part of why I didn’t think we’d get through 2013. Well, we did — and now it’s worse, because this is only updated through the end of September and of course the market has gone screaming higher in the last three months.
With that said, that which cannot go on forever won’t, and this clearly can’t — and thus won’t. The only question is exactly when, and what, triggers the corrective move back down.
US Q3 GDP was revised up to an eye-watering 4.1% annualized rate, and that headline was received as confirmation that the Fed’s policies are working; but a rudimentary dig beneath the surface reveals that a significant contributor to the strong performance was our old friend consumer spending:
(USA Today): Boosting optimism for the new year ahead, the government announced Friday that the economy in the third quarter grew at its fastest rate in nearly two years and much better than previously estimated.
Higher consumer spending was largely responsible for the economy’s annual growth rate of 4.1% from July through September, the Commerce Department said. Last month, it estimated a 3.6% rate. In the second quarter the economy grew at a 2.5% annual pace.
Last quarter’s better-than-expected performance was spurred by consumers spending more over the summer on health care, recreation and other services.
The government says consumer spending grew at an annual rate of 2.0%, up from 1.6% in its previous estimate last month.
“The consumer is back in the game,” exulted Chris Rupkey, chief financial economist of Bank of Tokyo-Mitsubishi UFJ, in a client note Friday. “Is this economic growth fast enough to put America back to work? The answer is, yes. The wheels of the economy are turning fast enough to bring down the unemployment rate further.”
Folks, take it from me, any time you see the words “chief financial economist” and “exulted” in the same sentence, be afraid.
Be very afraid.
Meanwhile, over a third of the strength in the economy was down to private inventory buildup — the biggest such buildup since records began almost 70 years ago:
Source: St. Louis Fed
And the farm component of that particular datapoint provides an even more staggering anomaly:
Source: St. Louis Fed
So, despite equity markets making all-time highs in 2013 more often than Miley Cyrus gave offence, beneath the surface, the economy — which equities are supposed to reflect — didn’t perform as well as the headlines would have you believe; and by far the biggest driving force behind the strength of the equity market was free money courtesy of QE.
Though QE has morphed into the means to create trickle-down wealth through higher equity markets, quantitative easing was, of course, a program originally designed to save stabilize bond markets; but there’s only so much you can do once bond prices reach the levels they did this past year. And so next week, in Part II of “The Weak That Worked,” we’ll take a look at ground zero for the Fed’s intervention and a few related issues that unwittingly saw themselves dragged into the ring.
As we take a look at the bond and housing markets, we’ll see a bunch more headlines that don’t quite tally with what’s going on under the hood and that show that the “recovery” is really not all that it’s cracked up to be.
Until next time…
*******
This week has turned into something of a world tour. We begin in Turkey, where a new scandal threatens to topple the government, and then move on to Japan for a look at the unintended consequences of Abenomics. Then we’re off to Argentina, where the government is at least consistent, before we head to China to lift the veil off a corruption scandal that couldn’t possibly happen in the West involving an official obsessed with reporting growth — whether it was genuine or not <coughcoughcough>.
Russian President Vladimir Putin shocked the world this week when he pardoned Mikhail Khodorkovsky, so we’ll head to Moscow to try to learn the real reason for such an out-of-character move, before we return to the United States to find equity markets in a bubble and billionaires heading to South Dakota in droves, thanks to an obscure tax loophole.
Unflagging, we’ll then scoot over to Japan to hear how a beauty queen is taking on the Yakuza, power on to the UK where one journalist has figured out the motive behind QE, and then zip on back to Upstate New York for my friend Dave Collum’s review of 2013.
Interviews include the aforementioned Mr. Collum discussing his thoughts with Chris Martenson, as well as the views of both Jim Rickards and Saxo Bank’s Steen Jakobsen on the Taper.
Charts of GDP, the reality of consumer confidence, and declining unemployment in America wrap things up for the week and the year; and all that remains is for me to add a personal note as 2013 turns into 2014:
This year has been a pivotal one for me, and I want to take this opportunity to thank my friends and family, the folks at Mauldin Economics, and of course you, the readers of Things That Make You Go Hmmm… for all the support you’ve given, not just in 2013 but over the past several years.
When I began writing this thing in 2009, I had no idea where it would lead me nor the tiniest inkling as to the number of wonderful, smart, engaged, and entertaining people it would bring me into contact with; and this past year has been the best so far.
My travel schedule has been brutal, but it has taken me to many corners of the world and given me the opportunity to meet and speak to an incredibly diverse collection of people who humbled me by the mere extension of an invitation, let alone the gift of their attention.
Last, but most definitely not least, 2013 finally provided a victorious end to a three-year legal battle I had been fighting against an investment bank, which had put me under tremendous financial and emotional strain.
Due to the brilliance of two wonderful lawyers and the unwavering support of some extraordinary friends, I managed to stay the course, and justice was conclusively done.
Thank you. You know who you are.
THAT little story is definitely one for another day (perhaps a book), but it will certainly make you go “Hmmm…”
Until Next Time Year…
*******
Turkey first of Fed Taper victims as political crisis scares investors
The Turkish lira has tumbled to a record low amid a deepening political crisis in Ankara, the first emerging market domino to wobble as the US Federal Reserve starts to wind down global dollar stimulus.
The currency has weakened by 6pc against the euro over the last two days, culminating a 25pc fall this year. Foreign funds have cut holdings of Turkish debt by a quarter since the May.
Turkey has gone from star performer to “sick man” of the emerging market block as the Fed begins to taper bond purchases, a move that threatens to set off a further rotation of funds back into US dollar assets.
Turkey is the most vulnerable of the emerging market nexus.
An estimated $4 trillion of foreign capital has flowed into the developed world since 2009, much of it “hot money” chasing asset bubbles. Regulators are nervously eyeing yields on 10-year Treasuries as they touch 3pc, levels that could set off a scramble for dollars.
Pressure has been building this month on Indonesia, one of the “Fragile Five” (along with India, Brazil, South Africa, and Turkey) with big current account deficits. The rupiah fell to the lowest since 2008 yesterday, down 22pc this year.
Even the much lauded Philippines has been hit in recent days on fears of a broad-based “taper tantrum”, akin to events in May last year when tougher talk from Washington set off worldwide jitters.
Mark Carney, Governor of the Bank of England, warned before Christmas that the epicentre of global stress has shifted from West to East. “The greatest risk is the parallel banking sector in the big developing countries,” he said.
Emerging markets have been sputtering since 2011, with Brazil and Russia flirting with recession this year. Some have hit the buffers as the commodity supercycle fades or because they have exhausted the low hanging fruit from their catch-up growth models.
The MSCI Emerging Markets index is down 9pc this year, in stark contrast to the 28pc boom on Wall Street’s S&P 500. Investors appear deeply divided over whether this is a “contrarian” chance to buy cheap.
The global bond giant Pimco says Fed tapering is already priced into markets, while countries have ample foreign reserves to counter shocks, unlike earlier Fed tightening episodes in the 1980s and 1990s.
Yet Goldman Sachs — once the cheerleader of the ‘BRICS’ — said the shift in global economic power had been over-dramatised and advised clients to trim emerging market holdings from 9pc to 6pc of their portfolio until the dust settles.
“The returns were not as attractive as expected, the economic growth rates were not as sustainable as imagined, and the countries were not as stable as believed,” it said.
Berkeley professor Barry Eichengreen said the coming turn in the Fed’s liquidity cycle remains a threat, with no guarantee that those with stronger fundamentals will be spared. “A revival of last summer’s emerging economy turmoil is a real concern,” he said.
Turkey has become the immediate flash point as the country’s political storm turns into a constitutional crisis. Recep Tayyip Erdogan, Turkey’s Islamist premier, fired half his cabinet on Thursday to tighten his grip….
*** AMBROSE EVANS-PRITCHARD / LINK
The unintended consequences of Abenomics
As discussed earlier, Japan continues to struggle in its endeavor to generate demand-driven inflation. To a large extent, price increases have been the result of costlier imports due to a weaker yen, particularly items related to food and energy. Outside of those sectors, prices remain soft.
The danger of Japan’s current policy (Abenomics) is that the outcome could turn out to be the exact opposite of what was originally intended. With wages stagnant, these import-driven price increases are hitting the Japanese consumer quite hard. As a result, spending on domestically produced goods and services could end up falling, constraining domestic prices instead of increasing them.
Scotiabank: Key here is that the Japanese CPI inflation figures continue to showcase evidence of a relative price shock driven by imported food and energy price spikes significantly related to yen depreciation. Most CPI components not related to food and energy either continue to fall or remain soft as shown in the accompanying chart. The big gainers are prices for fresh food, utilities due to soaring electricity prices in the wake of the T?hoku disaster coupled with rising imported energy costs, and the energy impact on rising transportation prices. CPI ex-food-and-energy remains largely flat. We maintain the year-long view that Abenomics would impose a relative price shock that would force wage- and credit-constrained consumers to spend more upon what they have to (food and energy) by restraining spending elsewhere in the economy in disinflationary fashion on the second- and third-round effects.
That’s a very different inflation dynamic than would be the effects of a generalized increase in economy-wide prices in that it counsels future effects that will be bearish for the outlook for Japanese consumers. At the same time, the other main supposed benefit of Abenomics is an improvement in the trade account by stimulating export growth through yen depreciation, yet this is only evident via a price effect as export volumes remain weak.
One sad consequence of Abenomics is the impact on Japan’s elderly, whose ranks are swelling rapidly (see post). Isolation combined with rising prices on food and electricity makes survival for many older Japanese citizens a struggle. According to the National Police Agency survey, shoplifting incidents accounted for close to 10 percent of all crimes. And the number of shoplifting offenses is only growing among people 65 and older — with 68 percent of those cases representing food items. The latest 18.6 trillion yen stimulus package from the government is supposed to (among other things) provide additional help for the elderly, but it remains unclear how sustainable such efforts will ultimately be.
*** SOBER LOOK / LINK
Still lying after all these years
FOR years the IMF turned a blind eye as Argentina doctored its inflation index and plumped up its numbers for economic growth. Then last February the fund steeled itself and censured the country, warning it to improve its statistics by September or face potential suspension or expulsion.
This threat was unprecedented in the fund’s history. Yet it seems it was a largely empty one. On December 9th the IMF board met to review Argentina’s progress on a new inflation index. It declared that, although the country had not adopted the measures the fund wanted, it “recognised” the government’s “ongoing work” and deferred further action until March.
Certainly, those who care about the integrity of statistics cheered the recent resignation of Guillermo Moreno, the secretary for interior commerce. Mr Moreno was the man who intervened at INDEC, the statistics institute, in 2007, after which it began to fudge inflation data. Many officials nowadays take less care to pretend that inflation is around 10% rather than the true figure of around double that.
Some economists believe the new inflation index will be an improvement. Others doubt that the government has suddenly embraced numerical honesty. INDEC is likely to cherry pick items for which the government has ordered price freezes and leave out those whose prices rise, thinks Juan Luis Bour of FIEL, a think-tank in Buenos Aires.
Covering up the true rate of inflation has
