…Greg Ip, commenting for The Economist in the wake of the Fed’s QE-Unlimited, wrote:
Between the ECB’s action last week and the Fed’s today, the world’s two most important central banks are bringing unprecedented resolve to bear on economic growth. The world may one day look back and conclude the first half of September was either a turning point for the global economy, or the final nail in the coffin of the doctrine of central bank omnipotence.
Ip correctly alludes to the risks of all this, which is that if things don’t get better, then you risk confidence collapse in all sorts of institutions, from the Fed to the German constitutional court.
Regardless, both the Fed and the ECB have done something that went beyond what people thought their institutions were capable of.
Given that each market is essentially a barometer of the economic well-being of corporate America, the yawning gap in performance that has opened up between the stock market and the credit market suggests that one or the other is out of synch.
While there are not enough data points to make a definitive statement about which is right and which is wrong, I would note that the last time we had the kind of disparity we have now was in late-2007.
Of course, things are different this time…right?
For my reason, look at happenings in China, a huge recession in Europe, and even a recession in the US that surprisingly few have even figured out yet.
The Globe and Mail reports Sharp trade slowdown set to wallop GDP
The high dollar and the global slowdown are crushing Canada’s trade-dependent economy.
The latest evidence: The country posted the largest trade deficit in July since Statistics Canada began keeping records in 1971.
It wasn’t just the scale of the gap – $2.3-billion – that jolted analysts. It’s how the economy got there.
Virtually all major exports fell sharply, including energy, autos, agriculture, forest products and machinery-and-equipment. The overall drop was 3.4 per cent, paced by an even larger 5 per cent decline in exports to the U.S. – Canada’s largest customer.
At $2.3-billion, the trade deficit narrowly eclipsed the old mark, set in September 2010.
Scotiabank’s Mr. Holt said the high dollar is most damaging to U.S.-bound exports, which accounted for 72 per cent of all exports in July.
Sorry guys, this is not just a currency issue. This is a global recession, starting in Europe, continuing in Asia and as of June hitting the US. Few even see the US recession yet, but it is here, and Canada will be on the leading edge of it all.
This is not unexpected in this corner, albeit I have for so long predicted the end of the Canadian housing bubble that no one is listening to anything else I have said about Canada.
Those who want to catch up on what is happening in China and how it is guaranteed to affect Canada may consider the following posts.
- By 2015 Hard Commodity Prices Will Collapse; Australia’s Mining Boom Dies (and the Official Denials Start)
- Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?
- Currency Wars, Commodity Prices and Capital Flight; China FDI Contracts 8.7% YoY, 8th Drop in 9 Months
All three of those pieces originate from Michael Pettis at China Financial Markets. What he suggests about China and Australia, I have long-since stated applied to Canada as well.
Those posts are just the start of Canada’s problems. Europe is in a massive recession that few saw coming. I commented on that silliness on January 9, 2012 in Dimwit Comment of the Day: Christine Lagarde, IMF Director says “Europe May Avoid a Recession This Year”
Heck, even the vaunted German export machine is falling apart. See Germany in Recession: Private Sector Sees Fastest Falls in Output and New Business Since June 2009; New Export Orders Collapse
With the ECB’s new bond buying scheme, it appears that Europe is turning the corner on the sovereign debt crisis, as peripheral countries should be able to steadily sell short term debt to investors, who can then flip it to the ECB.
This isn’t a total sure thing, since Spain hasn’t even asked for aid yet (a crucial precondition to bond buying) but at least the mechanisms are starting to fall into place.
But that doesn’t solve a much bigger problem: The crisis of democracy and horrible growth prospects thanks to a dysfunctional system and the need for ongoing cuts.
Today tens of thousands of people in Spain and Portugal turned up to protest austerity.
via Google translate:
The CDS admits leaving the Government after the approval of the State Budget for 2013. The newspaper “Público” says Paulo Portas today that will dramatize the situation to reverse the tax burden. Ler mais:
Paulo Portas leaves open a way out of the CDS to the Government after the approval of the State Budget for 2013, the newspaper writes today “Public”. The centrist leader should try to reverse the tax burden, but not put into question the vote on the budget.
The CDS will dramatize the discourse in the coming weeks, as Paulo Portas wants to have a say on more difficult steps. Remember that the leader of the CDS has always expressed reservations about the Single Social Tax cuts for businesses. Once the measure is final, Paulo Portas will try to have a say in the budget, writes the daily.
The report, entitled “The Challenges of Economic Policy,” was published on Thursday, saying economic growth in Italy will remain depressed for the next two years.
“The Italian economy remains in a deep recession and signs of reversing the trend are not strong,” said the study carried out by Confindustria’s research center.
At this point, watch the price of oil if you want to know when the next recession is going to begin. As I’ve pointed out many times in the past, recessions (well, at least since World War II) have all been preceded by a sharp spike in the price of energy. Any move of 100% or more in a year or less, has historically been the straw that breaks the camel’s back. Modern economies cannot survive that kind of shock. It invariably triggers the collapse of consumer discretionary spending and economic activity comes to a grinding halt.
In 2007 oil surged out of the 3 year cycle low into a parabolic advance as Bernanke trashed the dollar in the vain attempt to halt the sub-prime collapse. That 200% spike in oil is what tipped the economy over into recession, which was then magnified in the fall of `08 as the financial bubble and debt markets imploded.
To the vast majority of the US citizenry, the Dow Jones Industrial Average is an odd number that flashes on the new 42″ plasma-screen during dinner; wedged between a news story about a panda sneezing and some well-endowed weather-girl saying “hot, damn hot”. This is why the behavior of Ben Bernanke this week might go unnoticed by most of the great unwashed. That is, of course, if they do not drive or eat food. For those that do eat or use vehicles; for the first time in history, national average gas prices for the 2nd week of September were over $4.00. Of course, this is mere transitory market speculators – and is not real money leaving their EBT card.
Marc Faber: QE3 is a Temporary Boost Followed By A Crash
Marc Faber : If I had messed up as badly as Bernanke I would for sure resign. The mandate of the Fed to boost asset prices and thereby create wealth is ludicrous — it doesn’t work that way. It’s a temporary boost followed by a crash. - in CNBC
Faber recently told CNBC (quote taken from Faber’s blog):
QE helps rich people whose asset prices go up and whose net worth then increases but it doesn’t flow to the man on the street who is faced with higher costs of living with price rises. You just have a small economy that is booming but the majority of the economy is damaged by QE.
WARNING! Catastrophic Financial Collapse