ECB’s Nowotny: Don’t Get Overexcited Policy makers and central bankers should retain a longer-term perspective and not get overexcited about Thursday’s meeting of the European Central Bank’s governing council, a member of the council said.
QE warfare pushing world financial system out of control Former BIS chief economist warns that QE in Europe is doomed to failure and may draw the region into deeper difficulties
The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world’s financial system going into 2015.
Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West.
“We are in a world that is dangerously unanchored,” said William White, the Swiss-based chairman of the OECD’s Review Committee. “We’re seeing true currency wars and everybody is doing it, and I have no idea where this is going to end.”
Mr White is a former chief economist to the Bank for International Settlements – the bank of central banks – and currently an advisor to German Chancellor Angela Merkel.
He said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20pc of GDP higher today. “We are holding a tiger by the tail,” he said.
He warned that QE in Europe is doomed to failure at this late stage and may instead draw the region into deeper difficulties. “Sovereign bond yields haven’t been so low since the ‘Black Plague’: how much more bang can you get for your buck?” he told The Telegraph before the World Economic Forum in Davos.
“QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies (SMEs) and they get their money from banks, not from the bond market,” he said.
“Even after the stress tests the banks are still in ‘hunkering down mode’. They are not lending to small firms for a variety of reasons. The interest rate differential is still going up,” he said. (…)
Mr White said QE is a disguised form of competitive devaluation. “The Japanese are now doing it as well but nobody can complain because the US started it,” he said.
“There is a significant risk that this is going to end badly because the Bank of Japan is funding 40pc of all government spending. This could end in high inflation, perhaps even hyperinflation.
“The emerging markets got on the bandwagon by resisting upward pressure on their currencies and building up enormous foreign exchange reserves. The wrinkle this time is that corporations in these countries – especially in Asia and Latin America – have borrowed $6 trillion in US dollars, often through offshore centres. That is going to create a huge currency mismatch problem as US rates rise and the dollar goes back up.”
Mr White’s warnings are ominous. He acquired great authority in his long years at the BIS arguing that global central banks were falling into a trap by holding real rates too low in the 1990s, effectively stealing growth from the future through “intertemporal” effects.
He argues that this created a treacherous dynamic. The authorities kept having to push rates lower with the trough of each cycle, building up ever greater imbalances, in an ineluctable descent to the “zero bound”, where monetary levers stop working properly.
Under his guidance, the BIS annual reports over the three years before the Lehman crisis were a rising crescendo of alarm calls at a time when other global watchdogs were asleep. His legendary report in June 2008 openly discussed whether the world was on the cusp of events that might prove as dangerous and intractable as the Great Depression, as it indeed it was.
Mr White said central banks have been put in an invidious position, compelled to respond to a deep economic disorder that is beyond their power. The latest victim is the Swiss National Bank, which was effectively crushed last week by greater global forces as it tried to repel safe-haven flows into the franc. The SNB was damned whatever it tried to do. “The only choice they had was to take a blow to the left cheek, or to the right cheek,” he said.
He deplores the rush to QE as an “unthinking fashion“. Those who argue that the US and the UK are growing faster than Europe because they carried out QE early are confusing “correlation with causality”. The Anglo-Saxon pioneers have yet to pay the price. “It ain’t over until the fat lady sings. There are serious side-effects building up and we don’t know what will happen when they try to reverse what they have done.”
The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. “They have created so much debt that they may have turned a good deflation into a bad deflation after all.”
OIL
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BHP cuts shale investment amid oil drop Onshore rigs in US to be reduced by 40%
This will reduce the number of rigs it operates to 16, down from 26. BHP’s drilling programme will be focused on its higher quality liquids-rich Black Hawk acreage in southern Texas.
BHP had highlighted shale resources in the US as a focus for investment. It spent heavily during the commodities boom to increase its presence in the US shale gas and liquids sector, and was set to invest about $4bn annually in its fields from a group capital spending budget of about $15bn.
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Halliburton, Baker Hughes to lay off thousands as oil slumps
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Oman Joins Other Oil Nations Saying OPEC Decision Wrong Oman, the biggest Middle Eastern oil producer that’s not a member of OPEC, joined Venezuela and Iran in questioning the group’s decision to keep its output target unchanged even with crude prices falling.
Oman, the biggest Middle Eastern oil producer that’s not a member of OPEC, joined Venezuela and Iran in questioning the group’s decision to keep its output target unchanged even with crude prices falling.
Oman is having a “really difficult time†because of low oil prices, Oman’s Oil Minister Mohammed Al-Rumhy said at a conference in Kuwait City. Standard & Poor’s lowered the country’s outlook to negative from stable on Dec. 5, citing a risk that oil may drop more than expected.
“I really fail to understand how market share became more important than revenue,†Al-Rumhy said.
From Lombard St research via FT Alphaville:
So did the Saudi campaign have the dire economic consequences in the US that some commentators are predicting today? Looking at Fed transcripts from the period, officials’ early concerns were all about financial risks. They were worried the oil-price crash would drag down ‘less developed countries’ such as Mexico, with possible contagion to global markets. This is similar to the discussions investors have recently been having about Russia. Mexico did struggle, with GDP dropping 3% in 1986, but global equities shrugged off the anxieties.
As far as the domestic US economy was concerned, the impact was mainly confined to the energy sector. Oil-dependent states suffered severe recessions, with employment contracting sharply. Unemployment hit double digits in Texas, Alaska and New Mexico, with what FOMC members called ‘severe effects’ on local financial institutions and state budgets. Yet the national economy continued to grow, with only a mild slowdown in the first half of 1986 followed by a decent recovery in H2. Paul Volcker described the situation as one of ‘micro problems’ that hadn’t ‘escalated into big macro problems’. Other officials noted that the positive impact of lower energy prices on consumers soon outweighed the initial negative effects on production. This suggests we shouldn’t be too scared about the wider implications of a shale crash, not least because the energy sector is smaller than it was back then. Even the most exposed US states are less energy-intensive than they once were (see chart)….
Contrary to popular fears, there is nothing here to suggest the latest collapse in oil prices will trigger a US recession. But I guess, for the time being, investors only want to hear bad news.
Japan slashes inflation forecasts
The Bank of Japan has slashed its inflation forecast for the year beginning this April to just 1 per cent, down from the 1.7 per cent anticipated in October, conceding that its 2 per cent objective is out of reach for now.
But governor Haruhiko Kuroda argued in a press conference that monetary easing was working as planned, consumer expectations of future inflation were holding up, and the BoJ would still hit its goal in a period “centred†on the coming fiscal year.
Mr Kuroda said the BoJ expected the oil price to level off and then start climbing back towards $70. “If so, we expect consumer inflation to reach 2 per cent in a period centred on fiscal 2015,†he said.
UK wages grow at fastest rate in 2 years
The recovery in Britain’s jobs market is at last starting to filter through to workers’ pay packets with wages growing at their fastest rate for two years.
Official data show regular weekly wage growth accelerated from 1.6 to 1.8 per cent in the three months to November. That was the fastest pace since mid 2012, though still much lower than before the financial crisis.
The unemployment rate has also fallen again to 5.8 per cent — the first time it has been below 6 per cent for six years and the number of vacancies hit a record high.
The figures on pay indicate higher growth in real wages — inflation was 1 per cent in November and has subsequently fallen to just 0.5 per cent.
IBM Gives Disappointing Outlook IBM on Tuesday gave a disappointing forecast for the year as it reported another period of sharply lower profit and revenue to end 2014.
How China’s Slowdown Could Drag Down the Global Economy
Oil Drop to Cause ‘Lost Year of EPS Growth,’ BAML Says Falling oil prices will hurt, not help, corporate profits this year, says Bank of America Merrill Lynch.
The bank’s strategists cut their forecasts for S&P 500’s earnings growth in a note Tuesday, citing the monthslong dive in oil prices and a strengthening U.S. dollar. The bank now expects “a lost year of EPS growth,†and thinks earnings will rise just 1.3% in 2015. Their previous forecast was for 5.1% of yearly profit growth.
That view pits them against other Wall Street strategists, like Goldman Sachs’s David Kostin, who think that falling oil prices will support corporate earnings. Their earnings-growth forecast also falls well below those of single-stock analysts, who expect earnings per share to rise 6.1% this year, according to FactSet.
Bank of America’s strategists say the oil-price drop will support broad U.S. economic growth, as measured by gross domestic product—but they don’t think it will move the needle for corporate earnings.
“The direct hit from lower energy earnings and capital investment greatly outweighs the positive impact of increased consumption and energy costs,†they write.
But the bank is still bullish on U.S. stocks. In a separate note, strategist Savita Subramanian keeps her year-end forecast steady at 2200, which would be a 8.9% gain from Friday’s close.
She thinks investors will push up U.S. stock valuations as they seek safety from patchy economic growth abroad, amid low expectations for bond-market returns. Plus, a rising greenback could make dollar-denominated U.S. stock investments more attractive, she wrote.
“A reallocation to U.S. stocks from other regions and from other asset classes could drive the market to new highs in 2015,†she writes.
But even so, she warns investors that recent stock-market swings could become a regular occurrence.
“Get used to volatility,†she wrote.