Still too cloudy! Gastbericht over nut en noodzaak van aggressiever monetair beleid.
Gastbericht van Erwan MAHÉ .
Money exists not by Nature but by law. Aristoteles
Still too cloudy!
Today’s Thaler’s Corner headline, like that of January 31st (“Too Cloudy”), describes exactly the situation today. It also explains why we are maintaining the Risk Off option positions we began advising as of last week. This is especially the case before the ECB’s monthly meeting, aside from a possible signal from Mr Draghi that he does not want to see a hike in the Eonia rate, which would prop up fixed income markets (just confirmed at the press conference). As for the clouds, let’s first talk about the micro accidents concentrated in the sensitive financial sector, which often augur poor news, with the poor earnings reports of DB, CBk, CASA, MPS (with fraud), the nationalization of SNS in the Netherlands and the liquidation announced last night of Anglo-Irish in Ireland.
But we also need to account for the European political context, with Silvio Berlusconi’s resurgences in Italian polls, following his tax reduction promises, which clash with the country’s budgetary constraints, and Mariano Rajoy’s problems in Spain stemming from the financing of his political party. We already saw in Greece and Cyprus just how much the forces of nature detest a (political) vacuum. And the latest flare-ups between France and Germany about the euro’s level and the European budget (which we’ll have to keep a close eye on) will hardly help matters. I would just like to emphasize here that Mr Hollande’s speech before the European Parliament, in which he argued for granting the Eurogroup management of the euro, is consistent with both the spirit and the letter of the Maastricht and Nice treaties.
As I have argued many times in these lines, Mr Duisenberg’s and Mr Trichet’s “Mr Euro” stance amounted to a permanent “coup d’etats”, an assertion I backed up from the dusty archives of the founding documents as per Article 111. But even if this power is eventually taken back, the Commission’s two most important members must come to agreement, which is far from a sure thing. Our friends on the other side of the Rhine (Mahé bekijkt de zaken vanuit Parijs, M.K.) seem to have unfortunately forgotten that the ECB maintained super accommodative policies (with the refi rate at a historic low of 2% for 29 months!) during the restructuration years of the German economy (the Hartz accords of 2033-2005), and all this when M3 was growing at an annual rate of 7.5%, i.e. well above the 4.5% targets cited in the central bank’s own founding treaty!
And all this when Germany was merrily exceeding the deficit-to-GDP ratios stipulated in the treaties! These accommodating rate policies prevented the euro from appreciating too much against the dollar and thus allowed Germany to successfully pull off its economic restructuring hovering between 0.85 and 1.35, with an average of 1.15 for the period concerned!
The parity was very far from the 1.35 criticized today by the French president. Moreover, the strength of the single European currency today hardly stems from a bright economic outlook, but to more or less disguised interventions undertaken by the world’s other main monetary blocs (Japan, US, UK, Switzerland).
In Europe, we seem to prefer internal devaluation. You know, the kind that pushes unemployment to 25% of the active population and to over 50% of youth in the peripheral nations. However, we can read about all that in the press, and the macroeconomic and credit indicators are the backbone of this letter! That is why I have presented, below, our graph of the day updated with the latest eurozone consumer lending and retail sales figures. Yeah, I can hear people moan, not this graph again, but check out the graph with the updated retail sales statistics, which we predicted would come in below the consensus (see preceding graphs and Thaler’s Corners) and, sure enough, the figures were horribilis!
Eurozone retail sales and consumer lending
Expected at -0.5% for December, they actually declined -0.8% on the month, and the downward revision of earlier months resulted in a -3.4% plunge, which compares to an expected -1.4%! This is the steepest YoY contraction since April 2012, which also came to -3.4%. We have to go all the way back to the air pocket of H1 2009, at the height of the financial crisis, to find worse figures (-4.9% in February 2009 and -3.8% in May2009). Given the continued credit contraction in the first quarter of 2013, as seen in the qualitative studies conducted by the ECB of eurozone banks, and cited in the last Thaler’s Corner, I do not think the next retail sales figures will show improvement over the latest ones.
I constantly return to these stats because they have consequences for the behavior of financial securities, ergo their predictive character. Everything being equal, this also explains why we need to account for current interest rate policy. You can see for yourself in today’s graph just how much these credit variables (consumer lending) and those of the real economy (retail sales), despite conventional wisdom, precede changes in the value of financial securities. Do you see the recent divergence with the “Draghi put” effect?
Retail sales, consumer lending, Eurostoxx50
The Macro Geeks’ Corner (MG)
Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?
Seth B. Carpenter and Selva Demiralp; Federal Reserve Board, Washington, D.C.
(If even the Fed confirms this point, there is hope!)
Lord Turner; FT
(And to think that he could have become Governor of the BoE!)
Lord Turner Lets the Cat Out of the Bag: Print money to fund spending
L. Randall Wray
Have a good day!
Erwan Mahé – Asset allocation and option strategy
