Photo: AP Photo/Jin Lee
Markets gyrated this week as headlines shifted frantically between Europe and the Fed, both sending volatility higher. Greece started the week off on a relatively calm note, when the country elected a pro-bailout coalition. In other words, the chances of a disorderly Greek exit from the euro were less likely.
But disappointing Fed action on Wednesday hit markets — particularly as economists debate if the slowdown is just a bump or something more permanant.
Trying to make sense of it all?
'Also if left unchecked, the fiscal squeeze next year in terms of spending cuts and the expiry of all the tax goodies introduced over the past decade will conspire to take roughly four percentage points out of real GDP growth. There have only been two instances in the past when we experienced such fiscal restraint and recessions ensued both times. It pays to note that with the baseline trend in real GDP little better than 1%, even if half of the expected restraint manages to get kicked down the road, the economy will at best stagnate in 2013. That may not be a recession in a technical sense, but it would sure feel like one for a whole bunch of people.'
'Since the latest data cover the employment survey week, the modest deterioration in claims suggests that June nonfarm payrolls should remain sluggish and perhaps even slow relative to their disappointing April and May gains of +77k and +69k, respectively. Our early read is +75k on June nonfarm payrolls and +90k on private payrolls; with continuing claims up modestly in June compared to May--this series closely tracks the changes in the number of unemployed workers--the unemployment rate is expected to stay at 8.2%. We will revisit our payroll and unemployment rate forecasts as new information comes in, but at the moment, the labour market news is certainly discouraging.'
'While some have suggested that this baby boom echo won't buy stocks in view of the 2000--09 market trend, we would suggest that they look back at the 1980s and 1990s, which followed a 16-year bear market in stocks -- the 1970s stock market problems did not deter the baby boomers and the 2000s most probably will not prevent the echo generation from buying if opportunity exists. Keep in mind that the past three years actually have been very equity friendly and behavioural psychology argues that people are most affected by their most recent experiences.'
BUITER: A European Banking Union Will 'Sever The Poisonous Umbilical Cord' Between Sovereigns And Banks
'Minimal fiscal Europe will consist of a larger European Stability Mechanism, the permanent liquidity fund, and a sovereign debt restructuring mechanism (SDRM). The ESM will be given eligible counterparty status for repurchase agreements with the eurosystem, subject to joint and several guarantees by the euro area member states...Banking union aims to sever the poisonous umbilical cord between sovereigns and the banks in their jurisdictions. A roadmap to banking union will likely be announced at the EU summit on June 28-29. It better be a credible path. In any case, implementation is the hard part, and time is of the essence.'
'Moreover, the economy now faces a 'monetary cliff' in addition to the 'fiscal cliff' in early 2013. Although we have generally subscribed to the 'stock view' of the Fed's asset purchase programs, we do believe that unconventional easing is subject to 'decay' and that there are some modest 'flow' effects at the very long end of the yield curve. Taken together, these factors make a convincing case for additional easing in early 2013.'
'What this continued Fed activism will do is to continue altering the functioning of markets, contaminate price discovery and distort capital allocation. Already, the viability of several segments -- from money markets to insurance and from pension provision to suppliers of daily market liquidity, all of whom provide financial services to companies and individuals -- has been undermined.'
'Buy gold, while hedging the implicit USD exposure. Gold is back to the lower band of the trading range of the past year. It is also the commodity that benefits most from the Fed's unconventional monetary policies. As a result, we are strong overweight gold ahead of QE3 and expect its price to challenge $1,800 before the end of the year. Timeline of the call: 3-6 months.'
'Further Long-Term Refinancing Operations (LTROs) are likely to bring only temporary relief:Even if the ECB do announce extra liquidity provision, we are not convinced even this will stem the rise in periphery yields for long. A new LTRO (3yr or longer) should help support periphery auctions going forward, but we suspect that large concessions will still be needed as domestic banks, already heavily laden with domestic sovereign debt, make room to buy primary issuance by selling in the secondary market.'
'In 2005, I told a senior ECB official that it was unfair to force other countries to rescue Germany by boosting their economies with loose monetary policy without requiring Germany to administer fiscal stimulus, when it was Germany that had become so deeply overextended in the bubble. The official responded that that is what a unified currency means: because Germany could not be granted an exception on fiscal stimulus, the only option was to lift the entire region with monetary policy.'
'Heavy government intervention in the economy and central bank incursions into asset markets in the name of reflation have bumped against recurring deflationary pressures -- causing intense market volatility. This is precisely why it is that in addition to a focus on bonds and low-beta income equity portfolios, exposure to long-short strategies that involve relative-value trades that mitigate the volatility is also totally appropriate in the current and prospective investment climate.'
'If you add in the Democratic Left, which is not fiercely anti-bailout, but is certainly not a buyer of the ND/PASOK MoU world; then over 50 per cent of the Greeks VOTED against the austerity plans. So while tonight the Greek people did not pull the EMU rip cord, they came VERY close. And a 'majority' of Greeks will not be happy with any continuation of MoU policies. We may have postponed the inevitable Greek exit another 6 to 12 to 24 months, but this result is NOT comforting. The battle in Greece will rage, and it will surely spill over into the rest of Europe.'
'Overall, Greece will remain a source of uncertainty due to its macro-dynamics. The country is undergoing extreme economic pressures that are likely above and beyond austerity; prolonged uncertainty have led to a multi-year suppression in confidence and a collapse in credit growth, which has helped compressed the private sector, create supply shortages and has contributed to the lack of investment or privatization efforts, higher structural unemployment and persistent inflation currently observed.'