Declining Global Growth

In an increasingly globalised economy, we need more global data measurement.

The Economist presents a new attempt to measure global GDP. The sub-bars are showing each region’s contribution to global GDP growth, rather than their internal growth rate:


Globally, there was a big and swift return to strong GDP growth, built on the backs of emerging countries and particularly the BRICs. Since early 2010, rather than getting stronger and stronger, global growth has actually become weaker and weaker.

This is quite a departure from certain narratives popular today that suggest that growth has gotten stronger and stronger since the end of the recession, that we are almost out of the woods, and that we are on the cusp of a new era of spectacular growth.

And in a world of globalised trade, globalised lending, and global supply chains the notion that any nation can really be shielded from the ongoing effects of declining global growth seems extremely over-optimistic.

Yet another reason to be highly cautious of the increasingly popular idea that now is the time to turn bullish on American equities. 


Propping Up The Gold Price?

Izabella Kaminska makes the point that central banks have turned net gold buyers:

Kaminska seems to believe that gold’s price is not just central-bank supported, but its trajectory is downward:

If not for the gold bar/coin frenzy and ETF demand (now substituted by official buying), one might speculate that the collapse in conventional demand (i.e. for industrial and jewelery purposes) may have led to a very different price path for gold post 2008.

Now that ETF demand is waning, however, marginal support for the gold price is actually being provided by the official sector more than ever.

Though, given the gold price reaction of late, clearly even this is not so effective so, either gold and coin buying has started to wane as well – and there is evidencethat this is the case – or it’s taking ever more buying (by official sources) to keep prices supported at the current level.

The recent plateauing of the gold price thus either suggest that today’s spot supply is increasingly catering to tomorrow’s demand expectations, or in the context of more gold being produced all the time, it is taking ever more buying by the official sector to keep prices from falling.

In other words, sans the intervention of central banks on a major level: case bearish.

The obvious thing, though — even if we take central bank buying out of the equation altogether — is that total demand for gold is still increasing. And the price of gold has increased faster than sales, illustrating that the market has struggled and continues to struggle to keep pace with underlying demand. 

And it’s not just demand for gold-denominated paper (i.e. ETFs or other such as-risky-as-anything-you’ll-get-from-MF Global assets) — it’s recently manifested as demand for hard physical gold:

It’s true that central banks are presently supporting the gold price — after years of selling off national wealth at pennies-on-the-dollar into a bear market and thus suppressing prices. Yet it’s not the Western central banks that are pushing demand for gold. It’s the BRICs. As PBOC official Zhang Jianhua noted:

No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.

And as I noted yesterday, BRICs have founded and legitimate fears of buying even deeper into an increasingly ponzified, over-leveraged, rehypothecated and interconnective paper financial system. The PBOC (and other American creditors) already faces the risk of the US Treasury inflating much of their holdings away; the entire point is to get out of such assets into something much harder to duplicate, and impossible to inflate away.

According to China’s State Council’s Xia Bing:

China must make fuller use of the non-financial assets in its foreign reserves, as well as speed up the diversification of investing channels to resist a possible long-term weakening of the dollar.

No; I don’t think it’s particularly wise to announce to the world that you’re going to get elbow-deep into gold bullion either, but this isn’t just a bluff. China is importing hard-to-fathom quantities of gold:

Ultimately, the surge in demand for gold reflects one thing alone: distrust of the increasingly messy, interconnected, over-leveraged and fraudulent financial system. Whether it is China — fearful of dollar debasement — loading up on bullion, or retail investors in the United States or Europe — fearful of another MF Global (or PFG, or Lehman Brothers) — stacking Krugerrands in their basement, demand for gold reflects distrust in finance, distrust in the financial establishment, distrust in banks, distrust in regulators, distrust in government and distrust in the financial media. And it is that distrust — not (by any stretch of the imagination) central bank interventionism — that is the force moving demand for gold.

The distrust is not going anywhere because the system is still rotten. We all know — even Business Insider readers know deep down, I think — that there is something exceedingly rotten at the heart of the global financial system. We don’t know quite how rotten, how deep the rabbit hole goes, who will be implicated, or how fast. But with every LIBOR-rigging scandal (which the Fed, of course, was aware of), every raided segregated account, every devalued pension fund, every failed speculative “hedge”, every Facebook or Zynga pump-and-dump, we get closer to the truth.

There will be no bear market for physical gold until trust in the financial system and regulators is fixed, until markets trade fundamentals instead of the possibility of the NEW QE, until governments represent the interests of their people instead of the interests of tiny financial elites. 

Death by Hawkery?

Joe Wiesenthal presents an interesting case study:

These two charts basically explain everything.

The first chart shows the yield on the Swedish 5-year bond.

As you can see, it’s absolutely plummeting right now.


Image: Bloomberg

Now here’s a look at its neighbor, Finland, and the yields on its 5-year bond.


Image: Bloomberg

Basically they look identical all through the year up until November and then BAM. Finnish yields are exploding higher, right as Swedish yields are blasting lower.

The only obvious difference between the two: Finland is part of the Eurozone, meaning it can’t print its own money. Sweden has no such risk.

This is a narrow version of something that much of the media picks up on earlier last week that UK gilts were trading with a lower yield that German bonds, a reflection of the same principle: In UK the government can print. In Germany, it can’t.

Yes — investors are happier with the idea of buying bonds which may be debased by money printing, than they are with the idea of buying bonds which may be defaulted on because the sovereign cannot print. But there is another element at play here, which may be much bigger.

Easing, of any sort won’t solve the underlying global problem — as explained by Reinhart and Rogoff in better detail than I have ever done — of excessive debt levels. By conducting QE (i.e. taking sovereign debt out of the market) governments are simply artificially contracting the supply, and in my view pumping up a debt bubble.

It’s important to consider Japan here — yields in Japan are as low as ever, and creditors are still taking their pound of flesh. That can’t be a bubble, can it? Creditors aren’t losing their money? Well, it depends how you define return on investment. Investors in Japanese bonds may be getting their money back, but Japanese society is slowly being strangled by a lack of organic growth and a lack of any real kind of creative destruction. Wages and living standards fall while unemployment rises. So Japan has become zombified, and in theory similar cases like the United States and Britain should follow down the path of death by slow Keynesianism (they won’t, because they are far more combustible societies than Japan, but that is another story for another day).

In light of all that, while the Teutonic monetarist hawkery may superficially look stupid, if we look at the resulting Euro-implosion as a potential trigger to crash global markets, burst the global bond bubble, trigger a cascade of AIG -esque events, culminating in the breakdown of the global financial system, a debt reset, and a new global financial order well then it’s really quite clever. Ultimately, a debt reset is what is needed to effectuate new organic growth and new jobs, and to clear out the withered remains of umpteen bubbles that have been created in the last twenty years through easy money.

I doubt that the stern bureaucrats at the ECB are anywhere near as clever or far-sighted as this (their most significant concern appears to be sound monetarist economics) but there is quite possibly genius in this stupidity.

So — rather than death by hawkery, I foresee rebirth.

Of course, on the other hand the “hawks” may just end up printing like their American counterparts.