US, China Monetary Easing measures may be ruled out; not Eurozone

Last Updated : 24 April 2013 at 15:00 IST

It is greed and fear that drives the markets. But what drives the economy is hope. When it comes to economics of commodities, the ultimate hope is the hope of Quantitative Easing.

We know it all started with the Great Recession.

Unconventional monetary tools were suddenly deployed to create a new normal with a hope to draw some sanity from them. US, Europe, China, Japan, India...the list of regions and nations that employed stimulus measures goes endless.

Now, the sudden spurt in gold, silver and copper prices is attributed to a new round of hope of monetary easing. This hope has arrived because the economic activity around the world is exhibiting signs of slowdown.

Just go through the recent numbers:

Factory activity in the US for April--preliminary, factory purchasing managers' index fell to 52.0 this month from 54.6 in March--expanded at its slowest pace in six months. But the housing sales data at their second-highest level in 3 years provided some anchor.

HSBC Flash China Manufacturing PMI for April gave a reading of 50.5 compared to 51.6 in March. A reading above 50 is indicative of expansion in the economy. But the dip from March levels is surely a cause of concern.

Flash China Manufacturing Output Index provided a reading of 51.1 compared to 53.0 in March, a two-month low.

Private sector activity in Eurozone too declined, amid business activity in Germany dropping.

All these economic events are pointing towards yet another possibility of a fresh round of global easing measures, analysts say. Will that be the case?

The case of US

We know that in US a round of stimulus measures is already underway. The US Federal Reserve is currently running its fourth round of Quantitative Easing measures. The latest round of easing is seeing to it that $85 billion in bonds and Mortgage Backed Securities are purchased by the US Federal Reserve on a monthly basis.

“I don't think there will be an additional round of Quantitative Easing measures from US. On the contrary they are seeking to exit the stimulus measures as exiting is also important.” said V.K. Vijayakumar, Chief Investment Strategist, Geojit BNP Paribas, South India.

The US Federal Reserve has tied QE measures to a positive evolution of job markets and a healthy inflation. Latest data suggests that unemployment rate in different US States dipped in March year on year including California where joblessness dipped to a low in 4 years. The housing bubble in US which invited the global downturn had destroyed the associated job markets there on a substantial scale.

Now, with new home sales and housing starts gaining momentum, US economy is trudging on a path of return. For instance, new housing starts climbed 7% in March from February to touch an annual rate of 1,036,000, and were up by 46.7 percent compared to March 2012.

According to Stephen Levy, Director of the Center for Continuing Study of the California Economy, a private research organization in Palo Alto:

"The good news is that the recovery is spreading beyond the [San Francisco] Bay Area. There are parts of southern California, such as Los Angeles County, that were badly hit by the housing crash, that are showing signs of recovery," California, he said Reuters, "is emerging again as an economic growth leader led by traditional strengths in technology, trade, tourism, agriculture and the application of creativity to the design of goods and services in demand worldwide".

This trend, if it sustains can see a phase out of Quantitative Easing.

Also, it has to be noted that the jobless claims in US climbed 4000 in figures to a seasonally adjusted 352,000 for the week ending April 13. However, the rise was in line with the expectations fielded by economists even as the claims stood near a line economists normally associate with average monthly job gains of more than 150,000.

The US recovery may at best be termed fragile, and a few indicators are not sufficient enough to hold forth the true picture. Nonetheless, it gives a picture and sunshine as of now outshines the shadows.

So, one can say that another round of monetary stimulus measures is least forthcoming from US.

The case of Europe

An April 4 report appeared in the Bloomberg hints at the possibility of a stimulus measure to be adopted by Eurozone.

“We are considering both standard and non-standard measures” to increase stimulus, ECB President Mario Draghi was quoted by Bloomberg. He was mum on what the tools are.

The report also notes:

“Our monetary policy stance will remain accommodative for as long as needed,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at a record low of 0.75 percent. “We will assess all the incoming data in the coming weeks and we stand ready to act.”

Meanwhile, in Europe, the Eurozone nations cannot think of stimulus measures as Germany has vehement opposition to such a move.

"The deficit reduction in the eurozone must continue," said Wolfgang Schäuble, the German finance minister raising his voice over and above stimulus measures; after all, Schauble is the pay master of the Eurozone. 

"Europe can't function without solving the structural problems." he added.

Germany is still haunted by the specter of hyper inflation episode it experienced in its formative years.

Now, if Germany will have its way, then chances are more that Eurozone would maintain the current status of depressive growth.

However, the picture is not definitive as Gavin Hewitt Europe Editor of The BBC notes in a an analysis titled 'Europe: Retreat from austerity':

Like the arrival of a new season, all the signs are that Europe is in retreat from austerity.

The retreat is disguised, but cannot be concealed. The President of the European Commission, Jose Manuel Barroso, said: "While I think 'austerity' is fundamentally right, I think it has reached its limit."

He implied that a policy can only be pursued if it has "a minimum of political and social support". There is not a general recanting yet, but the explanations are flying thick and fast as to why the policy that Europe has embraced for the past three years must change.

"A period of reduced spending and borrowing was necessary to calm markets concerned about out-of-control debt levels, particularly in peripheral European countries. That time has passed." The EU's Economics Commissioner, Olli Rehn, too said.

If this idea goes viral, chances are more that the Eurozone austerity drive would come to an end even as Germany would be forced to tow the stimulus line. After all, the German economy is also slowing down.

The case of China

Meanwhile, in China, yet another big economy, there are problems of inflation and asset bubbles. “This would deter the Chinese leadership from employing yet another round of stimulus measures,” Vijayakumar noted.

The Chinese property bubble and local government debt issues have already been dealt with here. 

While additional stimulus measures by US and China can be ruled out, the same cannot be the case for Eurozone. The general mood of Eurozone is drifting towards consumption/stimulus led growth rather than austerity driven recovery.

As published here: http://www.commodityonline.com/news/us-china-monetary-easing-measures-may-be-ruled-out;-not-eurozone-54108-3-54109.html

US Fiscal Cliff: Potent Recession trigger, source of market volatility

Last Updated : 30 November 2012 at 14:40 IST

"Are you an investor?"

"Yes, I am..."

"Are you ignoring the fiscal cliff issue?"

Don't say yes! One investor can only ignore the issue at one's own peril.

The continuing market volatility across commodity markets is mainly attributed to three factors:

1. Uncertainty regarding the US Fiscal Cliff issue
2. Uncertainty regarding Europe's economic crisis
3. Uncertainty regarding US' recovery from recession

Last things first!

The US is widely reported to be recovering from recession. Last quarter saw 2.7% growth. But it has to be noted that the growth in times of hardship is entirely different from growth in times of prosperity. The former is indicative of a trend that may falter, but for the time being may suggest of an attempt to stand on its feet, even as the latter is indicative of a definitive growth cycle working itself out. There is a huge difference between both. US may be recovering; hence the word 'uncertainty' regarding US' recovery from recession.

Now when it comes to the second issue pertaining to Europe, one should note that it is not having an easy solution. The woes are complex, to say the least and complicated or intractable to say the most. It is one factor that can still upset the so called apple-cart of recovery; the feeble recovery in US, included.

The first factor can have two outcomes

a. The talks may fail and the issue may get dragged well into January creating so much of panic in the markets.
b. The talks may succeed and the cliff issue may get averted; but still may stand to lose the coveted debt ratings.

Whatever be the outcome, some economists do not rule out the chance of a recession. “The fiscal cliff issue, if it goes off the cliff may not trigger a recession as such, but it can work as a potent trigger.” said Martin Patrick, an economist based out of Kochi, South India.

The fiscal cliff issue has a bigger, broader dimension: it is all about political economy; in a broad sense, it means the issue is as much about politics as it is about economics and the tug of war between Republicans and Democrats in Congress may add to decision lag, implementation lag and production lag--lag in economic output--which should be averted at all costs. For it can create what we have all been seeking to avert: another spell of slow down.

The politicians should be ready to compromise, should think creatively to save the world. They should exhibit speed and be of authority, Martin Patrick observed.

Now, with Democrats retaining the Presidency for a second term, will they bow to Republican pressure: it is highly unlikely. And, will not the Republicans take the inflexibility of Democrats as an excuse not to compromise? Highly likely.

As published in: http://www.commodityonline.com/news/us-fiscal-cliff-potent-recession-trigger-source-of-market-volatility-51591-3-51592.html

Will Sandy give back what Great Recession snatched away from us?

Last Updated : 01 November 2012 at 10:40 IST
The Americans are taking a heave of sigh after Sandy, the Frankenstorm lashed through the area leaving behind death and destruction. The estimated losses vary from $15 billion to $45 billion. While it may take time to rebuild and restore the infrastructure there to its original glory, a few set of positives emerge.

The restoration of lives and livelihoods is a painful task; but the Americans can spend their way out of the current economic crisis and could even think of being thankful to Sandy for all that she has done, if they are willing.

The Americans have been QE freaks. Ben Bernanke has now spend many a billion dollars to perk the economy up by injecting innumerable greenback into the system. But ultimately this money was invested by banks in commodities and equities who were supposed to lend them in the first place to industry and economy. This is because of a heightened sense of risk aversion as exhibited by the banks.

Hurricane Sandy has changed all that and more. Infrastructure restoration would be the primary priority of Obama administration as just like any other political leader, he loves to sit in his cushion chair in the Oval Office, especially as he has already cast his vote and requesting his fellow Americans to follow suite.

"Do not figure out why we can't do something. I want you to figure out how we do something," Obama exhorted to his legion of officials as and when he assessed the situatiion. "I want you to cut through red tape, I want you to cut through bureaucracy, there is no excuse for inaction at this point. I want every agency to lean forward." he added.

Once this vision is implemented, banks too will have to lend the money to facilitate reconstruction efforts; and right money (which is government backed) in right hands (people eager to pick up their lives where they left it) at right time (a time of death and destruction) can work wonders.

Spending for reconstruction would no doubt would help the economies there to gain momentum and restore some of the lost jobs. Post World War growth experienced by the world was no magic and all reconstruction feats.

There is a psychological factor attached to this as well. Once the economies get back to their feet and that too from depressive moods would double the sense of well being and hope.

What the Great Recession had snatched away from US could be delivered at least in part or if that be not the case could at least trigger a new wave of optimism and hope. And when the world's largest economy finds its dancing tune, that is a case for revival for the entire planet.

Sandy will spark a micro-trend. Let that be a trigger for other macro trends underpinned by hope and optimism. 

As published in: http://www.commodityonline.com/news/will-sandy-give-back-what-great-recession-snatched-away-from-us-51135-3-51136.html

How slowdown in China could drive Copper higher

Last Updated : 10 August 2012 at 12:00 IST
Commodities are mostly about China and China is mostly about commodities. And this necessarily means that China, if it grows or if it slows down could fuel rallies. However both rallies would be distinctly different and both would have different implications.

Let me explain:

We have two scenarios: Either China can slow down or China can grow. The latter scenario, as per fundamental economics is good for commodities and warrant no explanation.

So let's focus on the former scenario.

China trade balance missed its standard mark when exports climbed just 1% in July from year ago period and imports rising 4.7%; Chinese trade surplus stood at $25.15 billion. Deutsche Bank, meanwhile has cut the Q3 growth of China to 7.5% from 7.9%; Q4 growth is estimated at 7.7% revised down from 8.1%. The bank expects 2012 GDP growth of China to be at 7.7% from 7.9%. 2013 growth forecast is pegged at 8.2% from 8.4%.

This data may not portray a rosy picture for commodities. As Bhavik Patel, Commodity Analyst with Commodity Online says:

“Slowdown in China is not good for commodities because usually the prices are driven up by demand only. Slowdown signifies drop in commodity prices but because of slowdown, the expectation will build up for stimulus measures and that will provide a relief rally in commodities.”

At the moment market will focus on slowdown data and after the correction, the relief rally will come on anticipation of stimulus measures, he added.

So we may have a stimulus rally; but which all commodities would benefit?

“Copper...” Patel said and added, “Copper would benefit the most as China is the biggest consumer, rest of metals would follow but copper would gain the most.”

But will there be a stimulus at all?

"China will not escape from the global slowdown," Banny Lam, China economist at CCB International in Hong Kong was quoted by Reuters as saying. He is expecting Chinese government to free the cash reserves that banks should hold, so that additional boost would be provided to the economy.

There are already reports that China has made some investments in the railway sector. Besides Chinese inflation has come down to 1.8%.

So, if the Chinese juggearnaut slows down copper would make losses; only to make a triumphant come back.

As published in: http://www.commodityonline.com/news/how-slowdown-in-china-could-drive-copper-higher-49664-3-49665.html

Why Ben Bernanke of The US Federal Reserve stopped short of QE3

Back in 2002, Ben Bernanake, spoke at a gathering to commemorate 90th birthday of Milton Friedman, the dean of free-market economics. He referred to the seminal work of Friedman on Great Depression, which Friedman co-authored and said, “thanks to you, we won’t do it again.”

Big Ben tolled that he was sorry (he being in the Federal Reserve), that a depression occurred in 1930s and he will not let it happen again.

By not announcing a QE3, Ben Bernanke was simply keeping his word!

Yes, a QE3 would have ushered in an era of ‘super-uncertainty’, a tongue for depression.

The two rounds of QE or Quantitative Easing was a monetary stimulus initiated by the Federal Reserve at the instance of US government. Spawning billions of greenbacks, the Federal Reserve re-purchased US bonds from banks thereby injecting liquidity into the markets.

Rather than boosting investments in productive assets, the said money (being cheap) was actually invested in boosting consumption around the globe.

This ultimately led to a rally in commodities and equities starting 2010. With food prices shooting up, billions were dragged back to poverty. Social unrests marked the era as Arab Spring sought its soul.

But this prima facie unsustainable cycle ended with QE2 expiry.

QE3 and global hyperinflation

If Ben Bernanke had opted for a QE3, it would have kicked in a fresh cycle at a higher threshold. As experts at NIA warn, the world and US would slip into hyperinflation in dollar—the world’s reserve currency.

This anticipated rout in dollar value will spark another round of dollar sales starting from countries like China and India followed up by other nations. Result would be a monetary vacuum and a fiscal nightmare! Dollar would cook you food replacing logs and twigs, as they would be much more expensive to burn!

This global hyperinflation has not simply happened before and can prove to be something worse than depression.

We have seen hyperinflation in countries like Bolivia and Zimbabwe which made living a vegetative process. A global extension of the same...unthinkable; and that too if you care to live!

No doubt, Bernanke is farsighted and has not reneged on his promise.

What next

Ben has left the Federal Reserve rates untouched. But the decision was least surprising, given that there were nil alternatives. In fact I was surprised to see markets rebounding! My perception was that markets had already discounted the event.

The important thing is that markets felt some certainty after Tuesday’s Fed announcement; a date, a few statistics and some confidence as Bernanke announced he would spare rate hikes at least until 2013. May be that dose of certainty can be accounted for the rebound in markets.

But, with the rates down, a virtual, subdued QE3 would come into force. Credit would be cheap and banks would continue to lend. US would be identical to the proverbial frog in the boiling pot where temperature is raised one micro degree a time.

The resultant inflation would be exported and the Emerging Markets, the only ray of hope, would tighten credit situation, stalling growth.

Ben has only postponed a slow down by averting a depression.

Meanwhile, the European Central Bank is also taking the credit route. By buying into the debts of Italy and Spain, the bank is playing with fire. The credit scenario in Europe would be aggravated despite European Financial Stability Facility (EFSF) and to solve a credit crisis, a new deeper credit crisis would be created.

As published in: http://www.commodityonline.com/news/Why-Ben-Bernanke-of-The-US-Federal-Reserve-stopped-short-of-QE3-41524-3-1.html

Recession: Unusual, unconventional actions the need of the hour

Everybody dreads the R-word! But why dread the thing that you are living?

You heard me right: recession is still there in our backyard (if not in the bedroom), which Paul Krugman dubbed as nasty recession. But certain media outlets, through their analysis, are creating the impression that recession is approaching anew, once again, out-of-the-blue!

By assuming that recession is here for a “second” time, media outlets give out the false impression that it has already been ended and has started off “once more”. By creating that impression, they simultaneously fan the fire of hope and cold-water the same in people’s mind in a stroke of matchless mastery (that recession had ended and we are facing a “new” crisis).

“Recession has been here and is expected to continue for the short-term...” said Dr.N. Ajith Kumar, an economist with Centre for Socio-economic and Environmental Studies, a Kochi based think-tank.

The fact is that the political drama staged as the debt-ceiling debate unveiled in the United States was too compelling for the media community to miss. As a result, many of the high-profile analysts who have had a lag in writing when it came to the topic of recession, in due course, forgot that there has been a recession, and when the drama ended, wrote about recession with some nostalgia. A pardonable offence!

So, if recession has been here for a while, then what can we be doing about it?

“See, the raising of debt-ceiling did little to add to the confidence of the industry participants.”, said Martin Patrick, an economist from Kochi.

One cannot pay off debt by contracting additional debt! Given this aspect, it may happen that the United States will, today or tomorrow, announce a slew of austerity measures.

“This may not bode well for the economy.” Martin Patrick added.

He points out that there is a fundamental flaw with the so-far-announced US’ monetary measures to tackle recession. A significant portion was utilised to bail out the heavily-struck institutions. The ordinary people who lost their wherewithal did not receive anything.

“Unless the Purchasing Power Parity or PPP of these people are restored, recession cannot be hoped to rein-in. This is just one of the measures.”

Pump priming, as the measure is termed, can be extended to include regions where unemployment is rampant.

“The governments should identify sectors where there is the need for additional capacity creation and pump money to them, creating employment opportunities. India is already having welfare measures like NREGA which helped it.” said Martin Patrick.

The political will of the governments are often tested in times of crises. Failure of governance and policy paralysis can add to the current woes.

“The US government can consider bringing in youngsters to jobs which are being carried out by old people nearing retirement. This can be a temporary arrangement, say for five years until the economy rebounds...but can sufficiently infuse some amount of money into the hands of those who are unemployed. The old people can, for the time being, live out of what they already have.” Martin suggested.

Of course, the myriad nuances of this scheme has to be worked out.

But measures like this would need some unusual and unconventional thinking from the part of the political class.

Is the world ready?

As published in: http://www.commodityonline.com/news/Recession-Unusual-unconventional-actions-the-need-of-the-hour-41335-3-1.html

Recession, US default and the Capitol

The ensuing six months are very critical for the world economy as it moves through a tight rope with a short pole for balance and heavy winds lashing against it.

There are conflicting views regarding the state of global economy: many argue that the world is on a recovery path. Others would say that the crisis is far from over and the current growth is just a dream before a nightmare.

The truth is that it is still possible for the world to make the outcome the way it wishes: dream or nightmare.

It would be a beautiful dream provided a concerted effort is on from the part of world leaders putting to rest the petty political diatribes and narrow alley-mentality. It would be a nightmare if the opposite works out.

Take it from me: if the world goes to recession once again, it would not be purely for the (complex) economic reasons, but for the (petty) political ones as well.

Take the case of debt-ceiling debate in US

Nobody loves a bad debt. Not even US.

Debt is more a question of trust than a question of performance. It is more of an impression, an assurance signed and extended into the future that would help the lender sleep in peace. Please note that this applies only to the planet’s biggest economy: the USA. If you are USA, you can pay your debt. If you are not USA, then better be China or India; you may have some reprieve.

Go down the ranks and chances are less that you would survive on debt; debt alone.

Now what if the USA defaults?

That is unthinkable....

Sorry, a storm is gathering. If the planet’s dignified-glorified democracy goes nuts in its Capitol, a recession can happen. If it does not...Obama warning about a recession could have a Nostradamus effect. It can become true.

This is the moment: If the Republicans behave with some magnanimity and would raise the debt ceiling, a major global catastrophe can be averted. In return the world expects the wizard of the white house to tighten his belt and for that matter the belt of obese consumerist credit driven consumption maniacs in US, and help them start saving.

Meanwhile Bernanke can start raising the interest rates. He should also tell us what it would be like after the expiry of QE2. The world does not want a QE3; but it doesn’t want the commodity market, or for that matter, the equity markets to come down.

Aside: The world does not want the interest rates in the growth markets to rise as well.

As published in: http://www.commodityonline.com/news/Recession-US-default-and-the-Capitol-39067-3-1.html