First and foremost: To all of my readers, friends and their families in the path of the hurricane that has wreaked havoc on so many lives, my thoughts and prayers are with you as you strive to put your lives back together. For you I am “Waitin’ On A Sunny Day.” The markets will do their job of assessing the damage to property and the economic impact that follows such devastation. Hopefully lost lives were kept to a minimum. For those trying to measure the economic impact I warn to be careful with all the flotsam and jetsam that will be filling the airwaves about how the repairs of the storm battered region is certain to be a form of economic stimulus.
The famous parable of Frederic Bastiat should make all analysts stop and think before embarking on theories of economic stimulus stemming from catastrophes, manmade or natural, for there will always be a trade-off between “what is seen and not seen.” Bastiat theorized that without broken windows, glaziers would be out of business so it was in their self-interest to break the town’s windows. However, the flow of money for the glaziers comes from the possible sales of all other merchants involved in other forms of commerce. This is just a warning to be careful about some analysts screaming about the positive impact for the economy from the post-Sandy recovery.
***While the winds begin to subside on the east coast of the U.S. the headwinds battering the European peripheries continue. There is a great ongoing discussion about whether the TROIKA will contribute the needed funds for Greece. The IMF is pushing for further restructuring but the ECB and Schaeuble are firm in preventing a debt relief granted by public sector debt holders. If there is a public sector granted restructuring then it will be deemed by the Bundestag to be a direct bailout of a sovereign by the Euro authorities and the Merkel government is frightened of the political fallout from such an act. The IMF demands that the Greek GDP/DEBT ratio be reduced to the “magic” level of 120% from the present 144%. Otherwise the IMF will withdraw some of the promised aid. The resolution is quite simple for all parties if you believe that money is fungible.
IMF Director Lagarde should let Germany bankroll the reduction of the Greek debt overhang and the IMF ought to promise to increase its potential Spanish relief package by a similar amount. It is the same money and maybe Chancellor Merkel could actually get the IMF to ante up even more in a conciliatory gesture. The Spanish would rather have more IMF input than having to surrender more sovereignty to Berlin. In a Bloomberg article today, “Juncker Calls Extra Euro Talks as Greece Showdown Looms,” this dilemma is well stated by Nicholas Spiro. “Berlin may not want to cut Greece loose, but neither is it prepared to fork out more money to keep it in the euro zone.” To all the Eurocrats and members of the Troika: Money is fungible and what better way to continue the game of kick the can down the road until the German elections.
****Last night the BOJ decided to increase its Asset Purchase Program (APP) by a widely expected 11 trillion YEN ($138 billion). The DOLLAR/YEN initially rallied, but as the substance of the statement was revealed the dollar/yen retraced and the YEN wound up higher on the day to close at 79.57 yen. The market has interpreted that the BOJ came up short on the liquidity game again, but I am cautious in this assessment as the dollar/yen continued to hold above key moving averages. The NIKKEI sold off 1.4% as another signal that the BOJ was behind the QE curve so it will be important watch NIKKEI action as a bellweather to any type of genuine BOJ/IMF action to boost liquidity and weaken the YEN.
The Japanese authorities may be waiting for the end to the U.S. elections before commencing with a more aggressive program. A Financial Times article by Ben McLannahan says something interesting about the BOJ statement: “More significant could be the extraordinary joint statement by the BOJ and the government, confirming a shared goal to beat deflation that has plagued Japan….” The statement places “equal weight” on both parties for the responsibility of generating increased growth. The temperature on the BOJ by the MOF and other politicians is certainly rising so watch for all the corresponding signals of potential YEN weakness.
***In tomorrow’s FT there is an analysis piece by staff writer Ralph Atkins, “Draghi’s resolve is the ECB’s Sharpest Tool.” I believe that Mr. Atkins is guilty of faulty analysis as he makes the following observation: “A successful OMT programme, however, would have stimulative effects by reducing borrowing costs in crisis hit periphery countries and helping repair the Euro zone fragmentation, which has led to wild variations in financial conditions between north and south.” This is faulty analysis to the highest degree for if interest rates were the driving factor to the crisis in the peripheries, there should never have been a crisis for the peripheries has been able to borrow at close to German rates before the crisis. If the debt crisis was an issue of merely high borrowing costs then the austerity budgets and the slowing economies should mean that the interest rates in the recession plagued peripheries should in fact be lower than the rates of a booming Germany.
Mr. Atkins: There is no question that the Outright Monetary Transactions put forth by President Draghi have slowed the immediate crisis to believe that low rates alone will stimulate the debt plagued peripherals is seriously lacking. It is time for you to read Richard Koo and the impact from a balance sheet recession. Start there and continue to analyze the adverse feedback loops from the onset of severe austerity. The U.S. has zero interest rates and “only” 7.8% unemployment while all the troubled peripheries are well above 10% and the previous healthy France is slowing and they have very low rates. Faulty analysis prevents the Euro economy from knowing which way the wind blows.