(Larry Summers had to run to his medicine cabinet to take Prozac (not Diazepam as in the Rolling Stones song) after he read the G-20 communique. The finance ministers and central bank heads meeting in Shanghai failed to come to terms with any of the issues concerning the global economy. There was no PLAZA ACCORD and no deep discussions about the need for massive fiscal stimulus. The tone of the Communique was TEPID at best and views the present state of the global economy as slow but steady. There was certainly NO URGENCY about a rise in the prospects of a global recession. The finance ministers downplayed the recent volatility and slide in global equity markets, suggesting by those domiciled in ivory towers and model-based rat holes that the MARKETS ARE MISTAKEN AND THE MODELS ARE CORRECT. The arguments among the participants was such that there were some issues that seem in direct contradiction of any policy response.
1. German Finance Minister Schaeuble: “The debt-financed growth model has reached its limits. We therefore do not agree with a G-20 fiscal package as some argue …. There are no short cuts that aren’t reforms.” So the German voice of austerity was heard loud and clear to counter the desire for some for IMF and G-20 support for opening up the spigot of fiscal stimulus.
2. Idiot George Osborne raised the specter of the U.K. embarking on a new round of austerity to meet the promises of shrinking its budget deficit. In a speech prior to leaving for the G-20 Chancellor Osborne said they may “… need to undertake further reductions in spending because this country can only afford what it can afford.” Following Osborne’s ill-timed speech were the results from Saturday’s Irish election. “Popular” Enda Kenney was not reelected. Fine Gael and Labour, the current coalition partners, were delivered a setback as Fianna Fail received newly revived support as the Irish voters seem to have voted against further bouts of austerity.
3. Much was made of the G-20 not laying the currency blame on Chinese efforts of devaluing the YUAN. But in reports coming from Reuters and Bloomberg, Dutch Finance Minister Djisselbloem was pointing the finger was pointed at Japan, noting the slippery slope of intervention. It seems the reference was to the recent efforts by the BOJ to impose three-tier structure for its negative interest rate policy, which would lead to large deposits leaving Japan, thus putting downward pressure on the YEN. The problem with all the criticism directed at Japan is that the YEN has appreciated 5% since the surprise move by Kuroda so Djisselbloem must have been speaking about Japan’s policy since October 2012, which the G-7 sanctioned.
4. Overall, the G-20 failed to deliver the BOLD ACTION that the IMF had called for. This was indeed another photo-op for the top financial minds in the world. In this case pictures do not speak louder than words and the result is the ultimate selfie. The market’s response will be key. Will equities retrace their recent rally as lack of fiscal stimulus is seen as market deflating since the G-20 seemed to agree that monetary policy is proving ineffective? Will the yield curves begin to flatten again as Schaeuble and Osborne reignited talk for renewed AUSTERITY?
Remember the 80 BASIS POINTS LEVEL on the U.S. 2/10. The currency markets OUGHT to be a mixed bag because politics is beginning a dominant theme in many places. The uncertainty OUGHT to aid the GOLD but SILVER‘s miserable close on Friday provides a note of caution. (SILVER closed well under the 200-day moving average.) The EUROPEAN SOVEREIGN DEBT MARKETS should see the BUND and German assets outperform as the Irish election and Schaeuble’s comments about debt-financed growth should make investors leery of Italian, Spanish and French debt. Of course since it’s the last day of the month we don’t know how much debt the ECB has to buy to meet its 60 billion euro monthly target. Hey Larry, pass the PROZAC. What a drag, it is getting old.