Post-Christian Conservatism
Good afternoon. Political news was disgustingly usual last week. Rating of the Japanese Cabinet always moves with a clear trend: immediately after the change of prime minister it shows a maximum and then begins to fall briskly – the Noda’s government was initially supported by 62.8% of the population (according to a survey of Kyodo), while a month later this value decreased to 54.6%; to be continued. In Britain, the Tories held a conference where their leader Cameron has suggested equating sodomites’ cohabitation to marriage: “I support gay marriages because I am a conservative” – yeah, the ‘progress’ really leaps and bounds, for the ‘conservatives supporting sodomy’ were always unthinkable in a Christian world. The founder of Apple Steve Jobs died last Wednesday – a rare businessman could qualify for eulogies both from the US and Russian presidents, but in this case it happened. Meanwhile, Apple has launched a modification of iPhone 4, troubling the Chinese: the latter have already “created” an iPhone 5 (it is sold in Beijing markets) – the pirates have got too far. Climatic disasters are spreading: a mighty (2 million km2) ozone hole appeared above the Arctic due to the increasingly cold winters in the stratosphere (at the 20 km altitude the ozone layer thinned five times against the normal range); and in Britain there is an enchanting autumn – at October 1 in London (to the envy of the Bahamas and Mexico) it was plus 30 degrees!
Another parade of emissions
Monetary markets. The week was eventful for the central banks. Bank of England left rates unchanged at 0.5% per annum, but has expanded the program of bonds’ purchases by £75 billion - complaining on the lethargy of the world economy, worsening of the exports and debt crisis in Europe. It seems that this is the beginning of a new trend and Londoners, as always, are smarter than others. The ECB left the interest on the spot, but decided to increase the injection of liquidity: in October and December banks will be refinanced – and for an unlimited amount (they’ll get as much as they would ask); loans will also be granted to them throughout the first half of 2012; in addition, the central bank will buy bonds issued under the collateral of different assets (including realty). Incidentally, it was the last casual meeting of the ECB led by Jean-Claude Trichet – on October 31 he leaves his post, and the November meeting will already be led by Mario Draghi. Reserve Bank of Australia has not changed anything – but made it clear that if the economic situation worsens the monetary policy can be eased immediately. Only the Bank of Japan neither changed anything nor promised to change something later (it only grumbled about the yen). The Fed chairman Ben Bernanke spoke to Congress – he gave to understand that he is ready to continue the emission and at the same time warned about the dangers of budget sequestration – both of these theses have forced the Republicans to glare with rage; Benny’s forecasts are gloomy – he expects further slowdown in the economy. Against this background, a decision of the world’s largest bond fund PIMCO seems logical – it will no longer play on the growth of treasuries’ yields, but rather expects for the deflationary reduction of the interest rate across the market.
Europe was relieved with the decision of S&P to confirm the ratings of Portugal and Britain – the former was even praised for strictness in performing the plan of the EU and the IMF. But the picture was ruined by Moody’s – it cut the rating of Italy by 3 points (which was not expected), upholding the negative forecast; and then lowered the ratings of 12 British and 15 Portuguese banks – 27 in one swoop! The Greeks were about to exchange their bonds (which are due in the coming years) instead of pronouncing default, but a fresh bond with a maturity of... 100 years – this is too much, so the idea did not arouse enthusiasm. Athenian Treasury assured everyone that it is about to be allocated the money – but it soon became clear that in fact the Greeks have once again broken promises to reduce the deficit: the excuse is charming – they say that the economy is falling so fast that they don’t manage to cut spending at such a rate; what a nuisance! Yet most EU countries votes for the reform of the stabilization fund and the bailout of Hellas – however, Slovakia stated that that is absolutely unacceptable, until Greece ceases to qualify for the euro-money; and generally, it would be better for her to default – it is inevitable in any case. The Greeks were offended – but then said that they have enough money in the treasury not until mid-October (as all have thought), but mid-November: and now the euro-bureaucrats can indulge in their favourite hobby – postponement of important issues in the framework of disagreement among them. But in the end, they will have to make a decision!
Illustration: Artyom Popov, ITinvest
New problems in the banking system: Franco-Belgian group Dexia is on the verge of bankruptcy – governments and central banks of both countries (with Luxembourg’s participation) had to save the company urgently, infusing into it a necessary portion of the liquidity. However, the situation in the bank is hopeless – so it will have to be restructured: the bad assets (according to experts, that is at least €125 billion) will go to the “bad bank” that will receive government guarantees in Belgium and France; the rest will be divided into pieces and sold – if, of course, there will be any buyers. Meanwhile, the Spanish banks fear that the new regional governments which came to power after recent elections and found a surprisingly large gaps in their budgets may simply default on their obligations – only before the end of this year they need to repay debts for €7 billion (half of the sum accounts for Catalonia), which the treasury doesn’t have. All of this has convinced the euro-bosses that things are bad – and that the banks of the region should be recapitalized: Commissioner Olli Rehn spoke of “coordinated approach” in improving the eurozone’s financial system – and the Euro-director of the IMF Borges has already estimated banks’ need for additional capital at €100-200 billion. By the way the US banks, despite a brave face, also play bad – their credit default swaps are close to those of their Spanish and Italian counterparts; Moody's noted that the rating of Morgan Stanley should be 6 points below the current one – but the agencies fear to bring the US ratings down to reality. You never know what might happen!
Currency markets. There again were rumours that the Swiss National Bank intends to raise the lower limit of the euro-franc range from 1.20 to 1.30 – so the franc has cheapened slightly. Judging by the central bank’s balance, the sum of its positions by means of which it has managed to reverse the growth of the national currency is about $100 billion, or 20% of GDP – only such a huge price could break the high market demand. The pound fell after the meeting of the Bank of England – and then grew again; generally, FOREX has stood on the spot. The rouble continued to fall – and in the leading countries the major banks widened the quote spreads for the Russian currency, or completely refuse to accept it; Bank of Russia holds interventions (in September, the reserves shrank by $28.2 billion) and tames the panic – mostly without success. However, our authorities have far to go to the National Bank of Ukraine, which forbade any currency exchange in the country without showing a passport – the trick is that the passport could only be a Ukrainian one, so that foreign tourists could not buy hryvnas in local banks. And while the Europeans have tried to do something, refusing to believe that such a stupid order is even possible, the Russians did not lose time in vain – and bribed cashiers in the exchanges; NBU had to urgently approve the presentation of foreign countries’ passports. “At least let the small amounts of currency to be exchanged without a passport” – everyone asked, and the NBU took pity: it is now possible for sums below... 1 rouble (or $1 or €1), for which even the new ATMs will be put in place – gossips claim that the commission will be much greater than the amounts exchanged. Hmm...
Stock markets. Volatility in the markets is high – and even higher in the ‘put’ options: market participants fear of a collapse. However, the indexes, marking the new lows, have sharply rebounded from them – the Dow went to 10,400 and flew to 11,200. Banks are bad: Dexia fell below €1 per share; Deutsche Bank warned of lower profits in the third quarter – and this is only the beginning of the reports season, which starts on the coming week. And then there are gloomy rumours – for example, there were fears of bankruptcy of the American Airlines, which is why its shares flew up and down wildly. In general, optimism on the expectations of recapitalization for the banks of eurozone is not bad, but the impending recession in the economy is more important, so this doesn’t speaks of a reversal of the down-trend, although the correction may well take place.
Source: Yahoo Finance
Commodity markets. Brent crude oil fell to $99 per barrel, and Light to $75; followed by rebounds. Gazprom has one problem after another – in one instance Turkey argues, in another Poland demands a discount: but the misfortune is that the monopoly is far behind the market’s train – its pricing procedure is cumbersome and gives very high figures, while the gas becomes aggressively cheaper on the market. The metals (both industrial and precious) ceased to fall – however, the pause after a strong collapse of the previous weeks is quite natural. Speculative long positions for gold and silver has halved since the beginning of the year – which can mean a quick finish of the fall here: it looks similar to what has happened a week earlier with euro (many months record of net short positions) – in general, hard times are coming for the speculators. Cereals, legumes, vegetable oil and forage have continued to fall in price, while meat grows; milk is more or less stable; cotton and wood have also calmed down.
Source: Barchart.com
Pre-election Decameron
Asia and Oceania. Tankan review of the Bank of Japan showed an improvement in business sentiment compared to the figures immediately after the disastrous earthquake – however, the pessimism of small business is very strong. Region’s business activity in the service sector is showing signs of life: there is even an improvement in China, while Australia is out of the bearish zone (though employment is already declining here), but her manufacturing sector is confidently in the recession zone, and construction is even in a depression. The August trade balance has improved markedly in Australia against July figure – but inflation does not recede; building permits are growing - however, they are increasingly reluctant to result in real houses being built. The mood of Japanese consumers is falling for two consecutive quarters – which is understandable: the salaries are decreasing (-0.6% in August against the same month a year ago). On the other hand, the auto industry has generally recovered after the disaster – sales of new cars rose in September by 1.7% against September 2010: and in August the annual dynamics was in the red by as much as 25.5%. Retail sales grew in Australia in July and August (in nominal terms – excluding inflation). The picture of reality was eloquently put forward the director of Australian Retailers Association Russell Zimmerman: he complained on the households’ rate of savings which reached a peak for almost a quarter of a century and urged the central bank to cut rates to stimulate consumption – but the latter decided not to hurry.
Europe. Eurozone GDP confirmed at +0.2% q/q and +1.6% y/y; GDP of Britain was cut down to +0.1% and +0.6% (January-March was also decreased), while household spending fell with the worst rate since 2009. The officials claim that the deflator was +2.4% versus April-June of the previous year – even though the official figures of producer and consumer prices are much higher (+6.0% and +4.5%), and net exports account for less than 5% of GDP (the price dynamics there are similar). Let’s calculate the actual deflator; remove the inventories, net exports and government spending; take into account the growth of population – and we get that in fact the per capita private domestic demand fell by 0.9% versus January-March and 3.4% versus April-June 2010 – that is the reality of the present moment in the global economy. Industrial production in Germany fell in August by 1.0%; industrial orders tumble here for the second consecutive month – for July-August as a whole they fell by 4.8% against the average for the two previous months (internal ones – by 6.8%, external – by 3.0%). Business activity in the eurozone went into the zone of recession in all sectors – as well as in Switzerland. The British have pleased with an unexpected surge in manufacturing and services sectors; but the builders are ill – the demand is weak, prices fall down: they are now in negative territory for 2.5-3.5% y/y; but the producer prices are on 3-year peak. Retail prices were rising everywhere – even in Switzerland, where the central bank’s activity is bearing fruits. The rise of unemployment in Spain is seasonal, but it is a permanent one in Britain – the demand for labour is on the minimum since summer of 2009. Sales toppled in August - the eurozone fell by 0.3% m/m and 1.0% y/y (actually much worse): in general it is clear that we have only slightly rebounded from the bottom of 2009 – and have already returned to them.
Source: Eurostat
America. US industrial orders fell in August by 0.2% m/m – both in general and excluding transportation and defence; however, the prices also went down – so nothing terrible has happened yet. Business activity in the United States in September remained at the growth levels, surpassing analysts’ expectations – but the components of new orders in the manufacturing and employment in services went into the zone of recession. The same figure for Canada dropped – but stayed confidently in the expansion zone. August construction spending in the United Stated recouped the July fall; in Canada, building permits have fallen by 10.4% in the same month, after shrinking by 0.4% a month earlier. US consumer comfort index from Bloomberg went slightly away from the minimum since the peak of the crisis – but remains close to it. According to Challenger, planned layoffs for September were the highest since April 2009 (an increase by more than three times versus the same month of 2010) – however, two thirds of the total reductions occurred in the army and the Bank of America; desire to hire staff dropped in the last year by almost 40% - the crisis on the labour market is evident. National Federation of Small Business says that layoffs are going for the fourth consecutive month – at an average of 0.3 men per firm. In Canada, employment rose in September, while unemployment has fallen; in the USA the report was corrupted by a single factor (August strikers returned to work) – hence the exotics like the growth of both employment and unemployment; the broadest level of unemployment (U6, which includes the unemployed whom the Labour Ministry does not count as such) increased from 16.2% to 16.5%; long-term unemployment rates have swollen – and the average duration of unemployment reached a record peak. Institute for the Study of Business Cycles is sure that the recession is coming – its warnings to this effect were yet always accurate, so there is no reason not to believe them now.
Source: U.S. Bureau of Labor Statistics
Russia. According to Rosstat, GDP grew in April-June by 3.4% y/y (according to our estimates – twice weaker); final consumption of households swelled by 6.6% due to credit boom; gross capital formation soared by 17.8%, though capital investments have added only 5.0% - a hefty contribution to the final result was made by the growth of unsold inventories. In September, consumer prices remained unchanged against August and increased by 7.2% against September 2010 – at the forefront, as always, are the utilities. With the advent of autumn the incentive programs died out as did the low base effect of the previous summer – sales of VAZ in September had grown only by 0.3% y/y, although for the first 9 months of this year they grew by 19.8%. Mortality fell in August – which is understandable against the background of the last year’s horrors; what gladdens, however, is that the birth rate has increased – but as a whole for January-August there was a decrease in both figures. Business activity index sank in September to the level of May (a second consecutive decline); PMI index stood exactly on the 50 – the level separating growth and decline – however, new orders and employment are already falling. The authorities react to the arrival of the crisis rather nervously: on an investment forum Putin asked “not to escalate” – and said there will be no decline but only a slowdown of growth. At the same time he erupted with an article in which he proposed to create a Eurasian Union – as the spiteful critics have noted, this mega-idea will only have nano-effect. Others scoffs commented on the congress of EdRo: “Medvedev suggested Putin to suggest Medvedev the candidacy of Putin for the post of Medvedev” – what couldn’t these enemies of the people do!
However, the friends aren’t far behind: “Nashi” have decided to arrange a colourful performance for the PM’s birthday – to pose in a number 59 and sing Gena the Crocodile’s song. And in the real life the powers’ ratings are falling – in fact, even Putin’s rating does not shine, so that its lead from the abstract “candidate of the opposition” is minimal for many years; the ministers’ popularity falls. Snide citizens have found ways to circumvent censorship – they began to write slogans on the money: in Chelyabinsk there appeared a hundred-rouble note with the inscription “Putin – the leader of the party of crooks and thieves” – but the Bank of Russia will withdraw them from circulation (probably for extremism). There are even more gruesome examples of the perception of the authorities – a bailiff was killed who participated among other actions in the demolition of houses in the Rechnik village: evil tongues wonder of the profession’s yields – a 28-year-old officer was wearing Rolex and drove Lincoln Navigator. A detective from “Magnitsky’s List” was arrested for a $3 million bribe – Madame was to put silent the “tomography’s case” which the president himself swore to solve: as we see, the head of the state is openly ignored by everyone! A Chechen barrister was even more simple-minded – she personally wrote a phony court's decision on which hoped to receive 1 billion roubles from the Ministry of Defence. Putin’s spokesman informed that the prime minister’s extraction of amphorae was, of course, staged; and that Brezhnev is very good, and stagnation is not that terrible at all. Against this background, the only amusing thing is the attempt of Rurik’s descendants to win back the Kremlin from its present inhabitants – the court responded by saying that the plaintiff “failed to prove a violation of his rights”.
Illustration: Artyom Popov, ITinvest
Habits of the authorities are disgusting. EdRo’s campaign is financed by businessmen who get included in the regional lists for this – on average each one will give €5 million. There are also very specific figures: according to politician Yevgeny Roizman, Tajik drug mafia got itself a representative among the EdRo consultants and as an organization joined the United Popular Front. Transport Minister Levitin begot a fresh (after the toll roads) innovation: he wants to cut the number of gas stations along the routes by 10-15 times – they interfere with the majestic projects! Eternal Flame in the center of Vladivostok was cut from gas for debts; American sailors, who arrived to the town, were sent hastily to wreaths to another monument. Businessman Polonsky went on hunger strike – and was sued for entering a controversial construction site and offended on the competitors, officials and policemen. The first deputy of the head of the Bank of Russia Ulyukayev publishing poetry of own authorship: the verses sound exotic in some places. Football club Anji tries to lure coach Mourinho – he was offered €90 million over 3 years: generous is the Dagestani soul! Chechnya is generous too – her owner Ramzan Kadyrov innocently replied to the question about the sources of her prosperity: “Allah gives. I do not know. The money just come from somewhere” – we can only assume that the Vainakhs invented a latest version of Islam where the prophet of Allah is not the usual Mohammed, but a rather more up-to-date Putin, for it is the latter who is actually the source of the Chechen welfare. Well, what do you think about this pre-election Decameron? And it is still 2 months to go!
Have a nice week!