Debtor's Prison

Greetings fellow inmates,

Last time, in A Macroeconomic Snapshot, we presented you with a brief visual snapshot of the four “reserve currency” economies – US, Euro, UK and Japan – in four key variables: GDP, Industrial Production, Unemployment and CPI. Originally, we focused our attention on those countries because they were the ones which featured most prominently in our broader discussions. This post is meant to be an update of how these variables have behaved since we last saw them. We spend the larger portion of our discussions on monetary or credit-related topics, but it is always useful on several fronts to take a step back and look at what is happening on an actual macroeconomic level.

Moreover, there has been plenty of talk of “green shoots” in the world economy. To be frank, we are not prone to keep our focus on miniscule time-scales of economic indicators nor trying to sift through the myriad of complex interlinked variables that might or might not lead each other, at times simultaneously. For that reason, we are not yet in a position to verify nor discount any notions of green shoots. We will say however, that we think this downturn has plenty more to go (hence making the probability of real green shoots now seem less likely) and that the media seems to have been desperately hanging on to any piece of news they could find. This is of course, our opinion but we do find it laughable to hear commentators in mass media wanting to hype the recovery by talking about the “improved” second derivative. What a joke. Regardless, as we said, we cannot yet disprove any notions of green shoots. As always, rather than try to forecast, we would rather look at the data itself.

GDP growth has worsened for three of the four countries. In the US, there was only a mild improvement that is, in reality, just as bad. It is interesting to note that the US has “technically” been in a recession since Dec 2007 according to the NBER yet it had two positive quarters. Keep that in mind in case Q2 09 or Q3 09 come up with a positive GDP print; it won’t mean the end of the recession. In Japan, GDP growth continues to get decimated; not only was the Q4 08 revised downward from -12% to -14%, but it actually worsened in Q1 09 to -15%. Really astounding numbers. Both the Euro Area and the UK saw very sharp acceleration of GDP shrinkage. Euro area declined by 9.6% while the UK contracted by close to 8%.

Every single country’s unemployment rate continued to worsen. In the US, unemployment hit a new multi-decade high at 8.9 in April. In March, the European unemployment rate climbed to 8.9%, from 8.5% in February. The UK’s unemployment went from 6.5% in Dec to 6.9% in February. Japan’s continued its skyrocketing upwards, in spite of its more structured and regulated labor markets, all the way to 4.8% in March, from 4.4% in February. One thing is for certain, there definitely are no green shoots in the employment sector.

Three out of the four countries saw a decline in their industrial production and the fourth one, Japan, saw an insignificant improvement. What is most notable of this indicator is the incredibly synchronicity with which they have plummeted. One can certainly say that these four countries productive machines were interlinked by some mechanism. Of course, it is easy to see now, that it is the credit market that holds them together; hence it makes sense that the GCC has prompted such a concerted and dramatic decline. This, perhaps more than anything else, shows very clearly and powerfully how the downturn in different credit markets affects the broader economies. Additionally, industrial production also gives an indication of how large the economy might be in the future, as many cut-back in production have been to reduce overall capacity, thus reducing the potential future capacity.

Finally, we see that all four countries saw a further decline in inflation. For those of you that might ask yourselves how this fits in with our prognostication of superinflation, we’ll remind you of a few things. For starters, we believe that superinflation will come about in the next 1-2 years through a strong decline in the value of the USD. We do not believe the driving cause will be an expansion of the broad monetary aggregates. As long as banks continue refusing to lend, the broad monetary aggregates will remain stagnant. Uncle Benny is not in control of M2, not even indirectly with his FedBS; the banks are fully in charge. For that reason, deflation will continue as long as banks refuse to lend and the dollar holds up well versus other currencies and commodities.

Well, in all frankness, after looking at the latest numbers we are not believers in any notion of “green shoots”, not by a long shot. The actual numbers still paint a worsening picture. Not only have most indicators worsened, but many have even accelerated (ie: second derivative) their decline. Even those indicators that improved, did so only insignificantly and remain at severely depressed levels . Of course, there are many other pieces of data one can look at, some of them believed to be “leading indicators”, but we chose to look only at the latest-available data of these indicators because we believe they represent the broadest picture of the economy. At least in this segment of the economic universe, as reporters, we must say there are no green shoots.

May your capital be safe and your investments prosperous!

MAAA