Искандер Луцко

Good afternoon. Arab Spring has already swept up to Kuwait, where the opposition (only in the name of fighting corruption) broke into the parliament building. Change of the guard in Greece: Lucas Papademos has received unanimous approval in parliament — after which the opposition refused any form of cooperation with the government in promoting «plundering» austerity measures. Similar situation in Italy — where after the departure of Berlusconi, the new Prime Minister Mario Monti (who previously worked at the European Commission) could not find support of the Northern League. The prospects are sad — another protégé of Goldman Sachs (Monty had time to work there too) does not promise anything good; considering that the gangster institution’s school was also covered by the current ECB Head Mario Draghi, it gets very sad; by the way, Papademos also come from the ECB — in general everything is clear. Monty appointed himself Finance Minister — it is logical: Goldman’s people privatized th US Treasury — why should not Italy follow the bad example? We also note cycling treadmill of NATO Secretary General Rasmussen, ending in a broken arm — curses of Kosovo Serbs must have had an effect.

Koshchey’s needle

Monetary markets. Bank of Japan left the rate in place, as the volume of bonds buying program; Reserve Bank of Australia has threatened to cut rates at the next meeting — although stipulates that it is not a foregone conclusion. Quarterly inflation report of the Bank of England was pretty dull — economic growth is expected to be reset and inflation reducing: in such circumstances one can continue expanding monetary stimulus measures. The US Fed is still torn apart: Evans and Dudley want the emission, while Fisher and Bullard are against; the idea of buying up mortgage securities has caused irritation of Bullard and Lacker; all hawks are very unhappy that the Fed is basically financing the budget — with these embezzlers we will end badly, they say; they are also against binding the monetary policy to unemployment — reasonably asking what should they do if inflation and unemployment are high at the same time. Meanwhile, the second part of the ballet has appeared in time: by the nearest Wednesday, Congress should develop a detailed plan to reduce the budget deficit — nothing like that is visible, while it was a condition to solving debt crisis: Treasury only has $100 billion odd to borrow — after which the national debt will again bump into the ceiling; Treasury Secretary Geithner wanted to take another half a trillion dollars in January-March 2012 — no way. Agencies are threatening to cut the rating if the decision will not be found quickly — and they will really do that.

Change of the Italian government has not reduced the burden of debt — surprise! Bond yields climbed up the hill, dragging the papers of Spain and France behind. Auctions went badly: Italians placed the 5-year bonds at only 6.3% per annum; Spaniards — 10-year at 7.0%; the French are not so bad — but even here the interest has increased from by 1.5 times against previous offerings; the Germans have cancelled several auctions — they don’t like the weak demand, while investors are not willing to accept lower yields; the only one who stayed even is Greece, who proudly placed the 3-month papers at 4.6% per annum. Unicredit asks ECB to give money to the Italian banks — but in any case, the Euro-lenders will have to increase their own capital dramatically in order to meet the increased requirements: according to Morgan Stanley, estimated shortage is a mega $2 trillion that the banks will withdraw from emerging markets within a year — it threatens catastrophic consequences, for if in 2008 western banks have brought home about 20% of investments into emerging economies (which caused a tremendous collapse throughout the world), now this value may be even more. The French want to engage the ECB’s money into the aid and at the same time make a bank out of the stabilization fund — the Ugly Witch (Germany) is categorically against; instead the Germans are willing to allow states «voluntary» leaving the eurozone — and only the remaining states will integrate till final victory.

The European crisis endangers America: the latter’s banks, according to Fitch, have $50 billion cumulative risks in the troubled eurozone countries. Not much? — but it's not all. That is a pure risk — that is, investments not covered by insurance (such as credit default swaps); but for example Greece is going to forgive herself half of her debt — and have the CDSs helped the lenders? In no way — write-offs are considered voluntary, so an insurance accident will have never occurred; taking this into account, risk of the US banks grows up to $72 billion. But the Wall Street itself willingly subscribed CDSs to the third-party bond holders — J.P.Morgan Chase and Goldman Sachs have distinguished especially in that: we already know that face value of insurance issued by them only on sovereign debt exceeds $5 trillion — what part of this covers the eurozone periphery, the banks do not disclose; as we see, the price is much higher than officially dubbed 50 billion. Economists of UBS held a self-made stress test of the world for damage caused by the EU recession — as expected, Britain, Switzerland, Turkey and Russia are all in the forefront of risk; potential problems of China are high too (one sixth of exports goes to Europe, 5% of GDP) — in contrast to Japan and the USA (1.3% and 1.2% of GDP respectively), although the big guys there are tied heavily to the Old World. But the main thing is different — Germany has the largest share of European countries in her exports: 60%! — and this promises a big trouble.


Illustration: Artem Popov

For Germany, as for no one else, the failure of exports is dangerous — that is the result of the policy of recent years. On the chart of the share of foreign trade in the economy it is clear that it was modest until the late 1970s’, when the high cost of raw materials kept the balance in deficit. The neo-liberal era, the unification of Germany and the surge of globalization following the collapse of the Eastern bloc slightly increased the role of trade in 1980s’-90s’ — but nothing more. The jump from the introduction of euro in 1999 is clearly stronger — but the real madness came during a crisis period of 2000-03 and beyond: Germany has made ​​a conscious bid on exports, so that in 2007 the surplus of the trade balance reached 8% of GDP, while the size of exports went up to half of the economy. The dip of 2008-09 was short-lived — now the peak of 2008 has been passed: more than 50% of GDP goes on exports — of which three-fifths go in other European countries. The Germans had almost monopolized production in a number of industrial sectors of the continent — that was the price for their consent to join the eurozone. But this situation hides the «Koshchey’s needle» of Germany — the consumers of her goods are overstrained: their demand was previously stimulated by budget and loans — but now this resource has been exhausted. So, when the European states will be forced to balance budgets, and their economies, deprived of props, will fall into recession, the main victim will be the Germany: we have already mentioned how dearly has she reached the «competitiveness» (domestic demand slumps for 20 years due to continuous reduction of costs) — so, the coming decline promises their export model a total collapse.


Source: OECD

Currency markets. Euro has fallen again on the crisis of the periphery, while the position of pound was undermined by the Bank of England's propensity to emission; yen is trying to grow — despite protests of the Japanese authorities; fresh rumours about the rise of the barrier in EURCHF cross-rate dipped the franc — but in general, the FOREX is calm.

Stock markets fluctuated up and down. Reports season draws to a close — and this time Home Depot network has pleased: profits and revenue have grown, forecast for the year has been raised. But otherwise, only frustration: the world’s largest retailer, Wal-Mart Stores upset with reduced profits and lacklustre outlook for the future; Dell did not shine too — although was not marked with anything particularly scary. The latter is not true for an Italian Unicredit bank: instead of the expected profit of €7.5 billion, it received quarterly loss of 10.6 billion — and is now going to cut 6,200 people, and to issue additional shares to raise 7.5 billion into capital. Moody's has threatened to cut the rating of Credit Suisse — hard times await European banks.

Commodity markets. The rapid growth of US WTI crude oil has continued — it was particularly bright against the background of a rather melancholic Brent: the price difference, recently reaching here $27 per barrel, now narrowed to 8. Natural gas accelerated decline in the USA and returned to the prices of2002. Industrial and (to a lesser extent) precious metals distinctly feel the breath of the recession — and fall down. Also rushed south cereals and pulses — especially rice and oats; vegetable oil stays for now — while forage is already cheapening. The opposite pattern is in animal products: meat (beef) and milk showed new highs; fruits also clearly glance to the north. In general, however, commodity markets look a little weak.


Source: Barchart.com


Asia and Oceania. The OECD leading indicators fell in September by 0.4% m/m and 1.3% y/y; G7declined by 0.5% and the eurozone — by 0.8%; worsening is everywhere (including BRIC countries). Bank of Japan cut the assessment of the economy; although GDP grew the third quarter by 1.5% — but only because of the recovery from the earthquake; compared to the previous year, GDP fell slightly — for the third consecutive quarter; industrial production contracted in September by 3.3% m/m and y/y; wages are again in the red — as well as sales. Business confidence deteriorates in China — component of new orders fell into the zone of recession; housing is getting cheaper. Leading indicators of Australia are falling, wages grow slower than inflation; service sector of the New Zealand went back to stagnation, while retail has grown only due to the influx of tourists at the Rugby World Cup. Inflation in the country eased in July-September due to growth of local currency which offset the growth of import prices; in India, the rupee’s growth is constrained — and wholesale prices rose by almost 10% y/y. Crisis phenomena are everywhere: in Singapore exports fell by 5.9% m/m and 16.2% y/y (electronics — by 31.2% y/y), while retail sales grew by only 0.3% after falling by 7.2% a month earlier; unemployment swells in Hong Kong and Turkey — which spoils the consumers’ mood. In short, the economy is crippling, and the prices, even retreating, remain too high — if the combination of inflation and stagnation is commonly referred to as stagflation, the coming of recession marks something new that we would venture to baptize «incession». Hussars, be silent!

Europe. Recovery after the Japanese earthquake affected the Europe too — in the third quarter GDP rebounded slightly in Germany and France, in Spain there is a stagnation and recession in Portugal for already 4 consecutive quarters. Italy simply didn’t publish her figures; saying that there was an urgent need for a revision of historical data — the cynical analysts, however, suspect that it was not the errors but that the Romans did not want to disappoint the markets in the wake of a powerful series of treasuries auctions; otherwise, the statistics would have just been published in a few days time — now the provisional number were cancelled altogether, only the final assessment will be released, and as late as December, 21. Eurozone as a whole showed growth of 0.2% (as in the previous quarter); of the other countries the surprise was stagnation in the Czech Republic and the delight — a strong growth in Hungary — the latter, we recall, has recently banished the foreign bankers: as you can see, this is very helpful! Eurozone industrial output fell in September by 2.0%, and construction — by 1.3%, factory orders slowed in Spain, and collapsed by 8.3% in Italy; the ZEW index of economic sentiment fell in the eurozone, Switzerland and Germany — the latter reached a minimum since the crisis October 2008. In September trade balance improved across the eurozone (excluding France) — since exports fell slower than imports.


Source: ZEW

Swiss prices of producers and importers are in the red (franc is still expensive); the German, by contrast, are growing — but not as fast as before; consumer prices swell across the continent, sometimes even with an acceleration — as in Italy, where they added 0.9 % m/m; in the eurozone an increase of 0.3% m/m and 3.0% y/y was recorded — but in reality inflation is at least twice as large. British housing gets cheaper, while consumer sentiment, according to Nationwide, has fallen down to a record low in October — expectations for the next six months suffered especially. In the Netherlands the level of unemployment increased unexpectedly seriously (by 0.3%); the French labour market is stagnant — but the wages grow clearly slower than the prices; in Britain, the fall in employment in the third quarter was the worst since the crisis peaks, and the unemployment rate even broke them and reached 15-year peak — while the wages of Britons still in work fall behind prices even stronger than at their counterparts in the eurozone. In Spain, sales and employment decline in the services sector; registration of new cars in the eurozone went into negative again, the French retail is barely alive — and only the British one had grown due to surge of sales over the Internet (their share has reached a record high of 9.5% of the total purchases). Holiday season can present some revival — but no more.

America. Federal Reserve Bank of San Francisco published a surprisingly realistic report from which it follows that the probability of recession in the United States in 2012 exceeds 50% — and although the blame lies with the eurozone, it is just an excuse, not a cause. Meanwhile, the data here is yet much more optimistic than the European or Asian: Canadian shipments in manufacturing grow briskly, US production swells due to the need to replenish depleted inventories. The index of the New York Fed came from minus to plus in November — but components are pessimistic: new orders and employment went from plus to minus — and the result has improved only due to a surge of optimism about the future. The same indicator of the Philadelphia Fed has reduced due to a dip in orders — but employment rose sharply, and the outcome still remained in positive territory. In September, the net inflow of foreign money into US securities totalled $68.6 billion — boom after lifting the debt ceiling went on: China built up her treasuries portfolio by another $11.3 billion, bringing it to $1.15 trillion; Japan — by $20.2 billion to $957 billion; Britain — by $24.4 billion to $422 billion; and Russia alone has continued to run away from US bonds (another -$2.5 billion down to $95 billion from the peak $176 billion a year ago).

In October, producer prices fell in the USA by 0.3%, cutting the annual increase to 5.9% (in fact 7.0-7.5%); excluding fuel and food, prices do not retreat — plus 2.8% y/y against the previous 2.5% (in fact at least 4.5%); but the easing of inflation is possible in the next six months. Consumer prices fell by 0.1% m/m and rose by 3.5% y/y (actually by 6.5-7.0%) — here also the indication without fuel and food stayed strong: +2.1% y/y (actually 5.0-5.5%) — the peak since October 2008. In November, US housing market index from the NAHB rose to the peak since May 2010 — but the value itself (only 20% of optimists) is not cheering. Mortgage Bankers Association reported a dip in loan applications (especially for refinancing) during the second week of November. Construction developments were less in October — despite the fact that the August figure was revised sharply downwards; but building permits have added in number — however, housing actually being built is still very small (single-family houses are at the record low). The mood of Americans from Bloomberg has become slightly more optimistic (but generally very gloomy), while the number of unemployment benefits recipients less — as we already mentioned, it is not the improvement in the labour market, but the expiration of benefits terms. Retail swelled by 0.5% m/m and 7.3% y/y — but when you consider real inflation and population growth, you get 0.3% and −0.4% respectively: feel the difference! Weekly sales data from Redbook and ICSC/Goldman Sachs show annual growth in turnover clearly weaker than even the official inflation rate.


Source: U.S. Census Bureau

Russia. According to Rosstat, GDP grew in the third quarter by 4.8% y/y (due to the effect of very low base a year ago) — we have 2.5%: the familiar difference; jokes of the Russian statistics were described in detail by the ex-head of the Simcher Institute of Statistics — by the way, its estimates of the GDP overstatement are absolutely consistent with ours. But Putin wants more — he looks forward to the economic growth of 6-7% y/y, which is absolutely impossible: or if the party says «must» — anything is possible? The Bank of Russia’s heroic struggle with inflation bears fruits: in October, the annual increase in producer prices was a miserable 17.5% — what a nuisance! The monthly increase of 1.7% spoils the picture — they should tighten monetary policy again: we have someone living left — that is not right! The federal budget in October was recorded at a plus of 5.3% of GDP, and in general for 10 months — 2.9%; the surplus has formed due to the fact that the incomes were received at 90% of the annual plan, while expenditures funded only by 71%: as always, the peak of spending is scheduled for December — when there will be a mighty deficit. The deputy head of the Bank of Russia Ulyukaev happily reported that the outflow has slowed down in October to $13 billion — the problem is that in September the same 13 billion flowed away: and one must be the Russian official to see the slowdown here! In January-October exports of capital has reached $64 billion — jeopardizing the new, recently doubled, central bank’s forecast for the year ($70 billion).

In October, industrial production grew by 0.8% m/m and 3.6% y/y — the latter figure is minimal since October 2009 when the annual dynamics was creeping out of the crisis minus; manufacturing sector swelled by 5.7% — of which over a third were in cars. But farming has skyrocketed by 51.8% — the cause is a sharp decline a year ago because of the heat. By contrast, logging dipped by 9.5% y/y — the worst dynamics in the last 2 years. Construction continues to grow (+8.2% y/y) — but the introduction of housing rose only by 6.9%: it is not enough, considering the above-mentioned low base of 2010. Freight turnover remained virtually unchanged against October last year (+0.9%) — railways rebounded (+4.8%), but the pipes have gone into negative (by 2.3%). Retail trade grew by 8.8% y/y — that is less than the record 9.9% in September, but also too much. The unemployment rate rose from 6.0% to 6.4% — this is a seasonal phenomenon. Real disposable incomes were 0.8% higher than a year ago, and real wages — 5.0% higher; of course, the reality is much worse — for inflation is underestimated by about 3%. Overall annual growth of GDP in October is estimated by us at 3.0-3.5% — the officials will show something in the region of plus 5-6%; and if the bosses would insist, one can get them 6-7% with no problem at all.

The exploits of the authorities are spreading and multiplying. Prime Minister visited the celebrations in Sberbank on the occasion of the 170th anniversary — likening the bank to old money-lender woman; Putin thought that the Gref’s establishment could find its Raskolnikov. Then, the future president visited Belgorod, where he worked in the genre «both tailor, and reaper, and piper»: had a judo workout with children, paid tribute to the budgetary accounting and dancing, talked about the tablets and the noblewoman Morozova, and has even threatened the local governor with a drill in the dental cabinet. Finally, Putin met with the retirees, where praised himself and scolded Nicholas II, Gorbachev, and France. Meanwhile, the ratings of EdRo continue to fall — that does not prevent the authorities to certify all of their victory; particularly gladdened the phrase from a fresh panegyric: «As the election day approaches, outcome of the elections become more predictable» — oh yeah! Nashi are not so sure — so they are going bringing their punks in an amount of 30 thousand heads to Moscow on the Election Day: they, you know, should be ready to repel the opposition, if she dares to challenge the outcome of the ballot. Putin encouraged the bandits — he said, «we’ll get together, get some fresh air» — and decided to give them money. We remember the ruling of CPSS Central Committee on the Cultural Revolution from August 8, 1966: «As brave pioneers stands a large group of hitherto unknown revolutionary young men, women and adolescents. They are pushy and smart... Through full disclosure... they took on a decisive attack... In this great revolutionary movement it is, of course, difficult for them to avoid any deficiencies. However, the main revolutionary direction is invariably the correct one»- well, that’s nearly half a century past and now EdRo needs its own Red Guards.

The new authorities of St. Petersburg are investigating the commercial exploits of the former — that face resourceful Matvienko’s son with problems. Authorities will arbitrarily change the size of pension payments — oldies overstayed in this world! The survey revealed that the judges contemptuously dismiss humanity as a right quality for themselves — it is valued by less than 5% of the knights of robes, with the judges of Putin’s conscript being particularly grim; the acquittal rate is now lower than in 1937 — these are the fruits of de-Stalinization. But prosecutors buy 232 cars — including 7 pieces of all-wheel drive BMW 750Li xDrive, 5 million roubles each: customers like acceleration to 100 km/h in 5 seconds — and what a prosecutor does not like the fast drive! Bailiffs have other concerns: they evicted a cat from the hostel in Syktyvkar — he turned out to be of a bad character. Bolshoi Theatre, after fouling «Ruslan and Lyudmila», took on «Prince Igor» — in the opinion of the director Lyubimov, «Borodin’s opera is loose, the music is mediocre»: in general, where are the battle scenes? — That is in the opera! But the advanced theater-goers are far in creative ideas from the Ministry of Health — «Madame Arbidol» fights smoking: the department gave birth to a super-stallion named Dolbak — he roamed the streets and harassed smokers with exhortations about healthy lifestyle; alas, they showed a sad obscurantism, threatening to commit unnatural acts with the aforesaid horse and the Minister Golikova herself. Detractors of modern art insidiously advise Onishchenko to check on the Ministry of Health for excessive addiction to drug parsley — and in vain: stallion Dolbak personifies best the current Russian bosses — we should offer EdRo make it their symbol instead of an innocent bear.


Illustration: Artem Popov

Have a nice week!

Искандер Луцко
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