(Sept. 24, 2009 - Erwan Mahe) We continue to vigilantly monitor the velocity of money, because its screech to a halt in the wake of the death of securitisation in 2007 remains one of the pillars of our macroeconomic scenario.
Central banks successfully intervened to prevent a new “Great Depression” by making massive liquidity injections into the economy, either via purely quantitative programmes (BoE, FED, SNB, BoJ) or disguised ones (ECB), by lowering rates to unprecedented lows (0-0.50% on average for overnight rates).
With the help of stimulus spending efforts throughout the globe, the downward spiral was stopped and confidence indicators picked up sharply, leading some well-intentioned commentators to evoke a V-shaped recovery and others to believe in a surge in (hyper) inflation.
Unfortunately, the hard data (industrial production, consumption, world trade) continue to point to soft growth, marked by persistent exogenous and endogenous risk.
As for pure macroeconomics and its consequences for the V in MxV = PxQ, we consider world trade to be one of the most important indicators since it illustrates the global circulation of goods and merchandise and their ensuing financial flows.
The publication this morning of Japanese statistics, one of the high grounds of “mercantilism”, depict a fairly precarious balance.
As you can see in the graph below, exports and imports remain more than 42% below their levels in 2008, with the former stabilizing at 2002 levels and the latter at 2004 levels!
Luckily, exports to Asia have fallen by only a “modest” 30.6% y-o-y (-34.4% vs US, -27.6% vs China)), because those to Europe plunged 45.9% (-56% since the peaks of 2007) … (-85% vs Russia!)
When I say Europe is not yet out of the woods, I am not whistling Dixie.
Guess who had the nerve to declare that the yuan was undervalued this morning and that he wanted to see the matter taken up by the G20? -- None other than our white knight of European mercantilism, German Finance Minister Peter Steinbrück.
I continue to insist on the importance of changes in levels, and not just percentage changes, because even if the 34.4% y-o-y decline in exports to the US may seem not as bad as the 56.1% yearly contraction in February when, in reality, these are still depressive levels, at 54.60% below those of September 2006.
The $10 trillion question we can logically now ask is:
How will this world trade behave once the different stimulus spending programmes are over, such as the end of the Cash for Clunkers plan in the US, or the crunching of the Chinese Minsky ladder (see below)?
Moreover, we really cannot count on the Japanese consumer to pick up the slack, as supermarket sales contracted 3.4% in August for the ninth consecutive monthly decline on a y-o-y basis.
Once the stimulus effect is over?
This is indeed one of the news items that caught our eye most this morning, and I am surprised that it has yet to be circulated by the various news agencies:
“China Leadership Orders Investment Project Slowdown”
Communicated by press agency MNI, which cited officials from the NDRC (National Development and Reform Commission), who naturally opted to remain anonymous, it explains how the State Council (the most important political body in China) told the NDRC to slow down the pace of investment authorisations for reasons of:
“Irregularities, overlap and inefficient projects set up on a large scale (!) by local authorities”.
Given the context, which we have time and time again described as declining asset prices and deflationary trends leading inevitably to overinvestment in fixed assets carried out in the first six months of 2009, this slowdown is good news, but it will have a real impact on those economies which bet on Chinese growth to pull out of the crisis.
In terms of velocity closer to home, the ECB admitted this morning that, while some banks on the eurozone have observed in Q2 a stabilisation of different segments of the money market, a certain number (?) of other establishments had, on the contrary, observed a persistent worsening of liquidity conditions.
Aggregate turnover thus declined by 5%, the second decline in as many years, but on the unsecured market, the contraction came to an annual 25%.
Just a little related comment I picked up this afternoon from ECB board member and President of the Dutch central bank declared: “we are not yet out of the woods”.
- We remain favourable to fixed interest rate instruments, now with a bias more favourable to the 5-10 year range than to our 2-year champion. Inflation will not rise above the ECB’s comfort range, so interest rates will the central bank will maintain accommodating rates for a long time to come.
- On stock markets, we have returned to a negative bias after hitting our Eurostoxx targets in the 2850-2900 area.