Dawn

Dawn

Wednesday, August 21, 2019

Thoughts from Pontevedra, Galicia, Spain: 21.8.19

Spanish life is not always likeable but it is compellingly loveable.   
                  Christopher Howse: A Pilgrim in Spain
Spain
  • It's hard to avoid references to Benidorm this week. Here's another one, possibly giving one more reason to stay away from the place.
  • I sometimes wonder how God gets through his/her/hir day, given the millions - if not billions - of requests which come his/her/hir way via the prayers of the faithful. Here in Galicia, one very public case is that of a priest who recently held a Mass in which the deity's help was sought to have the potholes in the village's road filled in. And then, of course, there are the millions of - apparently ineffective - prayers which have been offered up over more than 20 years in respect of the arrival of the AVE high-speed train here in Galicia. Presumably they didn't meet whatever criteria God uses for celestial intervention. As with prayers in respect of mass slaughters in the USA, I guess.
  • I'm compiling a list of things that have or haven't changed in the 19 years I've lived in Pontevedra. One which doesn't seem to have changed is the risk you run venturing onto zebra crossings. As you might have guessed, I had to stop in the middle of one yesterday morning when a car in the far lane didn't stop. The 3rd time in a week. Plus one in the nearside lane which was undertaking a car which had stopped in the far lane. You need to have your wits about you. The accident statistics suggest quite a few older folk don't.
  • Cycling into town these days, I'm using our newish bridge - Puente Das Correntes - while the O Burgo bridge is being converted into pedestrian only. To get to the former, I ride alongside a small river that's a tributary of the Lérez river. At the moment, this path is a temporary camino stretch and is far prettier than the usual route up the main street of the barrio of Lérez. These paths join up just after the Alba marshes and I wonder if they'll make the temporary one a permanent 'variant' option. If so, it won't please the owners of the café O Recuncho do Peregrino (The Pilgrim's Corner/Refuge), a fair share of the revenue of which must come from 'pilgrims' leaving the barrio via the normal camino route.
The UK
  • Is there anyone who doesn't believe Prince Andrew was involved with Geoffrey Epstein's young friend? Apart, perhaps, from his grandmother.
The Way of the World 
  • Google - as you might expect - is so culturally (North) American that, when I typed 'main street' yesterday, it came up as Main Street. Thrice. Just as it did right now. Doesn't happen with 'high street'. 
  • Dear dog:  A UK homeopathic pharmacy with a royal warrant is selling a water and alcohol solution containing bits of the Berlin Wall. Homeopathic nutters believe it contains a “spiritual force” that can help imbeciles break down barriers in their lives. It costs a mere £72 for a 100ml bottle of 96% alcohol solution “in medicating potency”.
  • Is Ambrose Evans Pritichard's pessimism proving to be well-founded? See his article below.
The USA
  • Is Ffart actually getting oranger?
  • Amusingly(?), it's reported that - having got everything so embarrassingly wrong in 2016 - there's not a single US pundit of any colour who's prepared to state that Ffart has little or no chance of getting a 2nd term next year. Whatever his current popularity ratings. And whatever the hubbub about a faltering economy and even recession. 
Spanish
  • Word of the day: Zigzaguear. Guess.
  • I wonder what the difference is between unos fuegos de artificio and un espectáculo pirotécnico. Of our 3 recent midnight firework displays, 2 were in the former category and 1 in the latter.
Finally . . .
  •  I fancy I caught the 'song' of a robin in my garden yesterday morning, as well as the earlier sight of the 3 young thrushes/blackbirds. Hope springs . . . But absolutely  nowt this morning. The skies are still devoid of winged creatures. Except insects, of course.
THE ARTICLE

It's too little, too late to prevent a global recession as we enter the 'pre-slump window': Ambrose Evans Pritchard, Daily Telegraph.

US and European stimuli have come too late and this week's Jackson Hole may be a wicked disappointment

With each passing month of trade conflict, the world economy slips closer to stall speed. A partial cease-fire between the US and China – or the US and Europe – is not in itself enough to keep recession at bay.

The White House has flagged another package of tax cuts to keep the wolf away. Mere talk of ‘stimulus’ has brought instant relief to battered August markets, but beware. Donald Trump requires the support of Congress to do anything. House Democrats are in no mood to extend him a lifeline. Their political price will be exorbitant. Nothing will be done soon in any case.

One can only smile at the pretence that tax cuts will be funded by “Chinese tariffs”. China does not pay the tariffs. Importers in the US pay the tariffs (tax). To rotate this back into the US economy via tax cuts is not fiscal stimulus. It is neutral. If that is all Donald Trump has up his sleeve, fetch your tin helmets.

In the meantime, companies have frozen investment plans across the globe. The longer this goes on, the greater the damage. Call it time-decay.  Standard & Poor’s says firms are sitting on $6 trillion of cash and waiting. They are not going to spend much beyond maintenance investment as long as Trump keeps threatening to shut down the Pacific trade relationship – not to forget his parallel threat to impose 25% tariffs on European, Japanese, and Korean cars in November.

S&P’s capex diffusion index for North America has collapsed to minus 35. This is the steepest deterioration of any region in the world, though the EU and Japan are close behind. The capex freeze sets the world on a ratchet course towards recession unless something is done to stop it.

Trump’s tax cuts were supposed to unleash a wave of US corporate investment, delivering self-sustaining growth once the sugar rush of fiscal stimulus faded in 2019. The ‘happy hand-over’ never happened. All he got was debt – on track for 117% of GDP by 2023 (IMF) – and a budget deficit over 4% at the top of the cycle. Trade wars have undercut core premise of Trumponomics.  My view is that the current global soft patch looks deceptively innocuous.

We have entered a pre-slump “window” where the slightest shock is enough to crystalize recession – a blue chip profit warning? Liquidity woes at a large German bank? Iranian retaliation in the Strait of Hormuz? – at which point metastasis kicks in.

Some $16 trillion of debt trading at negative yields tells us it may already be too late. This includes the entire maturity curve of German, Danish, Dutch and Finnish bonds, as well as Portuguese debt out to eight years, and the junk bonds of Telecom Italia. This signal is of course distorted in a Europe of negative policy rates, but that begs the question why Frankfurt has to keep them so low and why it is eyeing minus 0.6% next month.

The Europeans never really overcame the deflationary virus, and now the threat is returning in earnest. That is poisonous for Italian debt dynamics.  The euro project cannot endure sustained deflation. It as simple as that. The currency bloc is not Japan. It has no treasury, joint debt instrument, or automatic lender-of-last-resort, and is not a cohesive state or an ‘optimal political area’ (to misuse Mundell).

There is a wicked twist to deflation in a zero-yield world. What normally happens in downturns is that inflation falls but yields (i.e. borrowing costs) fall even faster. This acts as a counter-cyclical stabilizer and – crucially – prepares the way for recovery. The self-correction mechanism is jammed. Jonas Goltermann from Capital Economics warns that real yields might actually rise if recession takes hold. This would be pro-cyclical tightening into the teeth of the storm. We are back to our old friend Irving Fisher from 1933: ‘The Debt Deflation Theory of Great Depressions”. If you are not disturbed by this, you ought to be.

Richard Clarida, the Federal Reserve’s high priest, knows the danger. He says the Fed must be extra dovish when rates are already so close to the ‘zero-bound’ and buffers are so thin. Yet somehow the Fed has allowed itself to fall behind the curve anyway.

Nothing much is likely to change at the Jackson Hole conclave this week. Last December’s rate rise was ill-judged. The Fed persisted with reverse QE (bond sales) for too long. Real M1 divisia money was allowed to contract in early 2019. The Fed did not start cutting rates until July. Chairman Jay Powell called the quarter point tweak a mid-cycle insurance move rather than the start of rapid-fire easing.

This was to defy market pricing in futures contracts. It smacks of insouciance at a juncture when the US yield curve is inverted on every metric, the US Cass freight index has fallen by 5.9% (y/y), and the world manufacturing contraction is getting worse. Trump accuses the Fed of “horrendous lack of vision”. He wants immediate rate cuts of at least 100 basis points, with QE for sauce. In this he is correct even if his own actions have led to this impasse. He is not going to get what he wants. Krishna Guha from Evercore ISI says the Fed will stick to its steady-as-you-go message. Fed staff argue that jobs and consumption (not leading indicators, nota bene) are holding up well. “We think Powell will convey that the Fed is in preemptive mini-easing cycle/mid-cycle adjustment mode in the spirit of 1995 and 1998, not super-aggressive easing to ward of recession mode,” he said.

A quarter point will be trickled out in September. Evercore said the Fed will switch to “super-aggressive” in a heartbeat if the economy buckles. It will cut rates to zero and throw the kitchen sink at the US financial system. Well, good luck with that. By then the Fed will be chasing its own tail.

It has let the Wicksellian natural rate of interest slide faster than it is cutting rates. It is therefore tightening. My presumption is that markets will spit out a quarter point offering with disgust. Once it becomes clear that neither Europe nor the US are in fact delivering either monetary or fiscal stimulus on a scale required to head off recession there will be a nasty moment of discovery.

One reader asked what I am doing with my pension fund. Answer: 40% bonds, 50% cash, and 10% equities. I have battened down the hatches. This does not feel to me anything like the refreshing pause of 1998 or 2016.

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