This note was originally published at 8am on April 02, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Such policies, known as financial repression, usually involve a strong connection between the government, central bank, and financial sector.”
-Carmen M. Reinhart
While Keynesian central planners continue to hope that they can suspend economic gravity, hope is not a risk management process. This morning’s economic data out of Europe continues to show you what Financial Repression looks like. Not good. Not going away.
The good news on this front is that it’s not different this time. Co-author of one of the most empirically damning books against Policies To Inflate through currency devaluation and/or sovereign debt pile-ups (This Time Is Different), Carmen Reinhart, wrote an excellent paper on March 11th that was, shockingly, not highlighted by The Ben Bernank in any of his daily Dollar Debauchery speeches last week.
Reinhart’s thesis, “Financial Repression Has Come Back To Stay”, is very similar to what we have called The Bernank Tax: “In the US, as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.”
Back to the Global Macro Grind…
While the Fed Chairman remains laser-like focused on “laws” that are nothing more than social science stories (Okun’s Law), the rest of the world doesn’t seem so interested in his career risk management. People with real money in the game continue to search for the truth.
The truth is that the pace of Global Growth Slowing has picked up, sequentially, in the last month. While plenty a perma-bull was anchoring on 1 of the 2 China PMI prints released this weekend (1 beat, 1 missed – they were both probably made up), here’s the truth about PMI reports around the world in March versus February:
- USA 62 MAR vs 64 FEB
- China 53 MAR vs 51 FEB (or 48 MAR vs 50 FEB)
- India 54 MAR vs 56 FEB
- Germany 48 MAR vs 50 FEB
- France 47 MAR vs 50 FEB
- Spain 44.5 MAR vs 45 FEB
In other words, if you look at 47% of Global GDP (these 6 countries combined = approximately $29.5T in GDP), it’s slowing.
Now if you want to be the bull instead of being the perma Risk Manager on this top line matter, you might say ‘well hey, the UK PMI print for MAR was 52 versus 51.5 in FEB.’ And I’ll be the first to agree with you – it’s just a fact - as is Italy missing their PMI and printing a 10-year high in its unemployment rate of 9.3%.
Taking a step back, since Growth Slowing around this time last year didn’t wake up a lot of people until it was way too late, it’s important to reconcile why perma-bull pundits don’t get paid to see the obvious. It’s called anchoring – “a cognitive bias that describes the common human tendency to rely heavily, or “anchor”, on one piece of information when making decisions.” (Wikipedia)
Anchored: Washington and Old Wall Street based “economists” still think, for example, that US GDP is tracking “around 3%.” Why? Well, because the US GDP report for Q4 of 2011 was, uh, 3%!
You’ll find the complexion of the Q4 2011 US GDP report (C + I + G + (EX-IM)) interesting:
- GDP = +2.97% (up from 1.81% SAAR in Q311)
- Consumer Goods = +1.29% (up from +0.33% in Q311)
- Consumer Services = +0.19% (down from +0.9% in Q311)
- Fixed Investment = +0.78% (down from +1.52% in Q311)
- Inventories = +1.81% (up from 1.35% from Q311)
- Government = -0.84% (down from -0.02% in Q311)
- Exports = 0.37% (down from +0.64% in Q311)
- *Deflator = 0.84%
In other words, if the US Government uses a low enough “Deflator” (you subtract inflation from GDP to get the real (inflation adjusted) GDP number), it can pretty much tell you that US Economic Growth is whatever it wants it to be. In an election year, that’s just great.
But is this economy great? I think anyone who drives their own vehicle in it knows that inflation in cost of goods is running at least +300-500% higher than the GDP Deflator of 0.84% (so is the composite of US CPI and PPI).
Q: So, what happens to GDP when:
- The Nominal GDP growth rate declines sequentially like it just did (Q4 to Q1)
- The inflation rate rises sequentially like it just did (Q4 to Q1)
A: Real (inflation adjusted) Growth Slows.
Notwithstanding that Consumer Services slowing and Inventories rising in Q4 wasn’t a bad signal in and of itself in terms of Q4 “growth” mix, what you are seeing in Q1/Q2 of 2012 is the other side of Bernank’s War –it’s called Financial Repression.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), and the SP500 are now $1636-1679, $121.94-124.13, $78.74-79.30, $82.44-84.03, and 1404-1416, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer