Looking back since my last review in June the world has recovered from
the tsunami and earthquake damage in northern Japan (Japan is still in recovery/clean up mode), the civil revolt and dictator overthrow in Egypt has resulted in a power vacuum which will be
resolved by election later, the dictator of Libya, Muammar Gadhafi, has been defeated by his opposition according to news reports. Other uprisings are
beginning to build in several other oil producing countries in the
region, including Syria and Persian Gulf states. The threat of crude oil
shipments being interrupted is a growing concern for all countries importing
from this region. Despite these pressures, the price of Brent Oil has softened recently from more the $120 to now $108.62.
In
Europe, the socialist government of Portugal has collapsed and is now moving on with a new center-right government. The government of Greece has had to renegotiate the bailout terms with the ECB (Germany and France) as a condition of getting the last installment of their bailout package. The renegotiated plan now calls for Greece to liquidate much of its net worth (state owned assets like airports and transportation services) as well as agree to new austerity. Can it get any more dire in Greece? Misery likes company and Italy, the eighth largest economy in the world, is drawing attention to itself for having public debt at 120% of GDP. That's second, to Greece, in the euro zone. Spain is on the radar screen now as well.
China is still wrestling with
internal high food and shelter inflation threatening the
massive lower classes, potentially destabilizing the power of the ruling
party. Published reports describe interest rate increases are the tool to fight inflation in China, to slow lending for business and personal discretionary
consumption.
In the US, the Treasury market is finding
some strength on a risk-off move. The yield on the 90 day Bill is 0.00%, the 2 yr T-note is 0.19% and the 10 yr T-bond is 2.06%! The US$ is weak, trending between 73.50 and 76.00 during the past several months, and currently
near the 74 mark. 'Risk off' has been a reaction to the US Congress displaying their lack of ability, building the case daily until the beginning of August when they finally extended the US public debt limit. The public display of incompetency was so much greater than expected that some economic activity slowed as a result of the spectacle and resulting loss of confidence in the leadership ability of the US government.
Calculated Risk has a summary of the recent economic reports which illustrate that the economy is not growing, but is not collapsing into recession. New home building is slow and existing home inventory is still large. Industrial production is trending sideways or improving. Same trend for production capacity utilization.
The
Federal Reserve is pulling the strings to guide global perception about
the strength of the US$. The Fed has no choice but to continue it's
zero interest rate policy and money printing practice. They will attempt
to support the Treasury market when the primary dealers and global
participants back away more than they have now. As mentioned above, yields are at historic lows. Doug Noland has this caution in his blog this weekend. "Fiscal and monetary policies are rapidly losing credibility. Treasury
prices may be inflated, but don’t mistake this for confidence in our
system’s “core”." Financial markets around the world are expecting a return to quantitative easing (QE3) sometime soon. Bernanke is speaking at the annual Fed Conference at Jackson Hole where last year he hinted at QE2. The world will wait for his message on Aug. 26. Calculated Risk has a post on what he expects from this years Jackson Hole speech. There is a building awareness that the Fed is wrecking the currency. On top of the loss in confidence for the US government, the reaction to a new plan of quantitative easing does not guarantee support for financial markets. Doug Noland writes "The American people no longer buy the notion that piling on more debt
and “money printing” offers a reasonable solution. They are
appreciating that it’s instead the problem, and there will be less
tolerance for this “experiment” going forward."