Good afternoon. Outstanding event of last week were riots in England which arose after the police shot and killed a black gunman — the blacks were joined by other achievements of multiculturalism, and then they all gladly indulged in looting and plundering. By the end of the week the situation calmed down — but PM Cameron had to stop his vacation; yet it wasn’t all right — even the waitress in an Italian cafe has responded to the request of a coffee in the spirit of Soviet shop-keepers: «There are many of you, and I am alone — you need it, you take it» — in retaliation for spoiled vacations Cameron deprived parliament of them too, convening an urgent meeting. And even the adversaries mock: Foreign Ministry of Libya urged Cameron to resign due to a loss of legitimacy via brutal suppression of mass protests of citizens (it was under this pretext that the British are now fighting in Libya and demanding Gaddafi’s resignation), while Iran has offered local experts on human rights. We note the Japanese idea of an alternate capital — in the event of a serious natural disaster all management falls so you have to have a spare center: we wonder, shouldn’t you also have spare officials for all vital services in such case?
Illustration: AP Photo/PA, Lewis Whyld
We buy old bikes!
Monetary markets. On August 6, S&P has downgraded sovereign rating of the United States by 1 point — for the first time in the history of this country; negative outlook has been maintained, and further deterioration promised — it is stated that the cost cuts are not enough to take the debt process into control. The decision has immediately created a series of scandals: the Democrats accused the Republicans in that their obstinacy prolonged lifting of the debt ceiling and triggered the agency — the Republicans noted the irresponsible fiscal policy of the administration. The White House said that the S&P made ??a $2 trillion mistake in their calculations — the agency countered that they weren’t interested in the grandiose plans for the next 10 years , but were more concerned about the prospect of next 3-5 years, although it is not clear why in this case the long-term rating was reduced while the short-term stayed at the top level. Even the investors quarrelled: Bill Gross praised S&P, and Warren Buffett criticized — the latter’s punishment was swift: the same agency lowered outlooks for his Berkshire Hathaway company — and also cut the ratings of public mortgage agencies Fannie Mae and Freddie Mac. Another agency, Moody's, confirmed the highest rating of the USA, although it retained a negative outlook on it; Fitch has chosen a middle path — it would re-evaluate the rating by the end of August. Of course, the markets panicked — as a consequence, the demand for US treasuries had only grown, while yields fell: President Obama was foolish enough to comment this saying that the market allegedly continues to see US as a bearer of the highest ranking level — for that he was subjected to a deserved ridicule. Opposition demanded the resignation of Treasury Secretary Timothy Geithner — but he, who was going to leave earlier, has now balked and reacted in the spirit «you won’t get it».
Anticipating the worst, the monetary authorities of G7 waged an extraordinary teleconference — and decided to «take all necessary measures to maintain financial stability and economic growth», including injecting liquidity to the markets and currency interventions. Politicians around the world mobilized too: Europeans all at once confessed their love for the United States (especially zealous was the French Finance Minister Baroin); Kudrin’s deputy Storchak assured of the constancy of the Russian policy to invest in US treasuries (but in fact, since last October, our portfolio of US bonds already lost a third); the Japanese and Koreans expressed support for America — and only the Chinese have responded to all in the spirit «we have warned you!» However, these are only words, and deeds are done on the market — US Treasury placed bonds for $72 billion: the demand was huge, dramatically lowering yields, so that the interest rate on 10-year securities showed a record low for the primary market (2.14% per annum, exactly one and a half times lower than on the previous placement) — and the volume of bids has overriden the proposal by more than three times for 2- and 10-year securities; 30-years ones, in contrast, caused little enthusiasm. On Tuesday a meeting of the Fed took place, replacing in its memorandum a vague «long period» of keeping low rates by a clear period «until at least mid-2013» — causing a surge of opposition unrest in the Fed: three board member (Fisher, Plosser and Kocherlakota) voted against the decision — this happened for the first time since November 1992; to mitigate negative effect of the split, the dissidents have publicly expressed their respect to colleagues in the Fed. Central banks of Norway and South Korea left rates on the spot — and even if raising is probable in the future, while markets are in panic it is quite scary to tighten the policy.
Panic soon spread to Europe; the ECB had to intervene — it began buying up government bonds of Spain and Italy, in order to bring down sales, and succeeded: yields of these securities fell. And now interest rates on Italian bonds are higher than on the Spanish ones: the market is concerned about the debt of Roman government more than about Madrid’s (as a fraction of GDP, the Italian debt is twice bigger than Spanish, in addition, in July the Italian banks took twice as much from the ECB as a month earlier). Berlusconi said he would not retire until 2013 — but in order to placate the markets, his Cabinet would slash treasury spending and balance it not in 3 years, as planned, but in 2. Even Greece took advantage of the brief window of complacency and placed the half-year bonds for €800 million. The idea of buying bonds of Italy and Spain met the opposition in face of central banks of Germany, Holland and Luxembourg — the Germans want the weak countries (particularly Greece) out of the eurozone; FDP member of the ruling coalition Scheffler said about Trichet's office that «the ECB will soon begin to buy old bikes for the newly printed money». Market fears spread to France — Sarkozy had to interrupt his vacation to hold an emergency meeting of the Cabinet: it was decided to increase compression of costs — rejoiced agencies affirmed the country's highest rating, and Sarkozy went back on vacation. But in general things are bad: even the German credit default swaps are more expansive than the British ones — and the interest on government securities is higher than the Swedish (for the first time in half a century); the former ECB chief economist Otmar Issing said that the processes in the eurozone went out of control. On Tuesday, Sarkozy and Merkel will discuss in Paris how to strengthen the eurozone. Inflation Report of the Bank of England is gloomy: forecasts for GDP decreased, the prospects are unclear.
Currency markets have experienced tremendous fluctuations in very short terms. Since late July for a couple weeks odd Australian dollar fell against the US by 11%, and the Swiss franc — grew by 12%; fell the New Zealand and the Canadian dollars while other currencies fluctuated nervously in wide ranges. The Swiss government held one emergency meeting after another; the central bank did the same — but only to declare that no decision has been made. After the Fed meeting on Tuesday, dollar-franc collapsed to 0.7060 — and the Swiss authorities had to intervene: emission is extended, swap operations restored, and the deputy head of Swiss National Bank Jordan made ??it clear that he does not rule out a temporary linkage of the franc to the euro (it came to parity) — and this is in fact would mean neither more nor less than a first step towards abolition of the FOREX as a free market, i.e. return to Bretton-Woods. Finally, intervention was made — not exactly a straight one (through the forwards market), but still — eventually franc bounced from the bottom against the dollar and the euro by 10%. On Monday, the United States will pay the coupons and redeem bonds for $72 billion — if it, as usual, will cause a decrease of dollar-yen an intervention would be possible here as well. Meanwhile, Advisor to the People's Bank of China Xia Bin promises buck a further decline — while the former head of PBC research department Jing Xuecheng recommends to diversify reserves, reducing the share of dollar in favour of euro and emerging markets; in the meanwhile, Chinese authorities intensified the revaluation of yuan — its rate against the buck showed a new maximum below 6.40.
Stock markets. Stock markets crumbled on Monday with the biggest rate since December 1, 2008; then there were wild swings — especially for banks. Bank of America collapsed on Monday by 20%, flew up on Tuesday by 12%, on Wednesday fell by 11%, and shot up on Thursday by 7%; dynamics of Citigroup is similar (-16%, +12%, −10%, +6% ); also flew J.P.Morgan Chase, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and Wells Fargo. Overall the US market recouped the entire 10-month’s growth in just 2.5 weeks — and dropped below the levels of early autumn 2010, when Bernanke announced the upcoming QE: months-long efforts of the Fed destroyed in a few days; and the trading volume is huge, doubling the average values — it's in August! On the Dow graph we can see the index piercing the lower boundary of the upwards trend at around 11,400, plotted on the closing prices for months (and the Fibonacci retracement level of 23.6% for the total growth from the crisis bottoms of 2009), now under a threat is a wider channel, built on the price extremes, and the 38.2% correction level — around 10,400; and if this line falls, the Dow could quickly come to the last bastion (lows of summer correction of the previous year and 50% retracement level) in the area 9500/9700 — below lies the possibility of an enchanting collapse due to the abundance of margin calls from hapless investors who bought near the recent tops.
Some cause for optimism is the number of insider buying — now they are maximum since 2009; but whether it could reverse the market is unclear. Dire consequences — Korean broker jumped out of window in his office out of shame for the losses of his clients. Banks feel bad not only in the USA — French have problems too (especially Societe Generale and BNP Paribas): their shares toppled almost vertically; the Italian authorities «because of excessive volatility» stoped trading in shares for Intesa Sanpaolo, Unicredit and Mediobanca banks; eurozone authorities are tired of it — and they put a ban on short selling of shares in Belgium, France, Spain and Italy. Bank of America holds active meetings with representatives of the sovereign funds of Kuwait and Qatar in an attempt (so far vain) to sell its stake in China Construction Bank worth about $17 billion — in case of a failure, they will have to conduct an additional issue of shares for the current capital does not suffice. In general, banks are cutting staff aggressively: 50 largest creditors of the world will fire 101 thousand people this year — and the latest plans will add to them another 60 thousand at a minimum (this is the worst dynamics since 2008). Of corporate reports we can note the positive of Cisco Systems and a moderate negative of Walt Disney — however, now, the things of bygone days (and all the data is for the second quarter) interest nobody.
Commodity markets. Oil continued its last week fall: Brent fell to $98, and WTI — to $75 per barrel; then, however, correction followed; OPEC had cut its assessment of demand for oil this year — and is ready to repeat this act again. Gold soared to $1815 per ounce — and has even managed to surpass platinum for the first time in many years: but then the CME exchange raised collaterals for guarantees on gold futures by 22% — after which there happened a moderate pullback. Industrial metals ranged around the lows of the first week of August — but fell no longer. Agricultural market, however, does not want to fall: the meat, however, calmed down — but grain, beans, forage, vegetable oil, sugar and meat have stabilized and even grew; milk and rice even showed new peaks of growth for recent years — and only fruits fell sharply, and cotton looks quite weak.
The Diamond Arm
Asia and Oceania. OECD’s leading indicators in June went to minus by 0.3% against May — the worst decline is in Brazil (by 1.1%) and India (by 0.9%); dropped China, Britain, Russia, Canada, Germany, France, Italy, Japan and the USA. Business activity in the New Zealand fell down a bit, but remained in the growth zone; Australian business confidence grew up. Mortgage in Australia is stagnant, housing prices in New Zealand fell, and sales shrank by 5.8%. In August, consumer confidence grew in New Zealand, and fell in Australia; vacancies on the Green continent are less, and layoffs are more — employment fell unexpectedly in June, unemployment jumped by 0.2%. In Japan, engineering orders jumped in June by 7.7% m/m and 17.9% y/y — external demand falls, but recovery after the earthquake covers the loss for a while. Activity in the services sector grew in June — as the index of economic observers in July; but the prospects assessment has gone down; bank credit contracts. Prices for corporate goods grew in July by 2.9% y/y (maximum since October 2009). In China, capital investments slowed down a bit in January-July, but investment in real estate has accelerated slightly; industrial production rose in July by 0.9% m/m and 14.0% y/y — after +1.5% and +15.1% in June there is an obvious weakening. But the trade surplus amounted to 2.5-year peak of $31.5 billion; producer prices increased by 7.5% y/y (in June there was +7.1%), and the consumer — by 6.5% (+6.4%); officials, however, expects reassurance here already in the coming months. Annual growth of monetary aggregates has slowed down (especially of M1 and M2), as the volume of new loans of Chinese banks. Retail grew by 1.3% against June and by 17.2% against July of the last year — impressive, but weaker than in the previous month (+1.4% and +17.7%).
Europe. Italian GDP grew in the second quarter by 0.3% against January-March and by 0.8% versus April-June of 2010; French GDP has remained at the level of the first quarter, and if not for external demand it would have fallen — private consumption fell by 0.7%. NIESR estimated the British GDP in May-July as +0.6%. The Bank of France notes worsening of business climate in all sectors of the economy — and it shows up: in June, industrial production has fallen by 1.6% m/m, manufacturing sector — by 1.9%; in the second quarter as a whole the decrease against the first quarter was 0.5% and 0.4%. Eurozone industrial production fell by 0.7% against expectations of zero change. In Britain, production stagnated (manufacturing −0.4%), and marked a quarterly decline by 1.6% — an anti-record since the spring of 1991. Investor confidence in the eurozone in August from Sentix collapsed abruptly, reaching a bottom since September 2009 — while expectations component fell to a minimum since January 2009, i.e. the peak of the crisis. Current account deficit declined in France, and in Italy trade deficit did the same; in Germany the surplus of foreign trade decreased; UK has this value at its record decline due to decline both in exports and imports. The English have many challenges — fight with a hole in the Treasury led to the situation when there are not enough police officers to quell the unrests: the authorities think about changing priorities in the budget sequestration. In July, the German wholesale prices dipped by 0.6% m/m (as in June), annual increase (8.2%) was the minimum for 8 months; consumer prices jumped by 0.5% versus June, accelerating to +2.6% y/y (a month earlier it was +2.4%). In other eurozone countries it is different: CPI of France fell by 0.5% m/m, in Spain — by 1.2%, and in Italy — by 1.7%.
But now the price indices are a relative concept: all the «innovations», which distorted the US CPI, are now included in the methodology of consumer prices calculation for other countries — and sometimes even the traces of such acts are clearly visible. For example, in Britain, the Retail Prices Index (RPI) is used for a long time — currently it is also used, despite the official transition to CPI: from 2000 to 2010, the CPI rose by 22% and the RPI — by 31%; this is despite the fact that the difference is only in the baskets — the CPI does not take into account local taxes, mortgage payments, realty insurance, commissions of agents, notaries, etc. But the machinations with the calculation itself (geometric averaging, substitution of some goods for others in baskets, calculation of prices for each commodity, etc.) occur in the RPI too — as is now customary everywhere in the world. The correction for these forgeries gives a very entertaining results — to study, for example, incomes of Britons, especially since their statistics is available for a very long time: if we calculate their real dynamics using CPI, then the subsidence from 2006 to date amounts only to 2%; if we apply the RPI (also official) — it is 6%; and if we clear inflation of the machinations of recent decades, then it appears that the real incomes of the British were not at the peak in 2006, but in 2001 — and since then they have fallen by 24% . This is not just a statistical fact: even during the Napoleonic Wars and the Continental blockade in 1804-14 real incomes sank only by 20% — and the last time they fell steeper than today is the years 1761-74 (by 27%). It turns out that the consequences of neoliberalism and globalism are quite comparable to the Cromwell’s civil war, or even the plague pandemic of the mid-14th century — and to hide it all, we only had to give inflation a «little touch ».
Source: UK National Statistics Office, the independent evaluation
America. Canadian statistics is mixed: employment is weak, unemployment fell due to the same machinations with a workforce that is practiced in the United States; prices and sales of real estate grew; trade deficit swelled, while business activity has gone into a zone of recession. In the USA, labour productivity declined in the first two quarters, while labour costs grew; and when it happens for several consecutive quarters, one should expect massive layoffs — in fact, they already are. Optimism in small business blows down for five consecutive months. The trade deficit peaked in June since October 2008: exports dipped by 2.3% m/m, and if fuel and planes were removed from it — by 3.2%, which has not happened since January 2009; the June international trade will take away 0.1% from the GDP in the second quarter. The index of consumer comfort from Bloomberg fell to the bottom of spring, and the Michigan sentiment index broke through the crisis minimum. In July, indicator of employment trends fell; primary applications for unemployment benefits kept around 400 thousand, meaning compression of the labour market. But in June, consumer credit jumped and wholesale sales increased (by 0.6% as did the inventories). Retail swelled by 0.5% m/m — mainly because of gasoline (+1.6%); if you take into account the forecast of inflation and population growth, the monthly growth will null, and the annual — fall by 1.0%. The July federal budget deficit is less than last year’s due to decline of spending by 10% — the latter is a temporary phenomenon: a year ago, August began with a day off, so a part of payments for it was made in the end of July — this time that did not happen. The US Federal Postal Service is on the verge of bankruptcy — it has losses for the fifth year in a row, and if the authorities do not throw some money, the mail threatens to default; for the sake of economy, closure of one in eight offices is probable.
Source: University of Michigan
Russia. According to preliminary estimates from Rosstat, in the second quarter GDP grew by 3.4% over the same period last year — our estimate gives approximately +2.5%. As of August 1, the monetary base was only 0.4% higher than last year — tightening of monetary policy in such circumstances is a sign of idiocy. Car sales rose in July by 27% y/y — minimum increase for many months: stimulation ceases. ICCI institute examined the government's budget plans for the years 2012-14 — in real terms (taking into account inflation targets), defence spending will increase (by 1.5 times) and security (by 1.4); spending will be cut for healthcare (by 1.2), culture (by 1.3), education (by 1.4), transfers to the regions (by 1.5, including low cost loans — by 6 times), physical culture (2.1) and utilities (4.5) — the last figure is most impressive; and the overall motion vector is clear. Dramatically (by 1.6 times) will increase spending on debt servicing — Ministry of Finance wants to take 7.4 trillion roubles in 3 years, which would triple the public debt: no special programs are scheduled (and, in general, state investments are being cut) — they are just expecting a hefty deficit, despite the authorities’ optimistic views on commodity prices. Raising money for a monument to Stolypin brought unexpected benefits: Ministry of Economic Development wants to repeat the century-old experience of the peasants resettlement to Siberia — well, well. Putin visited the excavation site at the ancient Phanagoria, dived under water — and lo! found a couple amphorae on a 2 meters depth, vividly recalling the fishing scene from «The Diamond Arm». He wanted to know whether there is wine in ancient vessels — alas; but, as you know, «at others’ expense, even non-drinkers and ulcers drink». In general, whether Premier climbs, dives or flies — his message is always the same, and it brings us back to the same film, «As our dear Chef says, strike while you’re on the spot!»
The next review will be published on September 10-12 due to the author’s vacation
Have a nice month!