The following is an excerpt from our 19 July Weekly Outlook #28/29
The overwhelming feeling right now, it seems, is one of complacency - everywhere. Recessionary forces at work globally, weak stock markets, Russia + China emerging stronger, resource races throughout the world, Middle East war, US quagmire in Iraq and Afghanistan, fiscal imbalances galore, gasoline prices in Europe are $7/gallon, global warming, ....ho hum, what me worry? Dear reader, these are BIG issues and everybody's on a daisy walk through the fields. Or so it seems. Investors seem impervious to the bad news yet the signals, like selling pressure, are increasing and the markets have now started moving lower. Recently gold and silver both took large hits even while oil remained high and war, and rumours of war, in the Middle East seem to be more entrenched despite weak press statements from the G8 and UN. As for recessionary concerns, we have a few items to briefly point out: historical 4 year cycles may be pointing to a stock market low in the Q4 timeframe; despite all the mail to the contrary, we continue to see the USD climbing higher or at least not giving up too much ground until EOY - fundamentals are not spectacular no matter who spins what, but the alternatives of a rising C$ or EUR might depress world economies even more. Also the idea of central banks now gingerly tipping the rates higher implies recessionary forces sooner rather than later. An interesting long-term graphic below is shown above whereby global liquidity has been steadily shrinking and the Asia foreign currency reserves look set to stabilize thus any more US deficits or growing imbalances may not necessarily be offset by greater US Treasury purchases from those asian central banks - that game for the US administration may be just about burned out. The reason may be that the Asian economies now feel more at ease to a somewhat stronger local currency as this eases petrol purchase imports (in USDs) and it eases the burden on local lending as interest rates remain lower than in an inflationary environment, i.e the environment of keeping their currency artificially low to aid exports abroad. As said, that game might now be slowing from the asian perspective.
Central Bank Rates: Forecast in grey
Likewise, the doubly whammy on the USD of Bank of Japan signalling higher rates off the long-standing ZIRP (zero int. rate policy) is a psychological shot across-the-bow that global liquidity is being put under pressure from the Japanese as well.
Today, Wednesday, Ben Bernanke at the US Fed gives his biannual Senate banking testimony on the state of the economy and possibly some insights into the rate outlook. Although Bernanke is keeping his options open on further rate rises by stating that future data will help in the decision making process, it may very well be the broad stock markets which are providing the real outlook. Currently the markets are looking fragile to wobbly and combining that with forthcoming midterm elections and not wanting the administration who put him in power to look bad (whoever said the Fed was apolitical?) we feel Bernanke will become more "greenspan-ish" in nature by keeping all options on the table while implying that Fed decisions are purely intra-US data driven.
In conclusion, Bernanke must now juggle all the balls in the air: US consumer, US asset prices, market expectations, higher energy prices, "trust" in the US Dollar towards USD creditors, administration politics and of course the Fed funds rate (FFR)...unfortunately everything seems to be "crumbling" around him. Consumers see a weak economy, asset prices falling, energy + geopolitics are a mess, USD creditors are diversifying, the US administration has never been one to reform or save and the little FFR to solve everything and make the world "good" again? Good luck Ben.