JF Tardif has come out of retirement. He says the demand for commodities will not be there in the next decade. He singled out oil and copper. He thinks oil's bottom may be $70.
 
I wrote about this demand uncertainty in the Geopolitics of Energy last November.

"Systemic imbalances in the global economy are forming, creating the potential for a category five hurricane of volatility and risk. Policy makers once again, despite ample warnings, have failed to buttress the levees. As a result, the storm’s aftermath is likely to be felt for an extended period of time, maybe even a decade. The purpose of this article is to explain why we are entering into a lengthy period of increased economic risk for the oil market and the broader economy. 

The swing in WTI futures from contango to backwardation, where contracts are trading below spot, is seen, by some, as evidence that producers are hedging their production with the expectation that the global economy will be weak over the next couple of years. Most of the mistakes that  will be made in capital allocation over the next twelve months will not be because the decision makers misread the economic environment for 2012; many analysts will misjudge the underlying causes of the 2012 recession and fail to  see the broader implications of the systemic imbalances. This article addresses how imbalances in the US, Euro area, and Chinese economies are creating significant demand uncertainty in the global economy for the foreseeable future." 

The Economist has hit the trifecta of stupid on its last three covers. I am starting to wonder if their writers are some Ayn Randish - Stepford Wives type clones. At very least the magazine seems to be turning into a corporate whore.

Think I am exaggerating?
Their cover for their print edition, May 12-18th, shows a picture of Achilles voting with the caption Europe's Achille's heel.

"If a majority of Greeks again vote to reject the spending cuts and reforms that go with their country’s bail-out, then euro-zone governments—in particular,  Germany’s—will face a drastic choice. Mrs Merkel will either accommodate Greece and swallow the moral hazard of rewarding defiance or, more likely, stand firm and cut the Greeks adrift."

The problem is not democracy or that European voters are rejecting austerity. At some point if you are going to anally rape me I am going to figure it out and resist. I may be asleep when the rape starts, but given your actions, unless you club me unconscious, I am going to wake up. The problem is that the austerity adjustment mechanisms will require sustained high
unemployment and will destroy the wealth of the middle class.

To quote Pettis on Spanish adjustment:
 
How  will we deal with the rising debt burden?  Typically we do so by confiscating  the wealth of small and medium enterprises or by confiscating the savings of the middle classes, and usually we do both. 

I am pretty sure that the middle class taxpayer in the European  periphery knows who's benefit the austerity measures are for - Germany's. 

With respect to their latest cover on China. How strong is China’s economy?

"Until recently most economists believed that China was heavily dependent on exports. But it has carried on growing even as its current-account surplus has  shrunk, and trade has subtracted from growth, not added to it. The country is undoubtedly investment-dependent, but its biggest problem is malinvestment not overinvestment. Most people believe that its past malinvestment will impede  future growth. This special report has raised doubts about that. Clearly China  would be better off had it not wasted so much capital. But if the capital stock  is not as good as it should be, that gives the country all the more room for  improvement.

Wrong on sooo many levels. Yeah, when you "invest" in millions of units of housing that are empty then this is both a misallocation of capital and an overinvestment of capital. You have lit money on fire. This money is gone forever. Also, "The Economist" provides no hope or insight as to why a flawed investment process (driven by corrupt SOEs) will do better the next time around.

Here is Jim Chanos on China's debt

Then their cover showing public companies as an endangered species. Woolly mammoths with brands like Facebook going over a cliff.

 They begin the article:
"The number of public companies has fallen dramatically over the past decade—by  38% in America since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in America has declined from an average of 311 a year in
1980-2000 to 99 a year in 2001-11. Small companies, those with annual sales of less than $50m before their IPOs—have been hardest hit. In 1980-2000 an average  of 165 small companies undertook IPOs in America each year. In 2001-09 that
number fell to 30. Facebook will probably give the IPO market a temporary boost—several other companies are queuing up to follow its lead—but they will do  little to offset the long-term decline."

So they pick, as the reference point, the 20 years of one of the  biggest bull markets in history (that contains the dot com bubble) and compare it with a bear market that contains the popping of the dot com bubble, the fraud scandals like Enron, and the Great Recession. Wow, are you intellectually dishonest.

They end the article with a free market bromide:
"Public companies built the railroads of the 19th century. They filled the world  with cars and televisions and computers. They brought transparency to business life and opportunities to small investors. Because public companies sell shares to the unsophisticated, policymakers are right to regulate them more tightly than other forms of corporate organisation. But not so tightly that entrepreneurs start to dread the prospect of a public listing. The public company has long been the locomotive of capitalism. Governments should not derail it."

With the way the Facebook IPO was handled does “The Economist” still think the problem with IPO’s is too much regulation?

I am sorry,  but this magazine is turning into FOX News.




 

Slate says the BRICS are coming in for a hard landing.

By Spain, he means all of the PIIGS. Also outlines the case as to why the  Eurozone's problems are fundamentally about trade - as I have said many times on these pages.

Pettis points out that Germany (among others) has learned very little from the crisis of the Great Depression. I expressed these same feelings in my Remembrance Day post.

According to Pettis, politicans (and from my perspctive most acadmeics) do not appreciate that these one sided austerity adjustments are going to destroy their middle class and threaten the fabric of their democracies.

But the times they are a changing.

Hugh Hendry via FT and  Bloomberg.
“We might soon come to question whether China is going to be able to maintain  its currency peg to the dollar,” he wrote.“When we look to at where the next  market crisis will come from, we should be looking to China. There is a near consensus that China will supplant America this decade. We do not believe this.”

Regarding the currency devaluation, I have been saying that to my students since China announced it would move to a managed peg. I said it on this blog 4 months ago.

I have been a China skeptic for much longer :).
 
According to Hendry, China's demise will export a crisis to Japan via Japanese corporates.

Hendry says he is more bullish on US growth than most- well no one is perfect.

I discussed these two points in my very last post. Seems like Hussman sees the world close to the same way I do.  Here is Hussman's take:

"Two main hopes have kept investors relatively complacent about the growing risks in Europe: the hope for Eurobonds, and the hope for large-scale ECB purchases of distressed sovereign debt (essentially money-printing). 

With respect to Eurobonds, investors should understand that  what is really being proposed is a system where all European countries share  the collective credit risk of European member countries, allowing each country to issue debt on that collective credit standing, but leaving the more  fiscally responsible ones - Germany and a handful of other European states -  actually obligated to make good on the debt. 

This is like 9 broke guys walking up to Warren Buffett and proposing that they all get together so each of them can issue "Warrenbonds."  About 90% of the group would agree on the wisdom of that idea, and Warren would  be criticized as a "holdout" to the success of the plan. You'd have 9 guys issuing press releases on their "general agreement" about the concept, and in  his weaker moments, Buffett might even offer to "study" the proposal. But Buffett would never agree unless he could impose spending austerity and nearly complete authority over the budgets of those 9 guys. None of them would be  willing to give up that much sovereignty, so the idea would never get off the ground. Without major steps toward fiscal union involving a substantial loss of  national sovereignty, the same is true for Eurobonds.  

Moving to the European Central Bank, large scale ECB  purchases of sovereign debt would simply be the money-printing version of  Eurobond issuance. When the ECB purchases the bonds of a given country, and  creates Euros for them, it has essentially printed money until the point in time  that the bond is paid off. If that day never comes, as is the concern with   distressed European debt, then the ECB has essentially printed permanent Euros  in order to finance the spending of the country whose bonds it purchased. In  order to guard against this sort of backdoor fiscal policy, the ECB only buys bonds after ensuring that it has a senior position to other bondholders. So if  the ECB was to purchase distressed European debt on a grand scale, the result  would be that the remaining bonds would be subordinated, making the  prospective losses on those bonds even higher than they were previously. 

Ultimately, what investors really want is for the debt of  various countries to be wiped away by the ECB simply printing money to
retire that debt, or by having Germany and stronger Euro-area members  to make endless transfers to peripheral European countries. The whole system  rides on this willingness to transfer fiscal resources, or to allow money printing (with no revenue to stronger members from that money printing) in order  to finance heavily indebted members. The reason the recent elections in
Greece  and France matter is that they send a signal from the public to European governments: the people are unwilling to make any more "austerity bargains" that  put the public behind bank and government bondholders. So Germany is now being  asked to continue its transfers without any end in sight. 

We can't rule out the chance that Europe will cobble together  enough temporary liquidity for Greece and troubled banks to kick the  can down the road another time or two, but these kicks will become increasingly  weak and short-lived in the context of a new recession. Even in the event of  various liquidity injections, there is virtually no chance of  addressing the solvency of Europe - the ability of each  government  (much less the banking system) to sustainably pay their debts -  within the  constraints of the Euro. As long as the Euro exists as a single  currency,  individual countries can't inflate away the real value of their debt,
or restore  their trade competitiveness through exchange rate depreciation against other  countries.

Under these strains, I expect that the Euro will fracture  well beyond a Greek exit. Ultimately, the result might be a "strong Euro" that  reflects the union of Europe's most fiscally responsible countries, or we might  instead see a "weak Euro" that follows the departure of Germany from the currency union and leaves peripheral members free to inflate. So it's not clear  which direction the value of any surviving Euro may take until it is clear which  member countries will remain. In any event, however, what we are unlikely  to see  is a single Euro that combines fiscally responsible and fiscally irresponsible  countries, and requires endless one-way transfers of sovereign  public resources  in order to hold the system together."

Here is s a link to a bunch of videos from commentators on the Eurozone on Bloomberg. 

Societe Generale's Marcussen says Eurozone needs austerity, growth and risk sharing. She believes the European Stability Mechanism (ESM)  may be granted a banking license. This would allow it access to the ECB and to directly recapitalize national banks.

Rosenberg says Europe is approaching its existential moment. Seems to think ECB can kick the can down the road and will do so in the eleventh hour (perhaps through the ESM).

Neil Ferguson wants Eurobonds. He notes that even if adopted along with the structural reforms, economic prospects in Europe look ”bleak”  for the next five to ten years. 

Meh

It is conceivable that, faced with an existential question,  Germany may sign on to Eurobonds (though I don’t think this would be in the long term interests of German voters to agree to this). And that we will get a recapitalization of the European banking  system through the ECB. As noted, the later is much more likely in the short term. Der Spiegel lists both ideas as crucial to saving the Euro.

I just don’t believe the competitive dynamics generated by the common currency, the Euro, are sustainable and that the degree of fiscal integration required to  give it a proper chance of working is achievable The.Eurozone’s needs of austerity, growth and risk sharing are of course competing interests (more risk sharing promotes less austerity, more austerity promotes less growth etc).
 
Of course, all of the potential paths of how the Eurozone might unfold have an associated probability. I however haven’t heard a convincing case of why and how the Eurozone will function in the long term as a stable economic union. All I get is that the consequences of failure are so high that  those European politicians will have to do whatever it takes to save it. What is Spain going to produce? Are labour market reforms in Italy going to get rid of unsustainably high youth unemployment? Since the 1950s, European growth has only outpaced US  growth 9 times. Since US growth sucks, and my view iis that is likely to continue to suck for many years to come (see my last post) I fail to see a sustainable transition path for  Europe.

I  remain, as ever, a Eurosceptic. Maybe I am missing something?

WSJ post.
"The head of the Minneapolis Fed, Narayana Kocherlakota, said the economy may be  closer to maximum employment than the data indicate. If that’s so, well, to  be blunt, that stinks. The labor force is barely growing, millions have just  given up and quit looking for work, and wages are stagnant compared to  inflation.

Structural unemployment, I have said repeatedly (including yesterday) is the Trojan horse issue of our time.

“Consider the implications for economic growth. The biggest problem isn’t necessarily government spending, although that is a problem, nor is it a loophole-ridden tax code, although that’s a problem, too. No, the  biggest problem is that there are not enough Americans working and making enough money to pay taxes.
 
Strong economic growth would solve most of our problems. In a growing economy, the labor force is expanding, wages are rising, more people are paying more taxes (this isn’t an argument in favor of some socialist utopia. This isn’t a political debate. This is merely the reality of the  situation.)
 
If this is maximum employment, we are sunk.”

I have been telling my readers as much since this blog’s inception. WSJ (or Fed) does not address why this is the case –technical change and trade with the BRICS. 

This is why the Eurozone is utterly, completely, 100% screwed.

Q: If the US can’t generate growth then what series of reforms would be needed for the Eurozone to be on a stable growth trajectory?  Exactly.

Its all about trade.

 

I present this as counter programming, but I think it is some of the worst analysis I have ever seen.
 
"This is the key idea that Bass is missing, and why his trade is never  going to pay off. For a country that borrows in its own currency, government spending finances borrowing! If Japan spends 100 billion yen on something, that's 100 billion yen out there in the world that will eventually wind up in a financial institution, where ultimately 100 billion yen worth of  JGB will be purchased. It's the same with the US of course, and it's this idea that Bill  Gross didn't get when he famously asked: Who will buy our debt after QE2  runs out? It caused him to get crushed on the Treasury boom of 2011."

Wow, this is wrong on so many levels. It doesn't even pass the test of intro macro course analysis. Japan has 230% debt to GDP, an aging population,and a ten year bond under 1%. Its worked so far - why worry? This is the same rationale that supported the Japan bubble of the 80s, the dotcom bubble of the 90s , and the housing bubble of the 00s. 

However, as the saying goes, the market can stay irrational longer than you can stay solvent. Bass lost a lot of money on this trade in April.

"According to the website ValueWalk,  citing sources, his fund lost 29% of its value in April, and has really been  getting clobbered since inception. We haven't been able to confirm the losses  (Update: Now  confirmed), "

Koo proposes limiting the sale of government bonds to domestic purchasers in the Eurozone. Felix Salmon, the blogger (who prefers Eurobonds- an idea unlikely to happen) correctly identifies why it won’t work. 

"The fact is that when money flows into US Treasuries or JGBs or Gilts during  a balance-sheet recession, that has absolutely nothing to do with the fact that  they’re government bonds, and absolutely everything to do with the fact that they’re the dollar- or yen- or pound-based securities with the lowest perceived credit risk. If you ban Spanish institutional investors from investing in
Bunds,  then they’ll just buy something else with extremely low credit risk instead — AAA-rated corporate bonds, perhaps, or covered mortgage bonds from somewhere in  the north, or some other kind of highly collateralized structured credit  instrument. None of those things might have quite the degree of  liquidity that  Bunds can offer, but they’re still safer than Spanish government debt right  now.

Koo is absolutely right that the flow of savings out of Spain is doing  absolutely gruesome things to the Spanish economy: you can’t possibly grow when your companies and households are paying down debt, and all your national savings are fleeing the country. So maybe there’s a case for fully-fledged capital controls. But Koo’s weak-tea version would only serve to decrease, 
rather than increase, demand for Spanish government bonds. Their price would go down, their yields would go up, and Spain would be in an even worse position than it’s in now."


Koo’s and Salmon's analysis, however, points to  what I think the end game here will be within 5 years. Koo is suggesting limited capital controls, the real way of making things work is to implement rigorous trade sanctions- since current account must equal capital account. This is why Koo’s partial measures won’t work. From a structural unemployment perspective, this is the only way the periphery countries are going to get investment in domestic industries that have been replaced by imports from Germany and China.