TBT: in 2011, the need for ECB QE was quite clear (plus, EZ breakup combinatorics update)

In 2011, Greece had not yet defaulted, and the contagion had not fully spread to Italy and Spain. The Eurozone was trying to do the minimum possible,  as the failing crisis management of J-C Trichet was unable to avert horrendous damage to living standards and the EU project.

Despite the very real and very weak fundamentals in the PIIGS and self-inflicted “suicidal austerity”, I saw that there was also a self-fulfilling feedback loop that could be broken by massive quasi-monetary buying. It was another year before Draghi committed the ECB to such a safety net, and then a few more years before the central bank finally started bond buying (QE) in early 2015. Better late than never…

For the record, here is what I wrote then,

“There is still a great need for reforms, adjustment in competitiveness, the core to abandon its suicidal austerity, etc. But this is the way that the EZ and its members can go “All-In”. At worst, it will buy them a lot of time and take risk out of the markets and in particular the banking system.”

A bit later, for fun, I looked at how many Euro break-up scenarios there were (e.g. Grexit first, followed by Portugal’s returning to the escudo, and the others remaining is one such scenario; if the order is reversed that is a different one). I got 967 trillion. Of course, the actual unfolding reality is that no members have left so far (Britain is exiting the EU, but is a euro opt-out). On the contrary, there has been further Eurozone enlargement with two members joining: Lithuania and Latvia. So, ignoring any more countries choosing to abandon monetary sovereignty and transforming all internal debt into external debt, the new calculation is that there are 331 quadrillion ways for the EZ to break up. But unlike 2011, I’m not holding my breath.

The UK Doesn’t Rely on Anyone’s Kindness

The latest YouGov UK referendum poll shows a very close race. The interesting splits are Tory+UKIP (Out) and Labour+LibDem+Green (In); Old (Out) and Young (In); London (In) and North (Out) and Scotland (In). Lots of undecideds.

BoE Governor Carney made a ridiculous and biased speech that referenced the “kindness of strangers” as. This was repeated by many pundits and is given as a reason why leaving the EU would hurt the UK economy, especially as the current account deficit continues to grow (alongside the UK economy’s good performance, and after a few years of sterling strength).

Bloomberg’s Therese Raphael’s analysis (and Carney’s assertion) that foreigners or strangers are putting their money into the UK out of kindness is ridiculous. They are doing it because the UK is a grown-up country with good laws and low corruption. The world is uncertain, and the EU itself is hardly stable; indeed, some of the largest and fastest capital outflows went out of EU members in 2011-12. The argument that Brexit will increase uncertainty strikes me as superficial; it merely changes the uncertainties and risks; the government’s Project Fear is mostly on target on the risks of leaving, albeit with a pessimistic spin, but largely silent on the costs and risks of staying in, touting mainly the benefits.

Moreover, a current account deficit doesn’t mean that “more money is going out than in” as Raphael erroneously writes. That is true of the sum of goods and services imports and exports, but portfolio flows and FDI are positive. Thus, as always, the sum of the trade account and capital account is zero. Carney should know that in Britain, with its floating FX and fiat currency, it is the exchange rate and other asset prices that react to supply and demand for these goods, services, investments, and speculative flows TO MAKE THEM BALANCE OUT. Would a weaker currency or lower property prices be bad for the UK? If so, why?

I’m not saying a large imbalance –deficit or surplus — should be ignored; it sometimes is driven by unsustainable dynamics and it’s worth assessing how those trends will normalize. The worries about the London-area housing bubble are well founded, in my opinion. The GBP will likely need to weaken at some point, yet we should also remember that the UK domestic asset base, financial and nonfinancial, is probably around £10 trillion or 500% of GDP, as well as the fact that UK international liabilities are primarily denominated in its own currency, just like the US’s and China’s for that matter. Today, it is the regions with the world’s biggest CA surpluses — China and the Eurozone — that should worry the most about the “unkindness of locals” who are spiriting away their funds at record rates. Often to the UK! The BBC yesterday had a nice piece on how China’s rich are smuggling their cash abroad, and it is worth considering if, when they manage to buy that flat in Brighton, they are really doing it out of kindness rather than a mix of desperation, fear, greed, and/or good sense.

Letter to Bloomberg on Deepak Chopra’sQuote of the Day

Quote of the Day on Apr 5, 2016: Deepak Chopra
“Always go with your passions. Never ask yourself if it’s realistic or not.”
— Deepak Chopra
To Bloomberg Editorial Staff:
I have long been a fan of the Quote of the Day, which is read by thousands as they log in to their accounts every morning. From ancient philosophers to witty celebrities, your staff usually choose inspiring, thoughtful, and clever quotations that can be usefully recycled in cocktail conversations. Today’s selection is an exception: not only have you chosen a pseudo-scientific con artist, but the quote itself is stupid, if not dangerous. The only defence for this selection is that it accurately captures the idiotic Chopra’s ideas as being nonsense and diametrically opposed to the use of one’s brain. However, I doubt that it was selected with a sense of irony. If at all possible, please replace the quote with something sensible rather than promoting notions that I would hope are diametrically opposed to what Bloomberg, as a company, stands for.
Yours faithfully,
David Nowakowski
PS: please enjoy a free babble from the Random Deepak Chopra Quote Generator. I just got: “The secret of the universe is the wisdom of nonlocal excellence”
choprabullshit

Why I Like the Empire State Manufacturing Survey

Why is the Empire a useful survey?  It’s admittedly second-order importance indicator, but here is why I like it (besides being a New Yorker!):

1) It’s one of the first gauges of what is actually going on in February (most official data is January or even Q4 or Dec).

2) It is a good partial substitute for the broader surveys like PMI and ISM, that don’t come out for another week.

3) Empire, for whatever reason, tends to track New Orders, though that is also similar to the overall headline manufacturing PMI. See attached for a comparison. The survey also includes its own New Orders # and includes forward expectations for all the indicators, but I never dig in that deep.

In summary: it is a leading indicator that’s actually released relatively early.

Philly Fed is also useful, it comes out next and like NY/Empire has the usual breakdowns into sub-categories.

Finally, as far as the headline # today goes, it was rather poor: worse than expected and barely an improvement from January’s. The breakdown is also shown below:

(Bloomberg) — Following is a summary of New York manufacturing activity index from the New York Federal Reserve.

==========================================================================
                   Feb.   Jan.   Dec.   Nov.   Oct.   Sept.   Aug.
                   2016   2016   2015   2015   2015   2015    2015
==========================================================================
General Business ------------------Diffusion Index------------------
Conditions        -16.64 -19.37  -6.21 -10.06 -11.41 -12.86  -12.79
------------------------------------------------------------------------------
Prices Paid         2.97  16.00   4.04   4.55   0.94   4.12    7.27
Prices Received    -4.95   4.00  -4.04  -4.55  -8.49  -5.15    0.91
New Orders        -11.63 -23.54  -6.18 -11.75 -16.98  -12.52 -14.57
Shipments         -11.56 -14.39   4.62  -3.03  -8.79  -8.07  -12.65
Delivery Time      -1.98 -13.00  -8.08 -10.91 -11.32  -6.19   -4.55
Inventories         0.00  -6.00 -12.12 -17.27  -7.55 -18.56  -17.27
Unfilled Orders    -6.93 -11.00 -16.16 -18.18 -15.09  -8.25   -4.55
Number of Employees-0.99 -13.00 -16.16  -7.27  -8.49  -6.19    1.82
Average Workweek   -5.94  -6.00 -27.27 -14.55  -7.55 -10.31   -1.82