evidence emerged last week that Chinese banks were about to default on Shadow Banking asset management products, this was then taken as a sign of crisis rather than the sign of the adjustment process.
In addition, when evidence emerged that the President himself is linked to the very corruption that he is supposed to be eradicating the whole façade collapsed[i]. George Soros was being a little disingenuous when he referred to the situation being like 2008. In China’s case it was more like 1998. Further analysis of the performance of Asian Emerging Markets would confirm the 1998/2008 simile. Anyone breathing the air in China and parts of South East Asia would also see clouds of smoke similar to those from the regional fires back in 1998. It is all déjà vu all over again.
Observers should also remember that, had things gone exactly to plan, Larry Summers would now be sitting in the Fed Chair to deal with the next crisis.
“Now and Then”
It should be remembered that Summers was one of the “Committee” that “saved the World” back in 1998. This time around, history is rhyming with Janet Yellen because Summers didn’t quite make it. The rhythm and rhyme is still audible, because Robert Rubin’s former co-head at Citigroup, Stanley Fischer is scheduled to move to the Fed Vice Chair. Fischer was heard making rhyming noises of his own, back in June 2013[ii], about how the “Taper” was a good thing for Emerging Markets and rebalancing the global economy. He will shortly have the platform to explain the wisdom of his pronouncements.
So looking at the big picture, created by all these little pictures, things were falling into place nicely for Davos. There was however one missing piece of the global puzzle.
2013 was another year of abundant global liquidity, provided by the BOJ. The BOJ was given sanction to ease unilaterally; in order to boost domestic inflation and exports via a weaker Yen. The Fed’s “Taper” was then supposed to boost the value of the Dollar against the Yen and keep this bandwagon rolling.
“Read ‘em and weep”
By early October 2013, just as the “Taper” was emerging onto the radar screen, it was becoming obvious that the weak Yen was creating energy price inflation in Japan. This energy price inflation was proving to be a greater economic headwind than the tailwind of the weaker Yen. Our analysis at that time said that “Abenomics is not working”[iii]. The disconnect in the markets came from the fact that the “Taper” then started to boost the value of the Dollar versus the Yen even further. Speculators assumed that this stronger Dollar was the signal of the success of the BOJ. It was actually the contrary, because it raised the value of energy imports and hence the economic headwind even further. Against the backdrop of a crisis in Emerging Asia and China, the one way bet against the Yen no longer works.
History has shown that policy makers use a crisis to deliver policy-agendas. There were several crises evident at Davos last week. The headline crisis was the global consensus that wealth and income inequalities are the major threat to sustained global economic growth. QE has exacerbated this division in Developed Markets; and Kleptocrats plus QE flows have exacerbated it in Developing Markets. Global policy makers can therefore be expected to address this issue going forward. They must however address it in a way that does not undermine the rise in asset values created by QE; and also in a way that does not question the wisdom and fidelity of QE.
As we saw in Terminal Velocity “Gatsbied”[iv], America has been preparing this mendacious script since mid-2013. To get to the new policy statement however QE has to run its course, as does the BOJ experiment. The “Taper” decision effectively brings the course of QE to a pause. Japan has been in its early stages of the next crisis since Q3/2013, only no one in the markets has noticed until last week. Europe has allegedly emerged from its crisis at this point in time; the problem being that the recovery there is “feeble” to use the words of Christine Lagarde. If China and the Emerging Markets are imploding, where is the global growth driver, once America starts “Tapering”?
It is clear that a point has been reached at which a new wave of liquidity is being prepared. The logical place to look for it first is Europe, based on Lagarde’s recent hint and Mario Draghi’s recent comments about weak inflation and poor credit growth. But we should not be expecting traditional QE as we know it, nor should we be expecting the ECB to act alone. Rumour has it that Bernanke will soon be “landing” at Brookings; so he will still be close to the creation of economic thought leadership in America which has a global dimension. Following the headline income and wealth inequality agenda, articulated by the Obama administration last summer and reiterated at Davos last week, one can foresee a strong intellectual case being made for Helicopter Money.