Sive Morten
Special Consultant to the FPA
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- 18,648
Fundamentals
This week we've got a lot of information, guys - as political as financial, starting from common statistics and up to , NATO summit, G7 and Portugal Banking forum. So, let's keep NATO forum and political aspects for gold market analysis tomorrow and focus on economical situation. Statistics shows that everything is going with our long-term scenario. We already have got negative GDP numbers for IVQ 21 and IQ 22, as we've expected. Next step is rising unemployment and overall public wealth deterioration. J.Powell and C. Lagarde speeches are worthy of special analysis. So let's go step by step.
First is, let's take a look at GDP numbers and its components. I've shown you them on Friday. By looking at these numbers, I would like to ask what does J.Powell mean when he tells - "employment and consumption is strong". How we could get negative GDP numbers with strong employment and high consumption? This is absurd. Even GDP numbers below shows two times contraction of Consumer spending and Sales.
Returning back to consumption... Now, if you take a look at compounding of GDP numbers, you could see that private consumption gives the bulk of negativity to the number:
Second moment, is GDP deflator (Price index), it has reached 8.3% that is above the expectations, but it seems that inflation numbers are artificially undervalued. Because, the structure of the US GDP is 70/30 Services to Goods. We know that PPI inflation stands around 20%:
CPI is around 8%. Thus, GDP deflator should be around 11-12% and can't be equal to CPI.
Anyway... it is more interesting what we get as a result of recent GDP report and Powell's speech in Portugal. It seems, that in the US, at least, everybody understand that crisis stand for the long time, this is not the cyclical recession issue, as we've warned previously, because it has absolutely different background and reasons. Now, big banks and agencies start downside revision of the US economy. FRB of Atlanta cuts IIQ GDP expectation for 2 times - from "-1.0%" to "-2.1%". The same revisions you could find on JP Morgan and other Top banks and rating agencies.
Additionally it makes sense to mention massive drop of the sentiment as in EU as in the US and overall business conditions shown by PMI data.
United States ISM Purchasing Managers Index (PMI) - component analysis shows that employment and new orders are in negative territory already (below 50).
We also have got record high EU CPI data this week - 8.6%, while EU households follow the same trend as their US partners - the retail loans burden is growing. But all these stuff is not surprising. The downside trend has started three quarters ago and now we just see the progress of the process in numbers. It is more interesting what J. Powell and C. Lagarde said on Banking Forum in Portugal:
In general the the key news of the week are notes of pessimism sounded again in the messages of the heads of the monetary authorities. Federal Reserve Chairman Jerome Powell, speaking at the European Central Bank forum in Portugal on Wednesday, has sent an alarming message about the conditions of the US economy. He admitted that there are no guarantees of a so-called "soft landing", and a recession is possible.
In addition, according to Powell, he cannot guarantee that the labor market remains strong on a background of inflation fight and rising interest rates. It means that higher interest rates, likely to push unemployment higher. That's actually what we've said just above.
The Fed chairman also added that he intends to use all the tools at his disposal to ensure economic stability, although he acknowledged that there is a risk that the Fed will go too far and provoke a recession. His remarks came after the US Central Bank raised interest rates in an attempt to curb inflation.
ECB head Christine Lagarde echoed him:
At the same time, Lagarde hopes that fiscal policy will be aimed at supporting the most vulnerable, not the general population. Well, in conclusion, a mysterious phrase:
We suggest that she means 0.25% (!!!) rate change in July and probably September and plans to keep buying Italy, Greece, Spain, Portugal bonds of highly indebted countries and sell Germany bonds. Guys, I have nothing to say here - great investing strategy, the theatre of absurd. She seriously talks that "the ECB policy adjustment already makes positive effect on EU economy", and "we still expect positive economy performance".
While the US politicians have decided to fight inflation radically - "fight fire with fire", print more money to help people to fight inflation.
The leaders of the G7 states generally avoided discussing the economy (although some other participants of the G7 summit expressed doubts about the effectiveness of sanctions aggression in such an acute crisis). And, thus, the economic crisis continues its active development.
Stock market is turing to sharp nosedive - one of the worst half year results ever, on a background of poor reports from Amazon and Tesla. Take a look also at retail sector - Wall Mart and Target shows big collapse.
The classical picture of the structural crisis — is a constant rising of inflation despite the fall in demand and a significant tightening of monetary policy. It means that no matter what Powell says, there is no recession in such a situation, because this is cyclical phenomenon. This is a full-fledged structural crisis. The main question now is whether the Fed, ECB, BoE and others continue tightening policy (increasing the funding costs) on a background of slowdown of the economy? Because tightening monetary policy will lead to a collapse wigh high degree of certainty. This is, in fact, what J.Powell have talked about.
At the same time, the inner political problems of the elites in the US and EU leads to ignoring of economical ones as nobody is really engaged in economic policy. Sanctions are only accelerate the trend of negative processes. The US elections may change this situation, but it is pretty long time till November. Besides, to really change something, government and Fed authorities have to introduce the problems and their real causes publicly and put them into public discourse. This looks doubtful now. At the same time, whether Republicans can do it fast enough is also a big question.
The calendar of Fed meetings shows that we have July, September and November meetings, which is a great relief for the J.Powell. They could rise rate in July and September making no big hurt to the US economy, while the US comes to elections in November and policy could change drastically. Democrats supposedly will lose the control as in Senate as in Congress. De-facto the country will be under control of Republicans, and I will not be surprised with J. Biden impeachment procedure until the end of the year. There are real political risks around this stuff, but this is special topic.
With the current balance of ECB and Fed policy we do not expect trend change on EUR/USD. While Fed has the understanding of the problems and doing something, - C. Lagarde shows that ECB has absolutely no idea what to do in current situation and just watching how EU economy is slipping to downfall. Besides, EU has nonuniform structure and tensions will become more evident closer to the autumn. People are becoming tired from wealth deterioration, loosing faith in the future. So social unrests and tensions will become tougher. Thus, our target of 0.9, I would say, is conservative enough.
In longer-term perspective we do not exclude that EU, as bureaucratic political extension, government center will fall apart. There are few reasons. First is - no money to finance it. Second - structural contradictions between the EU-core developed countries and periphery.
EU is unifying legislation in almost all vital aspects. The legislation and, most importantly, the architecture of the EU shapes the foreign policy of the EU member states.
EU forms industrial standards and indirectly industrial policy;
EU directly impacts the energy policy through its standards.
EU shapes judicial practice and measures in the justice sphere.
EU totally subordinates international agreements by the EU, as well as agreements between EU members within the EU competence.
There is a direct impact on the economic policy of countries, including food policy via declarations and resolutions adopted by the EU.
The core of the contradictions in the EU is, of course, migration policy, which can be talked endlessly. Finally EU countries have a unified monetary policy.
Thus, all vital aspects that determine sovereignty – the monetary system, foreign policy and military issues, further migration, industrial, energy and food policy are at the supranational level. EU members cannot independently change it. In fact, the main beneficiaries of the EU, represented by Germany and France, are building donors around themselves to the detriment of their development. That is why we are approaching the political crisis in the EU, which is superimposed on the structural crisis of internal insoluble contradictions.
This is a bit longer process but with vital shortfall of financing, rising social unrests of foreign policy it supposedly becomes more and more critical. To get more in-depth view - just read this Credit Suisse report (it's just two pages) that clearly explains the ongoing global tectonic shifts. It is from Zoltan Pozsar - the Guru of political economy, previously occupied with Fed and US Minfin.
To be continued...
This week we've got a lot of information, guys - as political as financial, starting from common statistics and up to , NATO summit, G7 and Portugal Banking forum. So, let's keep NATO forum and political aspects for gold market analysis tomorrow and focus on economical situation. Statistics shows that everything is going with our long-term scenario. We already have got negative GDP numbers for IVQ 21 and IQ 22, as we've expected. Next step is rising unemployment and overall public wealth deterioration. J.Powell and C. Lagarde speeches are worthy of special analysis. So let's go step by step.
First is, let's take a look at GDP numbers and its components. I've shown you them on Friday. By looking at these numbers, I would like to ask what does J.Powell mean when he tells - "employment and consumption is strong". How we could get negative GDP numbers with strong employment and high consumption? This is absurd. Even GDP numbers below shows two times contraction of Consumer spending and Sales.
Returning back to consumption... Now, if you take a look at compounding of GDP numbers, you could see that private consumption gives the bulk of negativity to the number:
Second moment, is GDP deflator (Price index), it has reached 8.3% that is above the expectations, but it seems that inflation numbers are artificially undervalued. Because, the structure of the US GDP is 70/30 Services to Goods. We know that PPI inflation stands around 20%:
CPI is around 8%. Thus, GDP deflator should be around 11-12% and can't be equal to CPI.
Anyway... it is more interesting what we get as a result of recent GDP report and Powell's speech in Portugal. It seems, that in the US, at least, everybody understand that crisis stand for the long time, this is not the cyclical recession issue, as we've warned previously, because it has absolutely different background and reasons. Now, big banks and agencies start downside revision of the US economy. FRB of Atlanta cuts IIQ GDP expectation for 2 times - from "-1.0%" to "-2.1%". The same revisions you could find on JP Morgan and other Top banks and rating agencies.
Additionally it makes sense to mention massive drop of the sentiment as in EU as in the US and overall business conditions shown by PMI data.
United States ISM Purchasing Managers Index (PMI) - component analysis shows that employment and new orders are in negative territory already (below 50).
We also have got record high EU CPI data this week - 8.6%, while EU households follow the same trend as their US partners - the retail loans burden is growing. But all these stuff is not surprising. The downside trend has started three quarters ago and now we just see the progress of the process in numbers. It is more interesting what J. Powell and C. Lagarde said on Banking Forum in Portugal:
In general the the key news of the week are notes of pessimism sounded again in the messages of the heads of the monetary authorities. Federal Reserve Chairman Jerome Powell, speaking at the European Central Bank forum in Portugal on Wednesday, has sent an alarming message about the conditions of the US economy. He admitted that there are no guarantees of a so-called "soft landing", and a recession is possible.
In addition, according to Powell, he cannot guarantee that the labor market remains strong on a background of inflation fight and rising interest rates. It means that higher interest rates, likely to push unemployment higher. That's actually what we've said just above.
The Fed chairman also added that he intends to use all the tools at his disposal to ensure economic stability, although he acknowledged that there is a risk that the Fed will go too far and provoke a recession. His remarks came after the US Central Bank raised interest rates in an attempt to curb inflation.
ECB head Christine Lagarde echoed him:
At the same time, Lagarde hopes that fiscal policy will be aimed at supporting the most vulnerable, not the general population. Well, in conclusion, a mysterious phrase:
We suggest that she means 0.25% (!!!) rate change in July and probably September and plans to keep buying Italy, Greece, Spain, Portugal bonds of highly indebted countries and sell Germany bonds. Guys, I have nothing to say here - great investing strategy, the theatre of absurd. She seriously talks that "the ECB policy adjustment already makes positive effect on EU economy", and "we still expect positive economy performance".
While the US politicians have decided to fight inflation radically - "fight fire with fire", print more money to help people to fight inflation.
The leaders of the G7 states generally avoided discussing the economy (although some other participants of the G7 summit expressed doubts about the effectiveness of sanctions aggression in such an acute crisis). And, thus, the economic crisis continues its active development.
Stock market is turing to sharp nosedive - one of the worst half year results ever, on a background of poor reports from Amazon and Tesla. Take a look also at retail sector - Wall Mart and Target shows big collapse.
The classical picture of the structural crisis — is a constant rising of inflation despite the fall in demand and a significant tightening of monetary policy. It means that no matter what Powell says, there is no recession in such a situation, because this is cyclical phenomenon. This is a full-fledged structural crisis. The main question now is whether the Fed, ECB, BoE and others continue tightening policy (increasing the funding costs) on a background of slowdown of the economy? Because tightening monetary policy will lead to a collapse wigh high degree of certainty. This is, in fact, what J.Powell have talked about.
At the same time, the inner political problems of the elites in the US and EU leads to ignoring of economical ones as nobody is really engaged in economic policy. Sanctions are only accelerate the trend of negative processes. The US elections may change this situation, but it is pretty long time till November. Besides, to really change something, government and Fed authorities have to introduce the problems and their real causes publicly and put them into public discourse. This looks doubtful now. At the same time, whether Republicans can do it fast enough is also a big question.
The calendar of Fed meetings shows that we have July, September and November meetings, which is a great relief for the J.Powell. They could rise rate in July and September making no big hurt to the US economy, while the US comes to elections in November and policy could change drastically. Democrats supposedly will lose the control as in Senate as in Congress. De-facto the country will be under control of Republicans, and I will not be surprised with J. Biden impeachment procedure until the end of the year. There are real political risks around this stuff, but this is special topic.
With the current balance of ECB and Fed policy we do not expect trend change on EUR/USD. While Fed has the understanding of the problems and doing something, - C. Lagarde shows that ECB has absolutely no idea what to do in current situation and just watching how EU economy is slipping to downfall. Besides, EU has nonuniform structure and tensions will become more evident closer to the autumn. People are becoming tired from wealth deterioration, loosing faith in the future. So social unrests and tensions will become tougher. Thus, our target of 0.9, I would say, is conservative enough.
In longer-term perspective we do not exclude that EU, as bureaucratic political extension, government center will fall apart. There are few reasons. First is - no money to finance it. Second - structural contradictions between the EU-core developed countries and periphery.
EU is unifying legislation in almost all vital aspects. The legislation and, most importantly, the architecture of the EU shapes the foreign policy of the EU member states.
EU forms industrial standards and indirectly industrial policy; EU directly impacts the energy policy through its standards. EU shapes judicial practice and measures in the justice sphere. EU totally subordinates international agreements by the EU, as well as agreements between EU members within the EU competence. There is a direct impact on the economic policy of countries, including food policy via declarations and resolutions adopted by the EU.The core of the contradictions in the EU is, of course, migration policy, which can be talked endlessly. Finally EU countries have a unified monetary policy.
Thus, all vital aspects that determine sovereignty – the monetary system, foreign policy and military issues, further migration, industrial, energy and food policy are at the supranational level. EU members cannot independently change it. In fact, the main beneficiaries of the EU, represented by Germany and France, are building donors around themselves to the detriment of their development. That is why we are approaching the political crisis in the EU, which is superimposed on the structural crisis of internal insoluble contradictions.
This is a bit longer process but with vital shortfall of financing, rising social unrests of foreign policy it supposedly becomes more and more critical. To get more in-depth view - just read this Credit Suisse report (it's just two pages) that clearly explains the ongoing global tectonic shifts. It is from Zoltan Pozsar - the Guru of political economy, previously occupied with Fed and US Minfin.
To be continued...
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