There is not doubt that Larry Summers is excited by October G-20 and IMF meetings as the top policy makers meet to discuss the state of the world economy and other significant global interests. It’s a time when the media is focused on the world’s leaders and Mr. Summers likes the role of being a major player. There is no question about Summer’s academic qualifications and his wealth of policy making experience. If success in the field of economics was based on eugenics, well, Larry Summers would certainly have a Nobel Prize. My one major criticism of Secretary Summers was his running interference for Robert Rubin and Sandy Weil in their efforts to repeal Glass-Steagall, which even Mr. Weil has admitted was a great mistake. In today’s Financial Times, Larry Summers had an op-ed, “Why Public Investment Really Is A Free Lunch.”
In the fashion of public relations coordination, Summers’s piece is meant to provide discussion about the IMF‘s efforts to stimulate global growth by lobbying for Europe and the U.S. to undertake massive public works programs. China gets a pass because China has already leveraged itself up through huge infrastructure projects in an effort to stimulate its economy in the post-Lehman world. The FT piece argues that cheap interest rates makes it mandatory for governments to borrow now at ultra-low financing costs for long needed projects. Summers’ goes through the maths to show how the returns to developed economies will be far greater than the money spent. The IMF‘s “… recently published World Economic Outlook a remarkable and important document.I n its flagship publication, the IMF advocates substantially increased public infrastructure investment, and not just in the U.S. but much of the rest of the world.” This is a long-held Summers position as he argued at the IMF in 2012 that public expenditures were needed to offset the austerity budgets being imposed in Europe because of the adverse effects of the multiplier effects.
The IMF Chief Economist argued that austerity during weak economic times have a dynamic multiplier effect and that every one percent cut resulted in a greater percentage of lost growth. In an effort to show how the IMF has indeed seen the light, Summer s concludes, “The IMF, a bastion of ‘tough love’ austerity, has come to this important realization. Countries with the wisdom to follow its lead will benefit.” The table is now set for this week’s IMF and G-20 meetings and it also serves notice to the Germans. Massive European public works projects have been opposed by Berlin because the individual nations do not have their budgets in order, therefore any large infrastructure projects will be paid for with higher deficits. Pay close attention to these discussions, but if Summers’s arguments prevail I would look at three indicators:
- Copper should at least get a short-term bid because it has been under selling pressure in anticipation of a renewed global slow down;
- The stocks of large engineering concerns like Fluor and ABB OUGHT to rally on any type of IMF-inspired global public works initiative. Fluor has been under selling pressure of late falling 20% since June;
- If the IMF and G-20 follow Summers’s lead a short-term rally should ensue. Now if only they could find the money or unlock the value of the IMF gold hoard.
***Last night, the Reserve Bank of Australia and the Bank of Japan had their meetings and left interest rates and policy as is. RBA Governor Stevens remarked about recent slowdowns in China and their effect on the price of Australian exports. Monetary policy in Australia remains accommodative but with the Aussie dollar being at historically high levels the RBA feels justified in maintaining the status quo on interest rates. The BOJ also remained at its current levels of rates and monetary accommodation. It’s interesting though that BOJ Governor Kuroda was called before the DIET during the BOJ meeting and queried about whether the weak YEN was appropriate. Prime Minister ABE had noted that the weak YEN was good and bad. The bad being the hardship that some middle class consumers were feeling from rising import prices.
Depreciating one’s currency is a double-edged sword. The failure of Japanese wages to rise in harmony with rising import prices is having a negative effect on consumption. In looking at the crude oil/yen chart, Japan is getting some reprieve from a depreciating yen because of the recent drop in OIL prices. At 9560 yen to a barrel of WTI Japanese oil costs are the lowest since February, which should sit well with Japanese policy makers. But the pressure on Governor Kuroda to appear before the DIET should be noted that Japanese politicians are growing concerned about the positive outcomes for Abenomics.
Tags: Abe, Australian dollar, BOJ, copper, crude oil, G-20, IMF, Kuroda, Larry Summers, RBA, Yen
October 8, 2014 at 5:03 am |
Encouraging massive public works projects and paying for them with increased national debt on an already top heavy balance sheets, may not prove to be effective. Remember the WPA CCC, PWA etc. in the 1930’s.
Secretary of the Treasury Henry Morgenthau Jr. said the following in 1939..
“”We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot
October 8, 2014 at 9:14 am |
Yra- I agree with Summers that we can use more infrastructure spending, but the infrastructure projects will probably take 2 or 3 years to agree on, and another decade to implement.
It appears that we are on the brink of a deflationary collapse. Just look at Europe and any of the commodity indices. The dollar strength will end up weakening the USA economy by cutting exports.
If we’re going to do anything, it needs to be big and have an immediate impact on the real economy ( and not this ridiculous QE).
October 8, 2014 at 10:11 am |
Shocked–I agree with your summation but I think some of these programs might proceed quicker in just putting the logistics into action would create a great deal of activity–but in Europe the concept of financing the projects are a serious issue
October 8, 2014 at 10:37 am |
“Summers concludes, “The IMF, a bastion of ‘tough love’ austerity, has come to this important realization. Countries with the wisdom to follow its lead will benefit.”
Asher has beaten me to the punch, but in essence, WHEN has the IMF ever been a bastion of tough love or austerity, and WHEN has monetary policy ever been more accommodative, with such little result? Oh, well, there is always WW III to look forward to as a means to lift global economies.
October 8, 2014 at 3:41 pm |
These Emini S&P’s are the greatest yoyo in the world. Today’s low took out Thursday’s low by 1 tick which when that happens can be the greatest reversal signal. Eddie Toppel, a former S&P trader at the Merc always said “Expect Nothing Be Prepared for Everything” .
His badge was EGO and he wrote a book titled “Zen in the Markets”
October 9, 2014 at 6:45 am |
Mark Spitznagel must be laughing (as he buys puts) and crying all at the same time right now. Government aiming to aggressively join the mal-investment party drinking their own CB’s Kool-Aid. “Nuff said.
P.S. On a political note, the fact that Larry has signed on as advisor to the Libertal Party of Canada makes me very nervous. Larry and I don’t see eye to eye on most topics. Larry’s a top-down, egotistical, self described genius who, if I may borrow Hayek’s term, is really the definition of having “the pretence of knowledge.” While I am hoping for Harper to win in 2015 it just feels like the tides of change are real in Canadian politics. Who knows how low the CAD could go if the LPC wins come next October.
October 9, 2014 at 1:59 pm |
I’ve noticed in the past an inverted yield curve suggests a recession is being forecast. Tend to believe the reaction will be no different this time until proven differently.
No applause please, just throw money.
October 11, 2014 at 5:12 am |
Dear Summers:
There’s no such thing as a free lunch.
Yours,
Milton Friedman
October 13, 2014 at 4:06 am |
Rob Syp–remember Ed Toppel well–smart man with good insights.
October 13, 2014 at 7:51 am |
Yra and Chicken
I know it is blasphemy, but I think that if we get a strong recession, the yield curve will steepen.Hard to due with ZIRP.
The Treasury balance sheet is in bad shape, and I believe that investors will not want to hold Treasury paper beyond 5 years, due to credit risk concerns.
I could be wrong.
October 13, 2014 at 4:10 am |
Chicken–your views on yield curves I concur with as my work over 30+ years has found the same but the 2/10 curve in the U.S> is far from flat and that is the investor curve.The 5/30 is more a trader’s curve and I think that is where Bill Gross got it dead wrong as I have blogged about since late last November.Gross was buying fives and selling the longer durations but as I argued the fives were at a negative yield and had no value which is why the 5/30 curve has been so dramatic.Remember that Gross was all over the airwaves touting that position
October 13, 2014 at 4:12 am |
Dustin–I don’t understand the Spitznagel reference.I don’t know him and had to wiki him to read about his trading but he certainly seems to have good market sense and execution.On Canada that is definitely something to keep vigilant about—I am also a Stephen Harper fan as he is pragmatic and balanced
October 13, 2014 at 6:11 am |
Buy bubbles, bet big and backache. George Soros: “When I see a bubble forming, I rush in to buy, adding fuel to the fire.”
October 13, 2014 at 10:08 am |
shocked–my sense is the same as yours .I think the Fed getting out of the way will incent people to sell the longer dates in an effort to slap the Fed–Bill Gross will get another rbite at the 5/30 at a much smaller firm and he may get it right—but the market doesn’t tell us its time has come—but let us see what happens when the Fed leaves the stage
October 13, 2014 at 12:06 pm |
Let’s go to the next step. If investors will not want to hold long Treasury paper because of credit concerns, what will they want to hold instead?
Hint- It’s not another sovereign obligation.
October 13, 2014 at 2:16 pm |
Aherz- You would think gold/silver. I own both and they act weak, to me. This is the scenario I was waiting for. Gold should be rallying $30 a day.
October 13, 2014 at 7:52 pm |
Shocked-As a veteran market commentator said- “There are no markets anymore, just interventions.”
Paper gold suppression will end. The markets are bigger than all the Central Banks.
Level playing fields will return. They always do.