Wednesday, April 30, 2014

Gary Shilling: Deflation fears in Europe

The days of euro strength may be numbered, however, because of mushrooming fears of deflation in Europe. Average house prices in the euro area have dropped 5 percent since the second quarter of 2011. More important, inflation increased a mere 0.5 percent in March from a year earlier. Since January 2013, inflation has been below the ECB’s target of “just under 2.0 percent.” In the 28-country European Union, inflation was just 0.6 percent in March versus a year earlier.

Bankers and policy makers worldwide are deeply worried about trivial inflation in the euro area turning into chronic deflation. Christine Lagarde, the chairman of the International Monetary Fund, said in a January speech: “We see rising risks of deflation, which could prove disastrous for the recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively.”

This month, Olivier Blanchard, the IMF chief economist, said deflation “would make the adjustment both at the euro level, and even more so for the countries in the periphery, very difficult. We think that everything should be done to try to avoid it.”


Tuesday, April 29, 2014

Euro currency not a safe haven

The euro has been defying gravity for years. Europe's Teutonic North and Club Med South were joined under one monetary policy. But the 18-member euro area has no common fiscal policy and probably never will, given its vast cultural and economic differences. This hardly makes the euro a safe-haven currency.

Tuesday, April 22, 2014

Part 2: Sheep economies vs Goat

The Goats [Brazil, India, Indonesia, South Africa,Turkey, Argentina] are in deep trouble, but they are better off today than they were in the late 1990's, when many had fixed exchange rates and borrowed in dollars and other hard currencies. Back then they didn’t want to devalue because it would have increased the local currency cost of their foreign debts. But when Thailand ran out of foreign currency reserves in 1997, the Goats fell like dominoes. That triggered the 1997-98 Asian crisis, which ultimately sank Russia, Brazil and Argentina.

The Goats also have country-specific problems. Brazil is promoting consumer spending to the detriment of investment in industry and infrastructure. It’s also dependent on raw materials and agricultural exports. Turkey is in the midst of a sprawling corruption probe and a political power struggle. South Africa suffers from labor unrest. Energy-dependent Russia is subject to sanctions.

The securities of most emerging markets may get beaten down to the point where they look attractive. I’ll still favor the Sheep [South Korea, Malaysia, Taiwan and the Philippines]. Their economies are well enough managed to make it in a world with limited demand for their crucial exports. The Goats may not collapse and default, but until they get their houses in order, my answer is naaah.

Story via

Wednesday, April 2, 2014

US recession effects on economy and consumers

A U.S. recession would halt the housing recovery, which is already on shaky ground, as pending sales, housing starts and mortgage applications for refinancing decline. And a housing slump would spread to many other sectors, including home furnishings and autos.

The retrenchment by consumers -- which is already evident in the weak retail sales data of recent months and the lackluster holiday shopping season -- would accelerate, hurting appliance and automakers, the airline industry and other consumer discretionary spending products. Consumer lenders also would be hit as borrowers withdrew or repaid debts and delinquencies increased.

Tuesday, April 1, 2014

Sheep vs Goat countries part 1

As I noted earlier, since the Federal Reserve began its taper talk last spring, investors have been forced to separate the sheep -- the well-managed emerging economies -- from the goats with their poorly run economies. 

The sheep -- South Korea, Malaysia, Taiwan and the Philippines -- have surpluses in their current accounts (the excess of domestic saving over domestic investment) from 4 percent of GDP to almost 12 percent as of late 2013. They are exporting that difference, which allows them to fund outflows of hot money. The same surpluses mean the sheep haven’t had to raise interest rates to retain investors' funds.

The sheep also have stable currencies against the U.S. dollar, with exchange rates relatively unchanged since 2009. Moderate inflation of less than 4 percent has been the norm in the sheep countries for several years. The stock markets of the sheep economies have also been fairly flat over the last decade, unlike the less-well-run goats, whose equity markets have sunk. In part 2 of this article, I will explain more fully what makes a goat a goat.