14 November 2011

“There is no way out, I never thought there was, not for any of the countries that are in trouble. Once one of these countries goes into this sort of problem, there is no escape,” Roger Nightingale, economist at RDN Associates, said.

He dismissed the current, positive sentiment among investors regarding Italy as temporary and fleeting.

“In a few days time or a few weeks, things will go wrong again, yields will go up and the whole thing will skid into decline. It’s a foregone conclusion most of Europe is already in recession. It is relatively uncompetitive, and it is facing extra bond yields, extra interest rates which of course it can’t live with, and (it) will have slower rates of growth,” he added.

Nightingale was scathing about the possibility of the new interim heads of government – Mario Monti in Italy and Lucas Papademos in Greece - being able to deliver their countries out of the current crisis.

“These politicians can do nothing, there is no solution. I’m amazed that the media keeps on as if there’s an obvious solution and that these politicians know what it is,” he said.

He said the existing group of politicians and central bankers would be the last people in the universe to come up with the solution, if one indeed existed.

“It is somewhat ironic that the prime minister in Italy is Monti. He was a member of the European Commission. He was one of the architects of the system that caused all the problems. Why on earth would you put him in place? It would be a semi-miracle if the solution works” Nightingale said.

However, Alessandro Capuano, head of the Italian desk at IG Markets, disagreed with Nightingale, saying Italy had sound fundamentals underpinning its economy.

“If Italy can implement the austerity measures it needs to, we’ll still have a strong economy and in the medium term, we can balance the issue of the big debt and start to grow again,” Capuano said.

But the perfection of its adaptation was at once a strength and a weakness.  So long as the environ­ment was constant, its position was unchallenged.  But, when things did change, it became vulnerable.  The mammal, though less well-adapted to the old environment, was less badly-adapted to the new one.  It survived; the dinosaur didn’t.

Does palaeontology have a message for economics?   Are countries that have been enriched by one environment likely to be impoverished by the change to another?   Possibly so.

Argentina has much in common with the dinosaur.  For a while, it was the most successful economy in the world.  Its per capita GDP in the early years of the twentieth century was significantly higher than that of any other country. 

Its wealth was agriculturally based.  The country could produce wheat and beef very efficiently:  unit costs were just 80% of America’s; 60 % of Eu­rope’s.  Unsurprisingly, those who own­ed the land became millionaires; those who worked it, well paid.

But Argentina’s success depended on its access to foreign markets.  In the nineteenth cen­­tury, largely perhaps because of Britain’s commitment to free trade, Argentina enjoyed that access.  And, early in the twentieth century, it continued to do so.

But the depression of the thirties changed everything.  Levels of demand collapsed; levels of supply didn’t.  Everywhere in the world, there was excess capacity.  Production had to be cut back, and workers laid off. 

In such circumstances, free trade came to be regarded as an expensive indulgence.  In the US Congress, in the early thirties, tempers ran high.  Argentine shipments of wheat and beef (high in quality and low in price) were said to be intensifying American farmers’ problems.  Protectionism was thought to be the answer.  There weren’t many who disagreed.

Europe, also vulnerable to Argentine competitiveness, came to the same conclusion.  France was particularly keen to protect its farmers.  It banned most imports.  And Britain, persuaded to re­serve its markets for Com­mon­wealth producers, banned some.

Argentina’s competitiveness in the thirties was not an advantage, but a disadvantage.  It was the rationalisation for discrimination.  Exports fell, incomes plung­ed, and unemployment soared.

The country did not react well to adversity.  In politics, stability gave way to instability.  The populist Peron came to power.  And his eccentric policies probably made a bad situation worse.

Per capita GDP suffered substantially:  the highest in the world in 1929; it wasn’t in the top twenty in 1939.  And, remarkably, it didn’t recover much when the outbreak of war lifted demand.  Nor did it do so when the post-war settlement brought a return to free trade.

So!   Might there be another dinosaur roaming the world today?   Which country is most vulner­able to changes in the economics environment?    

The obvious candidate is China.  It’s as devastatingly competitive in manufacturing now as Argentina was in agriculture then.  But competitiveness is nothing without free trade.

Will it persist?   Or will the US and EU and Japan be tempted by protectionist policies?   Nobody knows.  But the risks are not insignificant.

Governments always claim to be virtuous, but rarely are.  Their principal objective is to stay in power.  If that means bending the rules a little, most are willing to do so. 

In the thirties, it was depression that drove Governments to reject free trade.  It might be depression that does so again in the current decade.  The outlook for the world economy is currently very dreary.  The business cycle is about to peak and a recession is likely in 2012.

But it could get a good deal worse.  If consumers, disenchanted with debt, were to seek to pay it down, the economics weakness would persist.  If, concurrently, central bankers were to raise interest rates (as they did in 1929), the negative momentum would become protracted.

In such circumstances, populist politicians would probably be quick to climb on the protectionist bandwagon.  It’s be one thing to surrender a rising share of the home market to foreign producers when aggregate sales are growing; it’s be quite another when they’re falling.  Europe has always been predisposed to direct action on this front.  It wouldn’t need much of an excuse to prompt renewed measures.

If the wind did seem to be blowing in that direction, how would China respond?   Pedantically or pragmatically?   With confrontation or compromise?   With revolution or militarism?  

Nobody knows, of course.  But, in the past, China’s leaders have tended to play the “long game.”  They’ve recognised there’s no point in winning a battle only to lose the war.  If the good times are to be exploited, the bad ones have to be survived.

Accommodation might, therefore, become the order of the day:  a voluntary programme of export restraint in key areas (but largely unrestricted access in others); a huge reva­lu­ation of the yuan; and a massive increase in foreign aid.

Near term, China is certainly vulnerable.  Its economy could crash and its politics dissolve into anarchy.  But there’s a better than evens chance that it’ll ride the storm; tossed by the waves, but not sunken by them.   In such circumstances, the long-term future could still be Chi­na’s:  the wheel having turned full circle—its virtuosity two millennia ago, reborn in the decades ahead.

The peak rate of growth for the world’s economy occurred more than 12 months ago and “it carries on going down,” Nightingale said. “We are probably going into negative territory around spring of next year; it is not for certain, but that is the most likely scenario. I would say the recession is 65 percent, 75 percent certain.”

The economist warned that should recession kick in, the global economy might be too weak to generate any GDP growth for years, or even decades.

“When the downturn ends, and when the upturn begins, will it be powerful enough to take us into some sort of growth again? Or are we going to find ourselves in a protracted depression-type scenario?” he wondered.

“Seven years would be a very short depression; depressions last a lot longer than that. I would be extremely pleased if it were to only last seven years. In Japan’s case, it lasted 20 years,” he said.

Nightingale added that the US economy has “some big pluses”, but was uncertain it was strong enough to steer the world out of a recession.

“America is very competitive at the moment, and she has a lot of advantages in finance, agriculture and many other areas. There are some big pluses in the American situation, and they are causing some growth. Whether they are going to be big enough to keep the thing going, and to bail out the rest of the world, is another issue,” he said.

But Nightingale said that Europe is in, “absolutely desperate trouble”. He warned that BRIC nations China and India might be heading in a “somewhat similar way”.

The strategist also raised concerns about the German ‘strong man of Europe’, saying its industrial production figures would plummet with Japan’s recovery from the tsunami.

“Germany is the major beneficiary of the Japanese tsunami, and as the Japanese come back on stream and production increases again, they will take their markets back from the Germans,” Nightingale said.

“Watch out very carefully for industrial production numbers falling quite significantly, perhaps from autumn of this year through to spring of next year,” he added.

30 August 2011

We have been seeing growth coming down for some time already. We are probably going into negative territory around spring of next year; it is not for certain, but that is the most likely scenario.

9th August 2011

“The real threat out there is protectionism.  This debt thing is pretty jolly unimportant, it was unimportant before, it’s unimportant now, it will be unimportant in the future.  Don’t worry about debt… worry about GDP, worry about the economy, that is the real problem,” Roger Nightingale said.

As markets braced themselves for another turbulent day Tuesday, one economist warned that the real danger of a double-dip recession is protectionism.

The real threat is protectionism. This debt thing is unimportant,” Roger Nightingale, economist and strategist at RDN Associates, told CNBC Tuesday.

“Don’t worry about debt, worry about GDP, worry about the economy.

“The economy is looking at a serious recession, possibly a major 1930s-style depression, in the near future,” he added.

“If you look at the situation now, we don’t know what growth in the third or even second quarter is going to be.”

He predicted that third-quarter growth would be around zero or slightly negative in the developed world, and that China will suffer as consumers in the US and Europe cut down on their spending on Chinese-made consumer goods.

Markets are awaiting the Federal Open Market Committee’s regular meeting later today. Any remarks afterwards from Fed chairman Ben Bernanke will be followed closely.

This is very serious and it’s going to be awful. That’s why we sell equities and buy bonds,” said Nightingale.

Edward Hodnett—the trick is to know which to ask (either instinctively, or by trial and error).

The EU is a rich source of case studies . . .
Incorrect diagnoses lead to inappropriate therapies. The result may be an aggravation of the original malaise, not an alleviation of it. It’s a rule that applies as much to economics as to medicine.

. . . for would-be administrators.
Recent events in the European Union illustrate how things can go awry. The periphery’s sickness is obvious enough, but its cause isn’t. The Commissarial Establishment claims that the problem’s been caused by excessive government borrowing. Accordingly, it’s recommended that public spending be cut and taxes raised.

The Commission demonstrates better than any other institution . . .
Member countries—Greece and Ireland, Portugal and Spain, Italy and France—have all hurried to comply. But the problem hasn’t been resolved; it’s been worsened. Most worryingly, the markets have lost confidence in the single currency. They doubt it’ll survive. They envisage devaluations, possibly repudiations.

. . . how not to do things.
Predictably, the response of the Commissioners has been tetchy. They haven’t revisited the causes of the difficulty, but have attempted to camouflage its symptoms. They’ve proposed that the debts of suspect countries be guaranteed with bonds issued by the EZ itself.

Previously, the euro had a slim chance of survival.
And who’ll guarantee the EZ’s bonds? The taxpayer, of course! Has anybody asked him if he’s willing to do so? Ne me fais pas rigoler!

No longer.
Interestingly, the German authorities (not always noted for their support of democratic freedoms) have ridden to the aid of the individual. The Commission’s proposal, complained the Bundesbank Chief, would impose the costs of profligacy in the periphery on taxpayers in the centre! It can’t be allowed to proceed.

So, who’ll be blamed?
At a stroke, therefore, the Commission’s managed to antagonise both of the EZ’s principal sources of finance: the Private Investor and the German Melkkuh. The outlook for the euro has been transformed: what was previously only probable failure is now assured catastrophe. All that remains to be decided was who’ll get the blame and who’ll pick up the tab.

Those who forecast its demise, of course.
The UK, not a member of the EZ, shouldn’t be liable. But in similar circumstances in the past it’s sometimes managed to land itself with sizeable liabilities. Prime Minister Cameron and Chancellor Osborne keep saying that the country will not be sucked into the crisis, but, to many, that’s more a cause for concern than comfort. They said the same before throwing monies into the Irish banking black-hole. And they promised also a referendum on the constitution before nodding it through!

Recession won’t help.
Making matters worse, the world economy is continuing to lose momentum. Growth in the US has begun to disappoint. So has that in most commodities producing countries. Likewise, recently, India. Only China, if the data are to be believed, is maintaining its earlier momentum.

But inflation’ll subside.
That may shortly ease the pressures on inflation. Indeed, the most recently published numbers have come in a little below expectation. By year-end, the trend may be more pronounced. By mid-2012, it’s possible that price rises will have been almost eliminated.

And asset prices benefit: bonds this year; equities next.
If so, interest rates may stop being raised and start shortly afterwards be lowered again. Then, the stock price indices would respond. The weakness in the immediate future might be quite sharp, but it’ll probably be short-lived. In the second half of 2012, the indices could be rising again.

Nikolai Gogol—it may not be sensible, but it’s what everybody does.

Nobody resigns these days.
Rebekah Brooks can’t have it both ways: either she knew what journalists at the News of the World were doing, or she didn’t. If the one, she was guilty of moral delinquency; if the other, of administrative incompetence. In either event, she’s disqualified herself from high office at the newspaper.

No matter how reprehensible the behaviour.
Her only “honourable” option in the circumstances was resignation. That she chose not to take it spoke volumes about her code of ethics. That the Murdocks, père et fils, chose not to sack her said much the same about theirs.

Society must exact penalties in other ways.
It looks now as if the takeover of BSkyB won’t proceed. Not until a number of executive heads have rolled will it be possible for the proposal be reconsidered. In the meantime, a forced breakup of NI might have to be contemplated.

It used to be possible to trust the police.
The Metropolitan Police Force appears similarly to have snared itself: caught between the Scylla of incompetence and the Kharybdis of corruption. Its officers have been responsible for a good deal of bungled inquiries over the years, but few rivalled the comprehensive ineptitude of this exercise! The question therefore arises: were the mistakes accidental or deliberate?

No longer.
In a sense, as in the case of Ms Brooks, it doesn’t matter. Senior officers have damned themselves in either event. Fools on the one hand, knaves on the other. Heads must roll.

And politicians?
And what about the politicians? Weren’t they too close to Murdock? Didn’t their enthusiasm to win the man’s imprimatur cause them to overlook his misdemeanours?

No worse than the others, but no better either.
Cameron is probably most vulnerable on this front. Why did he employ Coulson? Because of the man’s general ability to communicate, or because of his particular skill in liaising with Murdock’s editors? If the latter, was there a quid pro quo?

Will the guilty talk?
At the moment, nobody seems to be prepared to say anything. Each of the protagonists hopes his own silence about the misdemeanours of others will ensure theirs about his. Will that keep things under wraps? Not necessarily. A couple of minor revelations could break the logjam.

Or maintain silence?
On the other hand, it’s not impossible that the miscreants escape the rigours of the law. Theirs is a powerful alliance. If other news stories should start to grab the attention of the public, the hacking scandal could find itself be kicked into the long grass again.

The euro’s crisis may divert attention.
The principal alternative story at the moment is Europe’s financial crisis. It’s been brewing for months, and there’ll be many journalists, politicians and policemen who try assiduously to keep it going. They’ll claim, fatuously, that on its outcome will rest the fate of the world economy.

Europe has a lot for which to answer.
Nonsense, of course. The world is headed for recession and the euro for implosion, but the two events are only obscurely connected. So who’ll be held responsible? Who’ll have to pick up the pieces?

Its economics nonsenses most of all.
Not the lunatic central bankers who caused the problem. Not the demented politicians who devised the EMS. A shame: it’s the privileged wot gets the pleasure; the others wot gets the blame!

Equity slippage in prospect.
Unsurprisingly, market indices are sliding. The central bank in Beijing can’t stop the rot. Nor can any other. As a rule, officials (cacoëthes attingendi) do more harm than good.

The trick is to ensure that they don’t lose confidence. The Greek Government failed. Might the UK do as poorly?

Politics is a matter of perception; economics, of reality.
From a fiscal perspective, last year’s election changed very little. Britain’s public spending was out of control beforehand and remained out of control afterwards. If there was a difference, it related to the response of the party leaders. The one approved of incontinence it, the other didn’t.

Is Cameron tackling the issues? On one basis, he is; on the other, not.
In the event, that wasn’t much of a distinction. The Leviathan seemed to be unstoppable. Cuts were announced, but not implemented. Life proved to be much the same under Cameron as it had been under Brown: the private sector straitened; the public sector indulged; and the taxpayer picking up the pieces!

The reality, for what it’s worth, isn’t good.
Economics activity, of course, responds to reality, not rhetoric. GDP stalled, therefore; inflation quickened and the external accounts deteriorated. Sadly, the near term future’s not likely to be much better than the immediate past. It’ll not be until Ministers implement genuine cuts that the economy will mend.

Nor is it likely to be for some time.
That may not be soon! Last week, there was more bad news on the spending front. It looks as if the forces of political reaction are planning to challenge the decision to limit social benefits. Labour and LibDem, working in unison, successfully torpedoed the NHS reforms; they hope, along with a leftward-inclined Tory element, to do the same to welfare.

The PM is no Thatcher.
If so, Cameron will probably back down again. He wants consensus, not confrontation. He’ll be disappointed, though. Compromises tend not to satisfy the Opposition, but to encourage it. The risk is one of another financial crisis.

His Deputy, even less so.
Cameron and Clegg are out of their depth. The first twelve months of their term has already gone but the fiscal correction hasn’t begun. It’ll be another year before it does; two, before the private corporate sector feels any benefit; three, before personal living standards start to recover. What are the odds on the incumbents being re-elected? Very low!

They’d have done better . . .
Their priority, on coming to office, should have been to cut outlays. The pointless conflicts in the Middle East should have been the first priority. The overpaid Mandarins in Whitehall the second.

. . . to act rather than talk.
There should have been an immediate cut in the pay of top Civil Servants of 15% say, (25% in the case of those in the Treasury, Home Office and MOD; 40% in those at the BOE; 80% in RBS and HBOS). A similarly rigorous regime should have been imposed in the Local Authorities, Schools, Transport etc. An even more austere one in the BBC. For the public sector as a whole, headcount ought to have been set to be fall by 2½% per annum throughout the Parliament.

On pensions most obviously.
Most importantly, the pensionable age for the public sector should have been raised sharply and immediately. The policy wouldn’t have been popular. It would have provoked stoppages. But better sooner than later.

Too late.
Dream on. The world economy is drifting towards recession and Britain’s looks likely to fare worse than most. Thus far, it’s been the currency that’s taken the hit. But, in the next eighteen months, it’s likely to be unemployment that does so.

The die’s cast.
For the moment, asset prices are being supported by easy money. That may change in a crisis. It’s a time for caution rather than exuberance, therefore.