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Roach Sees ‘Relatively Contained’ Recession in Europe

Edward Harrison — Fri, 13 Jan 2012 03:00:14 +0000

Stephen Roach told Bloomberg television earlier today that he does not expect the recession in Europe to be severe. Therefore, he believes the impact on other economies, particularly in Asia that depends on Europe for external demand for exports, will be limited. Video below

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If no trade reversal now, then when?

Michael Pettis — Mon, 09 Jan 2012 13:00:00 +0000

The best resolution, and the one Keynes urged without success on the US in the 1920s and 1930s, is that Germany take steps to reverse its trade surplus. It could boost disposable household income and household consumption by cutting income and consumption taxes. If Germany imposes austerity, unemployment will force the peripheral countries into the unenviable choice either of absorbing that surge in unemployment themselves, or of forcing the unemployment back onto the core countries by abandoning the currency that is at the heart of their lack of competitiveness

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Japan and China: Small Beer

Marc Chandler — Tue, 27 Dec 2011 02:47:51 +0000

Understanding the financial agreement within the context of that rivalry is more important than what it means for the future of the dollar as the world's more important reserve currency, invoicing currency and vehicle currency. Nor will the agreement impact the outlook for either the yuan or the yen

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Italy Braces Itself For The Full Monti

Edward Hugh — Mon, 26 Dec 2011 18:39:01 +0000

The bottom line is that Italy is both too big to fail and too big to be bailed out, which is why it is still hanging dangerously in limbo-land. Since, as I argue in this article, some sort of restructuring or other is well nigh inevitable in the Italian case, the sooner Europe’s leaders work up a credible plan on how to achieve this, the better. Otherwise it will not only be Italy’s citizens who are subjected to the Full Monti, Europe’s leaders may also find themselves with their credibility stripped naked

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America: What to Do with North Korea?

John Lounsbury — Mon, 26 Dec 2011 06:19:29 +0000

North Korea’s dear leader, Kim II, died a few days ago. His 3rd son is now in charge, as Kim III, Kim Jong Un (pictured). There is no better time to talk about North Korea than now, as evidenced by some timely expert opinions. So it’s time for me to chip in my two cents. I will briefly but succinctly answer five pertinent questions as follows

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Is Finland Really A Closet Member Of The Eurozone Periphery?

Edward Hugh — Mon, 19 Dec 2011 02:36:20 +0000

The country’s debt dynamics are far from unsustainable at this point, but given the weakening in the country’s export performance and the steady unwinding of the housing boom we can now anticipate I would expect growth to be weaker than either the EU or the IMF are currently anticipating, and pressure on the country to increase fiscal spending to maintain expectations to rise, with the implication that pressure on the Finnish spread over 10 year German bunds will continue, as the country risks drifting off from being part of the core towards the growing periphery, at least in the eyes of investors

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China: Lots of news, signifying nothing new

Michael Pettis — Sun, 18 Dec 2011 02:24:51 +0000

I don’t think there is a whole lot to say about this week’s numbers beyond what I have been saying for the past several months. Nothing substantial has really changed. China’s external account is worsening, and will continue to worsen since global imbalances have no choice but to adjust. Growth in China is slowing but remains relatively rapid, and as unhealthy as ever, but there is little likely to be done to improve the quality of growth until 2013. Beijing will continue veering back and forth between stomping on the credit accelerator and stomping on the credit brakes as the only way they can manage the economy

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The ECB now wants export-driven growth for the whole of Europe, not just for Germany

Guest Author — Tue, 13 Dec 2011 13:49:59 +0000

The ECB President admitted that budgets cuts and tax increases are contractionary -“in the short term” he added - but there are two ways to lessen their negative impact on growth: the confidence-enhancing effect that will follow the new “fiscal compact” or “if you enhance the competitiveness, you can actually count on your external demand, on your net exports”

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China and Europe

Marc Chandler — Tue, 06 Dec 2011 03:00:00 +0000

China has an interest in preventing the total collapse of the largest buyer of its exports, but it also has an interest in forcing Europe to divest its overseas assets. Chinese banks and companies are in a position to be a buyer of some of those assets

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Charts of the day: Understanding the latest economic data out of China

Win Thin — Wed, 23 Nov 2011 21:30:23 +0000

The weak November HSBC PMI for China has added to market bearishness. This is not the official PMI but we do note that while the HSBC measure has been below 50 for 4 of the 5 past months, the official PMI has yet to fall below 50, but it was reported at 50.4 in October, the lowest since February 2009. A further drop in the official PMI below 50 seems hard to avoid. Slowing in the Chinese economy is inevitable given the deteriorating external environment as well as PBOC tightening measures taken in 2010-

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Germany must do it, not China

Michael Pettis — Mon, 07 Nov 2011 13:35:54 +0000

So how do we explain the European crisis? One theory is that the European crisis was caused by the moral turpitude and spendthrift habits of lazy Europeans along the periphery, in sharp contrast to the hard-working and thrifty countries of the center. According to this theory it is unfair to demand that Germans clean up the mess. If you believe this theory, you are going to have to explain what happened in 2000 that turned thrifty Italians, French and Irish into spendthrifts, and that turned ordinary Greeks, Portuguese and Spaniards into even worse spendthrifts. You will also have to explain why spendthrift Germans in the 1990s suddenly morphed into the stolid, thrifty creatures of legend. An alternative theory is that the imbalances were caused by internal policies – perhaps the creation of the euro and the gearing of monetary policy to German needs at the expense of the periphery? – which led to the severe internal imbalances. These imbalances created employment growth in the countries that suppressed consumption, and forced the countries that didn’t to choose between debt and unemployment. Of course since the latter countries had no control over monetary policy, the choice was largely made for them by the ECB with its excessively low interest rates, and their debt levels surged. I find this alternative theory a lot easier to understand, and if it is true it places responsibility for saving the euro squarely in Germany’s hands. The only way to save the euro (and incidentally to prevent Germany’s banks from being forced to absorb huge losses on peripheral European debt) is for Germany to spur consumption and investment enough to reverse the current account surplus. Only this will allow peripheral Europe to grow and to earn the euros needed to repay the debt

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The euro zone is one giant vendor financing scheme

Edward Harrison — Fri, 04 Nov 2011 14:45:35 +0000

Here’s an interpretation of the euro zone I have been meaning to run by you and I touched on it in the update to my post on how austerity in Europe works. In a fixed exchange rate environment like the euro area, you don’t have currency fluctuation issues. So persistent current account imbalances as we see within the euro zone are really a form of vendor financing

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Expect a lot more trade intervention

Michael Pettis — Wed, 02 Nov 2011 12:30:49 +0000

The currency may well be undervalued, but a significant rise in the RMB, especially if it is countered domestically by an increase in credit at lower real rates, might actually make the global imbalances worse and, more worryingly, cause China’s debt burden and capital misallocation to rise. This would make China’s eventual adjustment far more difficult. The focus should be on shifting China’s economy towards the more labor-intensive and efficient sectors, and an appreciating RMB might actually make things worse, especially if it encourages hot money inflow. It is much better, I think, for China to raise interest rates than to raise the value of the

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China PMI drops to lowest in 32 months

Edward Harrison — Tue, 01 Nov 2011 02:49:06 +0000

50.4 is the lowest number since early 2009, during the depths of the recession. So this number, shades above contraction, is a big deal. In fact, the sub-index for new (export) orders index is contracting, meaning slowing economic growth in the developed economies is now impacting China as well

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Stephen Roach on America’s other 87 deficits

Edward Harrison — Fri, 28 Oct 2011 20:00:32 +0000

Here are a few excerpts from Stephen Roach’s latest at Project Syndicate

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Deleveraging, Banks and Economic Recovery in Ireland

Guest Author — Fri, 28 Oct 2011 15:15:48 +0000

The challenge that the Irish economy faces can best be described in the context of flows and stocks of assets and liabilities. Under the Memorandum of Understanding (MoU) with the IMF/EU/ECB Troika, Ireland must implement a severe fiscal austerity programme and reduce the size of its banking system. These goals must be achieved in the context of a deleveraging process in the household sector brought about by the need to repair balance sheets following a collapse in the value of housing assets. The current policy mix, which aims to reduce these stocks simultaneously, is unlikely to be successful, a feature we term the domestic trilemma. An external trilemma arising from the constraints of EMU membership also limits the policy choices for high-debt economies attempting to engineer an export-led recovery. This paper argues that a sequencing of policies is required for Ireland to achieve its goals

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Argentina Reelects Fernandez, Unorthodox Policies And Peso Weakness To Continue

Win Thin — Mon, 24 Oct 2011 19:20:19 +0000

Fernandez will try to maintain the unorthodox mix of policies for as long as she can, and has shown little willingness to more towards orthodoxy during her first term. Troubles will come both internally and externally, with the growing fear that the exchange rate will bear the brunt of adjustment in the coming months

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China’s Dwindling Trade Surplus Signals Weak World Economy

Global Macro Monitor — Mon, 17 Oct 2011 13:00:00 +0000

The Chinese trade surplus has dwindled. But pressure to revalue the Yuan remains. Video below

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China Notes from the Yum! Brands Earnings Call

Global Macro Monitor — Thu, 06 Oct 2011 14:14:25 +0000

Today’s Yum! Brands’ earnings conference call was dominated by China. Management talked a lot about commodity inflation running around 8 percent and 20% labor inflation, which they do not yet see abating. This doesn’t square with the August official inflation rate of 6.2 percent. A China hard landing scenario is now on traders’ radar and needs to be closely monitored. The stock closed down 2.7 percent

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Chart of the day: Largest German trade partners

Edward Harrison — Thu, 06 Oct 2011 13:35:25 +0000

Since I did the numbers for the US, I thought I would do the numbers for Germany too. Below are the bilateral trade figures for Germany in 2010, first ranked by deficit with country and then by surplus with country. Germany has a deficit with 73 countries and a surplus with 147 countries. The largest deficit by far is with China at $23 billion, followed by Norway, Ireland and Japan. The largest surpluses are with France, the UK, the US and Austria

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BRICs to the rescue

Michael Pettis — Thu, 06 Oct 2011 13:00:08 +0000

Turning to foreign sources of capital will only aggravate the problem from which Europe already suffers. Even assuming that developing countries are willing to take on risks that Europeans find prohibitive, their help will not improve prospects for Europe. On the contrary, it will hurt growth prospects and make the ultimate resolution of the debt crisis more difficult than ever. BRICs should be exporting more demand, not more capital. It is important that the desperate short-term funding needs of certain governments do not lead to an overall worse outcome for Europe. If Europeans do not want to fund credit-impaired European governments, they should not ask foreigners to do so. Slower growth and foreign debt will not help resolve the problem of insolvency

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Chart of the day: Largest US trade partners

Edward Harrison — Thu, 06 Oct 2011 11:30:21 +0000

Below is the list of the largest trade partners of the United States as compiled by the US Census Bureau. The United States has a bilateral trade deficit with 12 of the 15. So I have ranked them according to trade deficit, with China in first place by a mile. Mexico is actually second, Japan and Germany, third and fourth respectively. The list also includes oil exporters like Saudi Arabia and Venezuela, but the lion’s share of the US trade deficit is in goods and services

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China currency bill is about US politics, not trade

Edward Harrison — Wed, 05 Oct 2011 19:48:24 +0000

Below is a video of my appearance on RT International last night discussing the recent bill to authorise sanctions against the Chinese for currency manipulation. I see this bill as all about the politics and little about the economics

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China Bill: Huff, Puff and Bluff

Marc Chandler — Wed, 05 Oct 2011 19:00:55 +0000

US national elections are 13 months away and not coincidentally, the Congress is looking at a new measures to encourage China to re-value the yuan. While there is little doubt that the yuan in under-valued, though reasonable people may differ on the magnitude, politics more than economics appears to be the driving force

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Ireland: Is austerity enough or will we see haircuts?

Edward Hugh — Mon, 12 Sep 2011 12:54:02 +0000

It is high time politicians in Berlin to started to recognise that fiscal austerity is not the be all and end all of the policy issues they now face. Ireland is applying fiscal austerity, but this alone may well not be enough. A better distribution of the pain needs to be found. As the IMF itself notes in its latest staff report: ”there is a strong sense that burden-sharing between taxpayers and creditors for the cost of supporting the banks has been unfair”

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UBS: Euro break-up – the consequences

Guest Author — Tue, 06 Sep 2011 14:38:17 +0000

The following is excerpted from today’s UBS research note by Stephane Deo, Paul Donovan and Larry Hatheway on the consequences of a euro break-up. The full note is embedded below

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Why Made in China Costs More in China

John Lounsbury — Sun, 04 Sep 2011 20:29:45 +0000

Chinese goods cost more in China because of currency, taxes, transportation,logistics and inflation. The Chinese get the jobs, while Americans get the consumer products; The Chinese government gets the dollar, but the U.S government gets to spend the dollar! The Chinese like to say: the Americans get a better deal!

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Brazil Surprise Rate Cut To Weigh On BRL

Win Thin — Thu, 01 Sep 2011 11:30:29 +0000

While most EM central banks have moved into dovish wait-and-see stances, very few have cut rates during this cycle. Besides Brazil, only Turkey has this distinction and we’ve seen markets punish the lira in recent weeks. While the underlying fundamentals are much stronger in Brazil than in Turkey, we simply point out that market credibility is something that should not be taken for granted

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Foreign capital, go home!

Michael Pettis — Wed, 17 Aug 2011 14:30:00 +0000

Once again we are hearing very worried noises from various sectors about the possibility of a reduction in Chinese purchases of USG bonds. Is the PBoC going to stop buying USG bonds

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What is the secret to Germany’s economic success, part 2?

Edward Harrison — Tue, 16 Aug 2011 13:00:00 +0000

There are a lot of reasons Germany has been doing well: wage restraint, educated workforce, low unemployment, etc. I could go on and on. But in a global growth slowdown, the Germans will not be immune any more this go round than they were last time when their contracted more violently than most along with the other export-dependent aging society, Japan. If Germany wants continued economic success, its government must do a much better job in leading the euro zone out of its existential crisis. If the periphery sinks, we all sink

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Estonia is also part of the Eurozone periphery

Edward Hugh — Mon, 15 Aug 2011 14:10:26 +0000

It is far from clear that the current level of Estonian CDS prices risk in in any more satisfactory way than they did at the height of the crisis, since membership of the Eurozone has brought with it both positives and negatives. The 0.28% contribution of the country to any future EFSF bailouts may not seem like a very big deal, but in comparison to Estonian GDP the sums involved may well be far from trivial. The country does not have, and is not likely to have, either a fiscal deficit or a sovereign debt problem, nor does it have a home grown banking system which might need bailing out. The risk to Estonia comes from elsewhere, from its association with Ireland, Spain, Greece, Portugal and Italy. Depending on how far the core EU countries are willing to finance debt and absence of growth in those countries the Eurozone’s future is far from clear

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Andy Xie Recommends China Diversify Out Of Treasuries

Edward Harrison — Tue, 09 Aug 2011 12:30:00 +0000

The Chinese foreign reserve accumulation is really about the exchange rate peg. As long as the Yuan's dollar peg remains near present levels, the current account imbalance will result in an accumulation of dollar reserves. Former Morgan Stanley Economist Andy Xie says the Chinesse do have a choice as to what US dollar assets to buy, even so. He suggests the US diversify out of Treasuries and into other US dollar assets

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Could There Really Be A Recession Risk In Germany?

Edward Hugh — Thu, 04 Aug 2011 14:00:01 +0000

In Germany movements in GDP follow movements in the rate of expansion of exports. Let’s not get into why that is for the moment (think Germany’s particular demography), and just consider the possibility, despite all the talk over the years of Germany finally “decoupling”, that it can’t. Export dependence could well be the key explanation for why the performance of the German economy is so “extreme” and so volatile, with quarters of record growth being witnessed just before the onset of substantial recessions, recessions which often register record falls in output only to be followed by massive recoveries

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Trade, Trial Balloons, and the Yuan

Casey Research — Wed, 13 Jul 2011 03:00:00 +0000

Regardless of the source of inflation, it is a serious concern for Chinese officials. Chinese history shows that periods of high inflation are associated with social, economic, and political unrest - all things that the central planners in Beijing wish to avoid. Toward that goal, the return to stronger export performance might provide a convenient pretense for another round of yuan appreciation. A strengthening yuan would lower the import cost of commodities and energy, both essential components throughout the food chain. China is the world's biggest consumer of energy and soybeans, and its import bills have been soaring. So, what are the odds that the yuan will be allowed to rise

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A ‘United States of Europe’ or Full Exit from the Euro? (Part 2)

Marshall Auerback — Fri, 24 Jun 2011 18:30:33 +0000

This is the second in a two-part essay on the origins of the sovereign debt crisis. Here the emphasis is on the present situation within the euro zone and the imbalances between the core, dominated by Germany, and the euro zone periphery

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