UPDATE II: Little Clouds on the Horizon

43 Then he told his young servant, “Go and look toward the sea.”
So he went and looked out to sea. “Nothing there,” he said.
But Elijah told him to go back seven times.
44 On the seventh look, he said, “Look! There’s a cloud, a small one, about the size of a man’s hand. It’s coming up out of the sea!”
“Get up and find Ahab!” Elijah said. “Tell him, ‘Mount your chariot and ride down the mountain so the storm doesn’t stop you.’”

1 Kings 18:43-44

It approaches from the sea, too small
for thunder and lightning
but ominous as a closed fist
and what it will bring

nearing us, growing larger,
is completely unknown.
Beware the leaves blowing, beware
the spot on the sun.

– Dick Allen, Cloud No Bigger Than A Man’s Hand


Of course saying another crisis is coming is like saying we are due a large earthquake in Southern California. True, but it doesn’t mean one is going to happen tomorrow. What I think it does mean is that we should be thinking what our leaders, what the people they work for – the global overclass – might already have in mind or have already put in place, for what they want done next time. I think it would be foolish to imagine they have not thought about it and are not putting in place the things which will close off some futures and force us into others that they prefer. They have so very much to lose and so very much more they want to gain.

David Malone (Author: The Debt Generation) – The Next Crisis – Part one

German exports plunged in August in a decline that led the managing director of the International Monetary Fund, Christine Lagarde, to warn that the euro zone risks following Japan and falling into a prolonged cycle of recession and stagnation. The IMF had also alerted the region to the risk of recession in the euro zone, she said, putting the likelihood of a drop in output at “between 35 and 40%, which is not insignificant.”

As the euro zone’s largest economy and manufacturer, Germany is relied on by the euro zone for driving its economic recovery. The French economy is also stagnant, while figures from Italy last week suggest that it has slipped back into recession. Economic growth among the eighteen euro-zone countries was flat in the second quarter, and it is likely to record a growth of nil this year.
For its part, the IMF forecast earlier this week that the euro-zone economy would grow by 0.8 per cent in 2014, rising to 1.3 per cent next year. It also warned that the currency area faced the threat of a triple-dip recession.

Meanwhile the IMF has more than doubled its growth estimate for the Irish economy this year to 3.6 per cent. Of Ireland’s total exports, 19 per cent go to the United States, 14 per cent to Britain, and about 32 per cent to the remainder of the EU, of which 8 per cent goes to Germany.
So, after more than forty years in the common market, the EU (counting Britain) still only takes less than half our exports. Could this explain why growth here seems high while that in the rest of the euro zone stagnates?

German exports plunge as euro zone heads towards stagnation – People’s Movement News, 19/Oct. 2014

For example, last week listening to the radio I heard one of our politicians crowing about how his policies were working and the new growth rate was evidence of this. Yet no one stopped to ask him why, just one month ago, his own government’s growth forecast was half of what it is today. If he was so confident about why his policies were so uniquely responsible for the recovery in Irish growth rates, surely his own forecast last month should have reflected that?

…like the Spanish economy, the Irish economy is growing quite significantly, yet the global economy of which we are both a tiny part is slowing down rapidly. Europe, with which we share a currency, is facing deflation, yet Britain and the US are doing quite well. This is good news for us. We do well when Britain and the USA are doing well and when Germany is doing badly.

This is because we have lots of debts and our interest rates are set by Germany. Therefore, we need Germany to be struggling. In contrast, our two biggest trading partners are Britain and the US, so we do well when they are growing.

Germany, the dynamo of the eurozone, is slowing down, and the ECB – our central bank – is prepared to print money. This cash could well find its way into the Irish economy.

David McWilliams – The Indominatable Spirit is Taking Over (Sunday Business Post)

In the past few months, Europe has stopped spending and as Europe is Germany’s biggest trading partner, ultimately the impact on Germany is felt through falling orders for German factories, falling production and falling exports. All this is now happening.
The problem for Europe is that no growth is not just an economic problem; it is a political headache too. As European growth stalls – yet again – the sustainability of the debts of Europe’s periphery governments come back into focus. The ECB wants to save the Euro, so it decides – as it is doing – to print as much money as possible. This angers the Germans who believe that the ECB is risking all its credibility if it prints money.
The Germans are beginning to understand that Mr Draghi, the Italian head of the ECB, is trying to turn the Euro into the Lira behind their backs. But they also know it is too late. They have traded the mighty Deutsche Mark for the Euro and they can’t go back. The Italians and Spanish have a gun to their heads.
[…]
Therefore, low Eurozone interest rates are here to stay and they will only rise in the government debt market (including Ireland) if the financial markets believe that Germany will not pay the bill for the rest of Europe.
Up to now the Germans picking up the tab was almost a given, particularly as the economy was so strong. What happens if the economy here weakens as quickly as the latest data from German industry suggests? Will the Germans have the money to bail everyone out? Will they have the stomach?
Ultimately, the answers to these questions will determine the future path of the Irish economy much more than anything announced on the steps of Leinster House.

David McWilliams (Irish Independent)

The Man Behind the Euro Curtain

Was it only a few years ago that Mario Draghi uttered his famous line, “We will do whatever it takes”? Interest rates in Europe have collapsed since then, as the European bond markets believed that Mario had their back. He has not had to do anything of true significance to back up those words, and what he has done has been lackluster.

This week Mario was up on the stage in Washington DC, where he essentially said that the problems in Europe cannot be fixed by monetary policy but are fiscal and regulatory and require actions from governments, not from central banks. The Bundesbank has clearly held sway, at least so far as the prospects for European quantitative easing go. While Draghi hinted that he would like to do €1 trillion worth of QE, it is not clear exactly how he would go about that.

Mario is like the Wizard of Oz. He talks a good game and puts on a good show, but it is soon going to become apparent that he really doesn’t have any magic, at least not until the Germans allow him to open up his trunk of tricks. Right now they’re keeping it safely stowed away in Berlin.

German intransigence is going to precipitate a crisis in Europe. Italy has been in a recession. France is crossing into one. Spain is barely holding on. Even German exports are slowing. France and Italy are balking at meeting the 3% deficit targets mandated by the EU treaty. Germany has drawn a line in the sand; France and Italy fully intend to cross it. This should be interesting; but however it turns out, I don’t think it will be good for the euro.

How long can interest rates in Europe stay at the irrationally low levels where they are today? We touched on that question in past letters, so I won’t cover that ground again, other than to say negative interest rates in Ireland and France are as indicative of dysfunctional markets as anything one might postulate.

When Draghi loses the narrative, or his ability to simply jawbone the market to where he would like it to be, all hell is going to break loose in the European bond market. Exactly what will the safe-haven currency be? The Swiss can’t print enough francs. Even Norway doesn’t have that many kroner. It will be the US dollar…

John Mauldin – Frontline Thoughts: Sea Change

What you are seeing in the Irish economy is a direct result to the emergency ECB interest rate policy. Irish banks have been able to avail of credit at 0.15% that has created a massive and very lucrative carry trade where these banks can use this ‘free’ money to purchase Government Debt that is fully guaranteed by the taxpayers to pay 2-3%. Irish banks buying Irish bonds has caused the bond rates to fall. If you want to give FG/Labour credit for the Irish ‘turnaround’ you may as well extend that credit to the ‘turnaround’ of Greece, Portugal, Italy and Spain. Equally spectacular, but nothing to do with FG/Labour.

This carry trade will end. Interest rates will rise, and our outstanding debt will become an unmanageable burden. What then? When FF destroyed the country we had a Debt/GDP of 25%. After 3 years of FG/Lab it’s up to 125%. There is no room left to absorb the second shock.

“Coles” – Politics.iep

On SME funding the Irish banks are in a bind. They need to continue to delever, and the only way to do that is to progressively increase the deposit base (costly) and/or reduce outstanding loans. In particular, reducing loans will be done while also shifting the balance of loans away from riskier towards less risky ventures. Lending to SME’s is inherently more risky than to more established sectors and ventures. The easiest venture at present is to obtain cheap money from the ECB and purchase Irish government bonds, a carry trade as it is known, reaping a handsome profit for the banks and incrementally driving up the price and down the yield on these bonds yielding a handsome political dividend for the government.
Brian M. Lucey – The Banking Union: What’s In It For Ireland? (Dec. 2012)

[All emphasis & internal links mine – OO’C]

This entry was posted in Analysis, Forecasting and tagged , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s