Category Archives: EU

China trade, Greece comment

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More reason to suspect US exports will disappoint and US imports will exceed expectations:
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Highlights
China’s June merchandise trade surplus was $46.6 billion against expectations of a $55.3 billion surplus. In Yuan terms, exports were up 2.1 percent on the year while imports tumbled 6.7 percent. The first half of 2015 trade balance was CNY1.61 trillion or $263.9 billion. On a seasonally adjusted basis, exports were up 1.1 percent on the year after sliding 1.4 percent in May. Seasonally adjusted imports dropped 9.9 percent after a 14.1 percent plunge.

According to Chinese Customs, expectations are for export growth to rebound in the second half of the year. It noted that the Greek crisis will have some impact on China’s trade – it is hard to quantify just how big an impact there will be.

China sees exports increase 2% in June, imports decline

By Chen Jia and Zhong Nan

July 13 (ChinaDaily)
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China’s export rose by 2.1 percent year-on-year to 1.17 trillion yuan($188.5 billion) in June, a better-than-expected increase after the 6.4 percent decline in April, according to data from Customs released on Monday.

However, the import figure fell by by 6.7 percent to 890.67 billion yuan last month, leading to an accelerated growth of monthly trade surplus to 45 percent year-on-year.

In the first six months, the country’s total foreign trade value was 11.53 trillion yuan, down by 6.9 percent from a year earlier. Exports increased by 0.9 percent to 6.57 trillion yuan while imports decreased by 15.5 percent to 4.96 trillion yuan.

Trade surplus in the first half rose by 1.5 times from a year earlier to 1.61 trillion yuan, the data revealed.

The structure of trade modes continued to improve when exports of general trade showed marked growth, and strong momentum was spotted in exports to emerging markets and some countries along the “Belt and Road”, said Huang Songping, a spokesman from the Customs department, at a press conference.

China’s bilateral trade with the European Union declined by 6.8 percent during the January-to-June period to 1.67 trillion yuan and trade with Japan fell by 10.6 percent to 832.02 billion yuan, said Hong.

“The Greek debt crisis is likely to influence China’s export, but it is difficult to predict the exact effects,” added Huang.

Varoufakis’ interview in the New Statesman:

Exclusive: Yanis Varoufakis opens up about his five month battle to save Greece

“He said he spent the past month warning the Greek cabinet that the ECB would close Greece’s banks to force a deal. When they did, he was prepared to do three things: issue euro-denominated IOUs; apply a “haircut” to the bonds Greek issued to the ECB in 2012, reducing Greece’s debt; and seize control of the Bank of Greece from the ECB.”

As suspected, he’s was in it over his head.

My response would be to let the banks remain open with circumstances limiting withdrawals to available liquidity. Liquidity might come from earnings on assets, asset sales, and new deposits. The banks would be free, by mutual agreement, to issue IOU’s to depositors who didn’t want to wait for actual euro. The govt might issue IOU’s if it ran out of cash for operating expenses. To ‘seize control of the Bank of Greece from the ECB’ is nonsensical, as there’s nothing there but a computer with a spreadsheet. It would not give Greece the ability to clear funds outside of Greek member banks that are on that spreadsheet. Haircuts to bonds issued to the ECB and reducing Greek debt would also be meaningless in this context.

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macro update

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Saudis remain price setter:

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Main theme: deflationary biases

Greece is a deflationary event, as EU aggregate demand is further restricted, with no sign of any possibility of fiscal relaxation.

Oil fell as Saudis increased discounts, further reducing global capex and related asset prices.

US oil production that gets sold counts as GDP, and for Q3 both production and prices look to be lower. Yes, the lower price also reduces the deflator, but the fall in the price of oil relative to other prices reduces GDP.

The decline in oil prices has also directly lowered income earned from oil sales, royalties, etc. plus ‘multipliers’ as that lost income would have been ‘respent’ etc. This loss has been at least 1% of GDP and completely ignored by analysts who have been over forecasting growth by several % since oil prices declined.

And the more than 50% decline in drilling due to the lower prices = declining production as oil (and gas) output from existing wells declines over time. This means both less GDP and higher imports, a negative bias for the dollar.

Trade flows remain euro friendly and are taking over the price action, and trade will continue to put upward pressure on the euro until the trade surplus is reversed.

The stronger euro vs the dollar initially helps US stock psychology via earnings translations, etc. but hurts euro zone stocks, exports, GDP, etc. reversing this year’s growth forecasts. And a weaker euro zone economy is also a negative for the US.

Oil capex is down and not coming back until prices rise, and the US budget deficit is down further as well, and I see nothing else stepping up to replace the reduced private and public deficit spending that was offsetting the demand leakages (unspent income) inherent in the institutional structure that grows continuously. So unlike last year, when oil capex did the heaving lifting, I expect any bounce in Q2 gdp from Q1 to be modest and transitory.

The Fed may raise rates some not because of the state of the economy, but due to fears that current policy somehow risks some kind of financial instability. No discussion, of course, that Japan has had a 0 rate policy for over 20 years with perhaps the highest level of financial stability in the history of the world, perhaps indicating that a 0 rate policy promotes financial stability…

Employment seems to have begun to decelerate as well, with fewer new jobs each month and claims beginning to rise.

Unlike the last recovery that ended suddenly with a financial crisis that cut off credit, this one is ending with a fall off in aggregate demand from oil capex due to the Saudis cutting oil prices, so the sequence of events has not been the same. But, as always, it’s just a simple unspent income story.

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Fed labor market index, ISM non manufacturing index, Bank lending, Greece

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Prior month revised lower and this month lower
so Fed that much less likely to raise rates:

Labor Market Conditions Index
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Highlights
Growth in the nation’s labor market remains subdued with the labor market conditions index at plus 0.8 in June vs a revised plus 0.9 in May. The reading is barely over zero and underscores last week’s soft employment report. The Fed won’t be any hurry to begin raising its overnight policy rate based on June’s employment data.

Ok, number but less than Q1, with export orders and employment growth slowing:

ISM Non-Mfg Index
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Highlights
Rates of growth in ISM’s non-manufacturing report held steady and solid in June, at a composite index of 56.0 for a 3 tenths gain from May. New orders are strong, at 58.3 for a 4 tenths gain with backlogs back over 50 at 50.5 for a 2 point gain. Growth in export orders slowed but still held over 50 at 52.0 in a reminder that services exports, unlike goods exports, are in surplus.

Other readings include a strong reading for business activity, up 2.0 points to 61.5, a gain offset by slowing in employment to 52.7 from a strong four-month streak over the 55 level. The report’s price reading slowed slightly to 53.0, a soft level contrasting with inflationary signals in this morning’s PMI service report.

A strong signal in this report is wide breadth among 18 industries with 15 showing growth with two of the exceptions, however, including mining and construction. Contraction in the latter is a surprise given wide indications of growth in housing.

This report is solid but, together with the PMI services index, point to a lack of acceleration for the end of the second quarter.
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To my point right after oil prices fell- banks will see large declines in the value of collateral backing their loans which could lead to capital write downs and institution specific lending restrictions, further dampening sales, output, and employment:

Banks Face Curbs on Oil, Gas Lending

By Gillian Tan, Ryan Tracy and Ryan Dezember

July 3 (WSJ) — U.S. regulators are sounding the alarm about banks’ exposure to oil-and-gas producers, a move that could limit their ability to lend to companies battered by a yearlong slump in prices.


The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. are telling banks that a large number of loans they have issued to these companies are substandard, said people familiar with the matter, as they issue preliminary results of a joint national examination of major loan portfolios.

The substandard designation indicates regulators doubt a borrower’s ability to repay or question the value of the assets that back a loan. The designation typically limits banks’ ability to extend additional credit to the borrowers.


The move could add an extra obstacle to companies struggling with high debt loads amid lower prices for the oil and natural gas they produce. Banks have been flexible with troubled energy companies to avoid triggering a flood of defaults and bankruptcy filings, but regulatory pressure could force them to tighten the purse strings.

This year’s Shared National Credit review process contrasts with those in prior years, when regulators didn’t broadly disagree with the banks’ own ratings of credit facilities known as reserve-based loans, the people said. But regulators are paying closer attention to these loans amid worries that a sustained slump in energy prices could lead to big losses for banks, they added.

Twice a year, banks themselves review the value of oil and gas deposits that companies have the right to extract and use as collateral for bank loans. Declines in commodity prices can prompt lenders to reduce their commitments to companies. The effects of such reductions can cascade through energy companies’ capital structures and require them to look elsewhere for funds.

Earlier this year, a number of energy producers sold bonds, took out term loans or sold new shares to replace shrinking reserve-based loans. While some of those moves were forced, others were pre-emptive.

Large energy lenders include Wells Fargo & Co., J.P. Morgan Chase & Co. and Bank of America Corp.

Regulators declined to discuss their conversations with specific banks but have been raising concerns about energy loans. On Tuesday, the OCC, in a semiannual report on emerging risks, said it is monitoring oil-and-gas production loans and said the “significant decline in oil prices in 2014 could put pressure on loan portfolios.” The report didn’t detail the examination of reserve-based loans.

The latest effort comes amid a broader crackdown on lending that regulators consider risky. In 2013, the Fed, OCC and FDIC issued guidance to deter banks from issuing leveraged loans that would increase the companies’ debt loads to levels they consider too high.

Bankers said they are concerned that this latest effort could push some struggling borrowers over the edge, which could, in turn, create more pain for the banks.

“They’re taking a broad brush to the entire sector and not really differentiating between secured and unsecured loans,” one senior leveraged-finance banker said of regulators’ treatment of reserve-based loans.

A number of energy companies already have filed for bankruptcy protection, and others are exploring options to raise capital or restructure their debt loads.

So far, the suffering hasn’t been as widespread as was initially feared when prices plummeted last year.

Bankers are selectively appealing some substandard ratings, especially for companies that can reduce spending and pay down some debt, said people familiar with the matter.


But for the companies that retain the negative rating, any issuance of new debt will likely need to reflect an improvement in creditworthiness, the people said. Options include the addition of loan terms known as covenants, which protect lenders but can increase a company’s risk of default.


Banks may turn to equity or bonds to supply additional financing to borrowers with the substandard designation, some of the people said, though both are costlier for companies than loans.

Analysts expect the oil slump to begin taking a greater toll on companies this fall, when banks review their reserve-based loans. In a note to clients this week, Wells Fargo Securities analysts said that only 30% of the expected oil output in 2016 from the companies they track has been presold at above-market prices, versus 56% of crude production that was hedged this year.


The analysts also said the prolonged period of lower revenue could push more companies closer to violating agreements with creditors to maintain certain profitability levels, and that they expect stock investors to be “more discerning” when offered new shares from heavily indebted companies.

The ECB has begun the move to remove the eligibility of Greek debt as collateral for ECB loans:

ECB maintains emergency assistance for Greek banks, but adjusts haircut on collateral

By Everett Rosenfeld and Matt Clinch

Now that the EU realizes it doesn’t need Greece, the terms are unlikely to be altered. With Greek leadership still committed to staying with the euro and the EU, they take on the role of beggars.

“Even if it came to a collapse of some individual banks, the risk of contagion is relatively small,” Schaeuble told Bild. “The markets have reacted with restraint in the last few days. That shows that the problem is manageable.”

Greek Leaders Says Goal Is to Secure Country’s Financing

By By Eleni Chrepa and Constantine Courcoulas

July 5 (Bloomberg) — Greek party leaders seek solution that secures country’s financing needs, reforms, growth plan and talks on Greek debt sustainability, according to joint statement sent by the Greek president’s office.
Immediate priority is to restore liquidity for Greek economy in cooperation with the ECB
Joint statement signed by Greek PM Alexis Tsipras, acting New Democracy leader Evangelos Meimarakis, Potami party leader Stavros Theodorakis and Pasok party leader Fofi Gennimata
NOTE: Earlier, Greek Showdown Looms With Europe Demanding Tsipras Make Move Link


*GREEK LEADERS: REFERENDUM GIVES NO MANDATE FOR RUPTURE

The call for humanitarian aide puts Greece in a category with other depressed nations seeing that kind of assistance, as Greece turns into a footnote:

European Parliament president: Need to urgently discuss humanitarian aid for Greece

July 5 (CNBC) — European institutions need to urgently discuss a humanitarian aid program for Greece, the …

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Greece loses the gambit

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It now looks to me like Greece has lost the wrestling match.
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The other EU members are very sensitive to market reactions.

The question was whether the EU economy needed Greece, and the answer is now looking more and more like ‘no’.

Not a good position for Greece to find itself after posturing as if it is needed.

That is, Greece forced a test of that question and appears to have the leverage the possibility that they were needed gave them.

The euro did fall, which was extremely worrisome even though it did help exports. There is always the fear, particularly in Germany, of a currency collapse that brings inflation with it. At least so far, that hasn’t happened, with the euro holding about 5% above the lows and recovering from the initial knee jerk reaction from today’s referendum.
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Real GDP forecasts remain positive, helped quite bit by the lower euro, and while high, unemployment has stabilized.

The camp claiming that Greece has been dragging down the entire EU economy is getting more support from the same data.

And so now while Greece isn’t being formally ousted, it will see it’s economy continue to deteriorate if it doesn’t agree to troika terms and return to ‘normal funding’ via securities sales at low rates under the ECB’s ‘do what it takes’ umbrella, and rejoin the rest of the members.

If the govt starts paying in IOU’s payments get made for a while, however they will be discounted ever more heavily with time, raising the cost of re entry to ‘normal’ funding, and the EU counts those as additions to deficit spending which could cause the terms of re entry to be that much steeper.

And any movement by Greece to use alternative funding will be taken as reason not to return Greece to ‘normal’ funding under the ECB umbrella.

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Greece

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Not much to say that hasn’t already been said.

I saw nothing good coming out of a yes or no vote and I still see it that way.

And watch for the follow up polls on the demographics of the vote- who voted, what they say they knew about what they voted for, etc. etc.

The no vote along with the payment past due to the IMF give cause to the ECB to no longer consider Greek govt obligations as ‘eligible collateral’ for ECB loans, and maybe not count as assets for purposes of determining a bank’s equity capital. These measure could cause banks to not be able to attract euro deposits and loans, and therefore those banks would not allow their depositors to withdraw euros or transfer balances to other banks until the deposits could be replaced.

Varoufakis stated an agreement with the troika would be reached within 24 of a no vote. If so, since both what the troika offered and what Greece countered with are negatives for the Greek economy the chances of any material improvement are not good.

For all practical purposes debt relief- the write down of Greek debt- does next to nothing positive for the Greek economy, since the existing debt is already long term and at very low interest rates.

The EU has a general problem of low aggregate demand and both the troika’s and the Greek govt’s proposals are likely to further reduce public and private sector spending.

The Greek govt resorted to nationalism to promote it’s desired ‘no’ vote. Success with this tactic will only promote more of same across the EU, where in many places it’s already taken root. And let’s just say nationalism isn’t generally a force for ‘peace on earth and good will towards men’ etc.

All of this remains supportive for euro exchange rates. Unlike govt debt crises of the past which were about debt in foreign currencies, this time there won’t, for example, be any selling of euro to get the currency needed to make debt payments, as the debt is of course already in euro. So good luck to whoever is doing the selling on this news:
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Housing Starts, Redbook retail sales, EU merchandise trade, Russia comment, California real estate licensees

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The good news here is that last month was up more than expected, and permits were up as well. Lots of cheer leading on this one, and the upward revision of last month’s report ups Q2 GDP estimates a tad, but a quick look at the charts tells me that so far it was a blip up last month from a prior dip, and now back to where it’s been, and longer term it’s still extremely depressed and no longer the large % of GDP it used to be, and growing only very slowly at best. Also, the latest move up in mortgage rates was caused by market anticipation of Fed hikes, and was not demand driven, so if anything it’s likely to slow sales once the pre hike mini surge in borrowing abates, as the credit numbers show has already happened.

Housing Starts
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Highlights
Don’t let the headline fool you, the housing starts & permits report points to solid strength for the housing sector. Starts came in at a 1.036 million rate in May which is down 11.1 percent from the April rate but the April rate, which was already one for the record books, is now revised higher to 1.165 million for, and this is no misprint, a 22.1 percent gain from March. Sealing matters is another gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April. Forecasters will be revising their second-quarter GDP estimates higher following today’s report, not to mention their estimates for Thursday’s index of leading economic indicators where permits are one of the components.

Permits are the leading indicator in the report and the latest rate is the best since way back in August 2007. The gain is centered in the Northeast followed by the Midwest. Turning to starts, the monthly step back is split between all regions with the Northeast, in contrast to permits, showing the largest percentage decrease.

The housing sector is moving to the top of the economy, just as many suspected following a first quarter that was depressed by heavy weather. Watch tomorrow for descriptions of the housing sector in the FOMC statement and also Janet Yellen’s comments at her press conference.

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Permits spiked up, but spikes like this have always been followed by spikes down, and sometimes worse:
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Still stone cold dead for all practical purposes:
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This is very strong euro stuff that will put upward pressure on the euro until this surplus goes away as it weakens the economy and brings on the next major euro crisis:

European Union : Merchandise Trade
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Highlights
The seasonally adjusted trade balance returned a record E24.3 billion surplus in April following a marginally larger revised E19.9 billion excess in March. Unadjusted the surplus was E24.9 billion, up some E10.0 billion from a year ago.

The monthly jump in the adjusted black ink reflected a combination of stronger exports and weaker imports. The former posted a 1.1 percent monthly rise, their third consecutive increase, to stand 9.0 percent above their level a year ago. Imports on the other hand were down 1.6 percent versus March and reversed much of that period’s advance. Even so, annual import growth accelerated to 3.0 percent.

The April data put the trade surplus more than 13 percent above its first quarter mean when total net exports subtracted 0.2 percentage points from the quarterly change in total output. Although volatile energy prices mask underlying volume trends the omens are good for a positive contribution from the external sector this quarter.
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Russia: President Vladimir Putin said his country would be bulking up its nuclear arsenal in the coming year. Speaking at a military and arms fair, Putin announced that, “More than 40 new intercontinental ballistic missiles able to overcome even the most technically advanced anti-missile defense systems will be added to the make-up of the nuclear arsenal this year.”

The announcement comes a day after Russia denounced a U.S. plan to move tanks and heavy weapons to the Russian border in support of its NATO allies. “The feeling is that our colleagues from NATO countries are pushing us into an arms race,” Anatoly Antonov, Russia’s deputy defense minister, reportedly told RIA news agency.

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EU Industrial Production, Credit Check, Atlanta Fed

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Even with increasing net exports, over all GDP isn’t benefiting all that much, as fiscal policy and structural reforms that assist exports do so by restricting incomes and domestic demand to achieve ‘competitiveness’. Additionally, negative rates and QE remove some interest income from the economy, which also restricts domestic demand to some degree. And, ironically, the subsequent current account surplus puts upward pressure on the euro until there are no net exports, obviating the efforts and sacrifices that went into achieving the competitiveness. Further note that a Greek default, for example, fundamentally removes net euro financial assets from the economy, further tightening the euro, as Greek debt is nothing more than bank deposits in the ECB system:

European Union : Industrial Production
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Highlights
The goods producing sector began the second quarter on a surprisingly soft note. A 0.1 percent monthly rise in production (ex-construction) was comfortably short of expectations and followed a steeper revised 0.4 percent decline in March. As a result, annual workday adjusted output growth dropped from 2.1 percent to 0.8 percent, its slowest pace since January.

However, April’s minimal monthly rebound would have been rather more impressive but for a 1.6 percent slide in energy. Elsewhere there were gains in intermediates (0.3 percent), capital goods (0.7 percent) and consumer durables (1.0 percent). Non-durable consumer goods were down 0.8 percent but, apart from this category, all sectors reported increases versus a year ago.

Amongst the larger member states output rose a solid 0.8 percent on the month in Germany but there were falls in France (1.0 percent), Italy (0.3 percent) and Spain (0.1 percent). Elsewhere Finland, already technically in recession, only saw output stagnate following a cumulative 2.4 percent loss since the end of last year while Greece (also back in recession) posted a hefty 2.3 percent reversal.

April’s advance leaves Eurozone industrial production just 0.1 percent above its average level in the first quarter when it increased fully 0.9 percent versus October-December. This provides early warning of a probable smaller contribution from the sector to real GDP this quarter and so underscores the need for the ECB to see out its QE programme in full.
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Portfolio selling from blind fear of QE and negative rates and Greece, etc. drove down the euro, but fundamentally inflation was falling and ‘competitiveness’ increasing so the trade surplus was pushed higher by the lower levels of the currency. Now it looks like the increasing trade flows are ‘winning’ and beginning drive the euro higher, with portfolios ‘sold out’ of euro, all of which should continue until the trade flows subside:
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Back to the US:

I see no sign of whatsoever of accelerating credit growth:
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This got some attention when the growth rate was increasing, but not anymore since it rolled over and remains well below prior cycles:
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They make point of potential growth every time one of the little wiggles bends up, but just look at how low the growth rate actually is, especially compared to prior cycles:
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Nothing happening with consumer lending:
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This shows how competitive banking is as banks compete by narrowing their spreads over their cost of funds:
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The Atlanta Fed forecast ticked up with the latest retail releases, but still remains well below mainstream forecasts and is also indicating what would be a very weak ‘bounce’ from the negative Q1 print, as the implied first half GDP growth rate would only be around .6%- very close to an ‘official’ recession. And as you’ve seen from the charts, those same releases indicated continued year over year deceleration of growth (including autos and retail sales) as well as elevated inventories, which doesn’t bode well for Q3 and Q4:
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Saudi output, Greek statement, EU pmi

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Saudi output up a bit. As they post prices and let their refiners buy all they want at those prices, this shows demand is up a bit, likely because of a supply disruption elsewhere, like Libya, for example:
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As suggested all along:

In an interview with Realnews newspaper published on Saturday, Economy Minister George Stathakis said Athens had no alternative plan.

“The idea of a Plan B doesn’t exist. Our country needs to stay in the eurozone but on a better organized aid program,” he said.

Stathakis was confident a deal will be reached. “Otherwise, mainly Greece but the European Union as well will step into unchartered waters and no-one wants that.

Note the improvement in exports, with the current account surplus already strong. This is the opposite of the US, and caused by the liquidation of euro reserves by foreign central banks, whose selling drove the euro down to the point the current account surplus expanded to absorb it. As the selling subsides the CA surplus will continue until the euro goes high enough to eliminate it:

European Union : PMI Manufacturing Index
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Highlights
The final manufacturing PMI for May showed a minimal 0.1 point downward revision to its flash estimate to 52.2. This matched the 10-month high registered in March and was 0.2 points firmer than the final April print.

Manufacturing production expanded again, albeit at a slightly slower rate than last time, and both overall new orders and new export business improved suggesting that growth should be sustained over coming months. Increased demand was reflected in a rise in backlogs and also contributed to a ninth consecutive gain in the sector’s headcount.

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macro update

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At the beginning of 2013 the US let the FICA tax reduction and some of the Bush tax cuts expire and then in April the sequesters kicked totally some $250 billion of proactive deficit reduction. This cut 2013 growth from what might have been 4% to just over half that, peaking in Q3 and then declining to negative growth in Q1, due to the extremely cold winter. Forecasts were for higher growth in 2014 as the ‘fiscal headwinds’ subsided. GDP did resume after the weather improved, though not enough for 2014 to look much different from 2013. And with the fall in the price of oil in Q4 2014, forecasts for Q1 2015 were raised to about 4% based on the ‘boost to consumers’ from the lower oil prices. Instead, Q1 GDP was -.7%. The winter was on the cold side and the consumer had been saving instead of spending the savings from lower gas prices. And the forecasts for Q2 were for about 4% growth based on a bounce back and consumers now spending their gas savings. Most recently Q2 forecasts have been reduced with the release of Q2 data.

My narrative is that we learned the extent of capex chasing $90 in Q4 after the price fell in half. It seemed to me then that it had been that capex that kept 2013 growth as high as it was and was responsible for the bounce from Q1 2014 as well as the continued positive growth during 2014 up to the time the price of oil dropped and the high priced oil related capex came to a sudden end.

By identity if any agent spend less than his income another must have spent more than his income or the output would not have been sold. So for 2012 the output was sold with govt deficit spending where it had been, and when it was cut by some $250 billion in 2013 some other agent had to increase it’s ‘deficit spending’ (which can be via new debt or via depleting savings) or the output would have been reduced by that amount. Turns out the increase in oil capex was maybe $150 billion for 2013 and again in 2014, best I can tell, and this was sufficient to keep the modest growth going while it lasted. And when it ended in Q4 that spending (plus multipliers) ended as well, as evidenced by the sudden decline in GDP growth. And so far the Q2 numbers don’t look like they’ve increased much, if any, since Q1. And to do so will take an increase in ‘borrowing to spend’ that I can’t detect. Of course, I missed the surge in oil capex last year, so there could be something this year I’m missing as well.

When oil prices dropped I pointed out three things-

1. Income saved by buyers of oil equaled income lost by sellers, so the benefit to total spending was likely to be small and could be negative, depending on propensities to save and to spend on imports. And yes, some of the sellers of oil were ‘non residents’, but that was likely to reduce US exports, and cuts in global capex could reduce US exports as well.

2. Lost capex was a direct loss of GDP, plus multipliers, both domestically and globally.

3. Deflation in general is highly problematic for lenders, and tends to reduce private sector credit expansion in general.

To me this meant the drop in oil prices was an unambiguous negative. And in the face of universal expectations (including the Fed) that it was a positive, which can be further problematic.

Euro Zone

Forecasts are for modestly improving growth largely due to the weak euro driving exports. However, the euro is down from massive foreign CB selling, probably due to fears of ECB policy and the Greek saga. This technical selling drove the euro down and the euro area 19 member current account surplus up, absorbing the euro the portfolios were selling. Once the portfolio selling subsides- which it will as euro reserves are depleted and short positions reach maximums- the trade flows continue, which then drives the euro up until those trade flows reverse. In other words, the euro appreciates until net exports decline and the anticipated GDP growth fades. And there is nothing the ECB can do to stop it, as rate cuts and QE works only to the extent it frightens portfolio managers into selling, etc.

Also, ironically, a Greek default would fundamentally strengthen the euro as Greek bonds are nothing more than euro balances in the ECB system, and a default is a de facto ‘tax’ that reduces the holdings of euro net financial assets in the economy, making euro that much ‘harder to get’ etc.

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