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Probing Market Meltdown, Is This Just a Simple Correction?

“Those of us who have attained a certain age can remember being bombarded by commercials in which we were asked “Is it live or is it Memorex?” The thrust of the ad was that it didn’t make any difference, that the tape recording was just as good as being there to watch that TV show live. Video recording technology was in its infancy, and the ability to play a movie whenever you wanted was really cool. Imagine being able to set a video recorder to record a TV show while you were away! … As long as you had somebody in the house young enough to be able to program the recorder to do it, it was great technology.

Today investors are asking themselves a similar question: “Is the meltdown in the stock market the result of Fed tapering, or is there something else going on?” We’ll address that question today and take a deep plunge into the emerging markets. We have a good old-fashioned central banker throwdown in progress, and if the results didn’t have such an impact on our investment portfolios, it could actually be quite fun to watch. What happens in the emerging markets will unfortunately not stay in the emerging markets. It’s all connected. There is more happening here than a simple correction. Let’s put our thinking caps on and try to connect some dots.

The current emerging-market meltdown is what Jonathan Tepper and I discussed in our book Endgame and specifically predicted in our latest book,Code RedLet’s rewind the Memorex tape and see what we said:

This unprecedented global monetary experiment has only just begun, and every central bank is trying to get in on the act. It is a monetary arms race, and no one wants to be left behind. The Bank of England has devalued the pound to improve exports by allowing creeping inflation and keeping interest rates at zero. The Federal Reserve has tried to weaken the dollar in order to boost manufacturing and exports. The Bank of Japan, not to be outdone, is now trying to radically depreciate the yen. By weakening their currencies, these central banks hope to boost their countries’ exports and get a leg up on their competitors. In the race to debase currencies, no one wins. But lots of people lose.

Emerging-market countries like Brazil, Russia, Malaysia, and Indonesia will not sit idly by while the developed central banks of the world weaken their currencies. They too are fighting to keep their currencies from appreciating. They are imposing taxes on investments and savings in their currencies. All countries are inherently protectionist if pushed too far. The battles have only begun in what promises to be an enormous, ugly currency war. If the currency wars of the 1930s and 1970s are any guide, we will see knife fights ahead. Governments will fight dirty, they will impose tariffs and restrictions and capital controls. It is already happening, and we will see a lot more of it….

We are already seeing the unintended consequences of this Great Monetary Experiment. Many emerging-market stock markets have skyrocketed. Only to fall back to earth at the mere hint of any end to Code Red policies.

Emerging-market countries have to fend for themselves. Bernanke, Kuroda, and other developed-country central bankers accept no responsibility. If other countries don’t like a weaker dollar or yen, too bad. Bernanke places the blame, not on the United States for weakening the dollar, but on emerging countries for not revaluing their currencies or imposing capital controls. As U.S. Treasury Secretary John Connally said to foreign finance ministers in 1971, “The dollar is our currency, but it’s your problem.” Indeed.

Let’s stop there for a moment, as this is an extremely important point. There have been numerous speeches by developed-world central bankers explicitly explaining that they are responsible for their own markets and that the central bankers of developing economies have to adjust on their own. Just as there have been many emerging-market central bankers complaining about quantitative easing in the developed world creating problems in their markets. In a few pages, we are going to look at a very important interview on Bloomberg with Raghuram Rajan, the brilliant head of the Reserve Bank of India, but now, back to Code Red:

Whenever the Fed hikes rates, bad things happen somewhere. It’s that simple. In 1994 the quick rise in rates killed a lot of leveraged investors in the bond market. Orange County had interest-rate derivatives that blew up in its face. It was the largest municipal bankruptcy in history. Emerging-market stocks and bonds were hammered, and Mexico was even forced to devalue its currency in a major financial market crisis. If (when) the Fed hikes rates today, we’ll see lots of bankruptcies like Orange County’s and blow-ups like the Mexican Tequila Crisis. The very low rates globally in a Code Red world mean that now there are probably hundreds or thousands of investors like Orange County. You can bet on that. And that is why the market gets so nervous about suggestions that the Fed might start tapering its quantitative easing. If QE is finally ended, can rising rates be far behind? [Or at least that’s the thinking!]

Recently, much of QE’s effects have been felt in emerging-market countries. This is a response not just from the U.S. Fed but from the BOJ, ECB, and BoE. Unlike the sick, indebted developed world, many emerging-market countries are growing and doing well. [Let me remind you that we wrote this in August 2013!] We have not seen a lot of borrowing in the developed markets. Instead, growth of credit and lending to private borrowers is happening in emerging markets. Emerging markets have been a popular target of excess capital for a number of reasons: their overall ability to take on debt remains strong, and their balance sheets are still relatively healthy; and more importantly, investment yields have been high relative to sovereign competitors. This two-speed world presents enormous problems. Code Red-type policies in the developed world are leading savers and investors to flee very low rates of return at home in favor of putting money into Turkey, Brazil, Indonesia or anywhere that offers higher rates of return.

Code Red-type monetary policies are designed to produce investment and growth, and they are! Just not in the countries that central banks intended to help. This is a major headache for governments in these countries. For them it is like having loads of visitors drop by all of a sudden. It is flattering that they like your house; but after a while, you’d rather they didn’t show up unexpectedly. Hot money flows are like drunken guests. They create a very big party, they leave unexpectedly, and they leave a god-awful mess behind. Large hot money flows have been behind most major emerging-market booms and busts.

Whenever major, developed-world central banks keep rates at very low levels and weaken their currencies, they cause bubbles. Let’s look at two recent bubbles and crashes that Code Red policies helped cause.

After the Japanese bubble burst in 1989, the bank of Japan cut interest rates close to zero. By 1995 the dollar/yen exchange rate weakened, and the yen lost almost half of its value. The Japanese took money out of Japan and put it into Indonesia, Korea, Malaysia, Philippines, and Thailand. Investors in other countries borrowed money either directly in yen or through synthetic instruments. It was called the yen carry trade, and it was designed to take advantage of easy Japanese money to invest elsewhere. Everyone assumed that the yen would continue to go down, making the terms of repayment easier.

Asia attracted nearly half of the total capital inflow to emerging markets, and the stock markets of South Korea, Malaysia, Singapore, Thailand, and Indonesia were soaring. The party didn’t last forever. When the Thai currency came under pressure in June 1997, almost all Asian countries faced stock market crashes, capital flight, currency depreciations, and banking busts. The entire Asian episode perfectly fit the five stages of a bubble, but it was certainly much greater than it otherwise would have been, given the policies of the Bank of Japan….

The idea that ultra-low interest rates cause booms and busts is not new. Economists of the Austrian school, led by von Mises and Hayek, warned that credit-fueled expansions lead to the misallocation of real resources that end in crisis. In the Austrian theory of the business cycle, the central cause of a credit boom is the fall of the market rate of interest below the natural rate of interest. Investments that would not be profitable at higher rates become possible. The bigger the deviation of interest rates from the natural rate, the bigger the potential credit boom and the bigger the bust.

Like all bubbles, rapid price increases can rapidly reverse when interest rates return to normal levels. The greatest danger will then be to leveraged investors who bought farmland, corporate bonds, some emerging markets, and other bubbles with borrowed money.

Narrative or Reality?

The US Federal Reserve has begun to taper by $10 billion a meeting. That means they are still putting $65 billion a month into the world economy. Let’s do a thought experiment. If the Fed had originally announced they were going to do $65 billion per month in QE rather than the $85 billion they did announce, would it have made any difference in the overall outcomes? I would suggest there is not a great deal of actual difference between $85 billion and $65 billion. Yet now the markets are acting as if there is some massive difference.

I would submit to you that the difference is actually in the narrative. The Federal Reserve is signaling that it is going to end quantitative easing at some point in the future; therefore, investors are trying to find the exits before the end actually comes. But does it make any real difference to your portfolio whether it’s the reality or the narrative that is driving the volatility in the markets?

Sidebar: the US just printed 3.2% (annualized) GDP growth for the fourth quarter – a quarter in which the government was a significant drag. Without that drag, growth might have been 4%. In such an environment it is going to be difficult if not impossible for the Federal Reserve to discontinue the tapering of QE. If there is a surprise – and with continued growth there might be – it will be to increase the amount of easing each meeting. Just saying…

What’s Driving Emerging Markets?

The trouble in emerging markets is just beginning.

Hot money has been chasing a growth story across the emerging markets since early 2009. Trouble is, the real driver of economic growth in emerging markets is not the explosive force of eager, low-skilled workers as they climb into the middle class. That’s just the story you hear from mutual fund salesmen. That’s like saying the economy grows over time because we all get raises and spend the new income on plasma screen TVs.

Emerging-market consumption is a RESULT of growing incomes, not the CAUSE. The real driver of long-term global growth has been the great spurts of innovation enabled by the last two industrial revolutions.

Longtime readers know I disagree with Professor Robert Gordon on his long-term forecasts for productivity growth. He specializes in economic history and is one of the finest productivity economists in the world, while I am just an amateur futurist with a wild imagination, but…

Dr. Gordon was absolutely right to proclaim the end of the Second Industrial Age. It began to pass away in the 1970s, and except for the boost from the 1980s through the early 2000s due to the advent of personal computers, the world economy has essentially been running on the fumes of a dying growth model, an unprecedented but now-deflating credit bubble, and the last high-spending years of wealthy but aging populations in the developed world.

As he attempts to peer beyond the chaos of debt, deleveraging, bankrupt governments, and desperate central banks that will ensue for the next five to ten years, Dr. Gordon’s dark and dire predictions about long-term growth hinge around the fact that he can’t see the rapidly accelerating technological transformation that promises to drive another century of explosive innovation. He doesn’t think it can happen again.

Can you blame him?

Identifying the next set of world-changing technologies before it “crosses the chasm” is infinitely harder than calling a market peak or a rare turn in the long-term credit cycle. In all of human history, we have seen only TWO sets of world-changing technologies that enabled centuries of follow-on innovation, inspired dynamic new industries, and revved up the faltering growth engines of ages past.

You would have to be extremely close to potentially world-changing technology to notice when it first leaps across the chasm, goes parabolic, and begins to drive a fresh explosion of innovation, productivity, and then – and only then – income.

But as you already know, the constant doubling of computing power since the late 1950s (known as Moore’s Law) has reached a point where our technological capabilities are taking exponentially larger leaps every year. And that constantly accelerating computing power is already enabling a massive round of follow-up innovation so disruptive that it looks and feels like magic.

That is great news for the human experiment and great news for the privileged minority in developing countries … but it could be terrible news for the vast majority of people in emerging markets who do not have the skills to participate in this new economy.

Contrary to popular belief, the real drivers of economic growth in most emerging markets are still investment and/or trade demand from the developed world. And those growth models – (A) attracting investment from the rich world to encourage development, (B) producing the things consumers in rich countries want, and/or (C) supplying the things manufacturing economies need to produce the things rich consumers want – are either running out of steam or becoming a lot more hazardous.

Let’s look at the longer-term challenge for export-oriented growth models first and then shift our attention to the sharp, Fed-induced reversal in capital flows that could devastate emerging economies in the coming months.

Emerging markets can’t depend on trade demand from the developed world…..”

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$BAC: Selloff is a Great Buying Opportunity

“Monday’s 2.3 percent drop in the Standard & Poor’s 500 Index represents a “natural phenomenon” that makes stocks a good bargain, says Savita Subramanian, head U.S. equity strategist for Bank of America Merrill Lynch.

“I do see this as a great buying opportunity for some of the higher-quality names in the S&P 500 that have sold off on emerging market exposure,” she told CNBC.

U.S. stocks historically experience 5 percent corrections about three times a year, particularly around shifts in monetary policy, Subramanian says.

The S&P 500 has lost 5.8 percent so far this year, closing at 1,741.89 Monday. The Federal Reserve last week announced the second leg of tapering of its quantitative easing (QE), cutting its monthly bond purchases by $10 billion….”

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Central Banks Fret Over Too Little Inflation

“The rise in consumer prices slowed across the world’s largest economies in December, fueling concerns that too little inflation, rather than too much, could threaten the global economy’s fragile recovery.

The Organization for Economic Cooperation and Development Tuesday said the annual rate of inflation in its 34 developed-country members rose to 1.6% from 1.5% in November, while in the Group of 20 leading industrial and developing nations it fell to 2.9% from 3.0%.

Although up slightly, the low level of inflation across developed countries will worry central bankers, since many regard annual price rises of 2% as consistent with healthy economic growth. The rise in the inflation rate was driven by higher energy prices, while the core rate of inflation—excluding energy and food—was unchanged at 1.6%.

When inflation is low, companies, households and even governments have a harder time cutting their debt loads, a particular problem for a number of highly-indebted nations in the euro zone.

When prices start to fall, consumers can postpone purchases in the expectation that they will get better value for their money in the future. That can in turn weaken economic activity, and create further deflationary pressures. Following the difficulties Japan has experienced in getting out of its long period of deflation, central banks in other countries are anxious to avoid a similar struggle.

The threat of low inflation, and the possibility that prices may start to fall, is most pressing for the European Central Bank, whose governing council meets Thursday. Figures released last week showed consumer prices in the euro zone rose by 0.7% in the 12 months to January, a decline in the annual rate of inflation from 0.8% in December…..”

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U.S. Small Businesses Increase Borrowing in December

“U.S. small businesses boosted borrowing in December, pushing a broad lending index to its highest level in nearly seven years and signaling that economic growth may continue apace in the early part of this year.

The Thomson Reuters/PayNet Small Business Lending Index, which measures the volume of financing to small companies, rose to 121.6 in December from an upwardly revised 114.6 in the prior month, PayNet said on Tuesday.

That was the highest level since March 2007, the data showed, and was up 5 percent from a year earlier. A rise in the index is historically correlated with stronger U.S. economic growth a quarter or two in the future.

“We are fairly optimistic there will be some growth coming at least from the small business portion of the economy,” PayNet founder Bill Phelan said. The rate of growth is “not too frothy, and not too tepid either,” he said.

Hero Images | Getty Images

Small companies typically take out loans to buy new tools, factories and equipment, so more borrowing can be an early signal of increased hiring ahead.

It’s a good sign for the Federal Reserve, which is dialing down its massive bond-buying program in a nod to stronger growth and a rapid decline in theunemployment rate, which registered 6.7 percent in December….”

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Sup With All the Suicides in the Financial Industry?

“The apparent suicide death of the chief economist of a US investment house brings the number of financial workers who have died allegedly by their own hand to four in the last week.

50-year-old Mike Dueker, who had worked for Russell Investment for five years, was found dead close to the Tacoma Narrows Bridge in Washington State, says AP.

Local police say he could have jumped over a fence and fallen 15 meters to his death, and are treating the case as a suicide.

Dueker was reported missing by friends on January 29, and police had been searching for him.

A Sheriff’s spokesman said investigators learned that he was having problems at work but did not elaborate.

Jennifer Tice, a company spokeswoman declined to comment, however said, that Dueker was in good standing at Russell.

We were deeply saddened to learn today of the death,” Tice said in an e-mail on Friday. “He made a valuable contributions that helped our clients and many of his fellow associates.

Dueker joined Russell Investment in 2008. He wrote for Market Outlook financial services publications, forecasting the business cycle and the target federal funds rate. He is the creator and developer of a business cycle index that forecast economic performance published monthly on the Russell website.

He was previously an assistant vice president and research economist at the Federal Reserve Bank of St. Louis, and is ranked in the top 5 percent of published economists.

Over the past two decades he wrote tens of research papers mostly on monetary policy, according to the bank’s website.

His most-cited paper was “Strengthening the case for the yield curve as a predictor of U.S. recessions,” published in 1997 while he was a researcher at the Federal Reserve.

He was a valued colleague of mine during my entire tenure at the St. Louis Fed,” said William Poole, the bank’s ex-president. “Everyone respected his professional skills and good sense.

Dueker held an undergraduate degree in math from the University of Oregon, a master’s degree in economics from Northwestern University and a Ph.D. from the University of Washington.

Streak of bankers’ deaths….”

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$GS: Global Slowdown is Becoming More Serious

Goldman’s Global Leading Indicator’s January reading and the latest revisions to previous months paint a significantly softer picture of global growth placing the global industrial cycle clearly in the ‘Slowdown’ phase. They add, rather ominously, While the initial shift into ‘Slowdown’ (which we first noted in October) had a fairly idiosyncratic flavor, the recent growth deceleration now looks more serious than in previous months. Of course, as we noted yesterday, Jan Hatzius us rapidly bringing his optimistic forecasts back to this slowdown reality.


Swirlogram solidly in “slowdown” phase…


Via Goldman Sachs,

The January reading and the latest revisions to previous months paint a significantly softer picture of global growth and the GLI now locates the global industrial cycle clearly in the ‘Slowdown’ phase.

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The United States of Europe Marches On

“Viviane Reding, the vice president of the European Commission, has made it abundantly clear that her vision is to create and enforce a United States of Europe, and the upcoming election of 751 delegates to the European Parliament in May is just the time to accomplish the task. Said Reding, “We need to build a United States of Europe, with the Commission as government, and two chambers: the European Parliament, and a ‘Senate’ of Member States.”

Once enacted, the commission would reign supreme over the governments of the once-sovereign nations of Europe, and the European Parliament members (MEPs) would supersede the authority of parliament members of the various national governments. And now is the time, declared Reding:

This debate is moving into the decisive phase now. In a little more than four months’ time, citizens across Europe will be able to choose the Europe they want to live in.

There is a lot at stake. The outcome of these elections will shape Europe for years to come.

And then she acknowledged why such a big push for a supranational regime is needed: the growth of the Euroskeptics who see what she is planning and don’t like it one bit. “This will be our best weapon against the Euroskeptics: to explain to our citizens that their vote really matters,” Reding noted.

It’s going to be close. The harder Reding and her comrades push toward a political union with teeth, the more her efforts are being resisted. Major media mouthpieces for internationalism are getting nervous and are devoting massive resources not only to explore the breadth and the depth of the euroskeptic movement, but to begin to mount counterattacks to neutralize it.

For example, Huffington Post turned loose five of their journalists to explore the extent of the Euroskeptic movement across Europe and had them report back to headquarters what they found. What they found wasn’t pretty. Peter Goodman, the leading light among them, titled his report “Skepticism and Contempt” and noted that his researchers found strong sentiments of “suspicion and even contempt” for Reding’s plans. He added:

Given abundant signs of Euroskepticism from London to Berlin, this once-every-five years electoral exercise appears to be shaping up as no less than a referendum on the merits of continuing on with the European Union itself….

Distrust about the treaties and conventions that hold together modern Europe appear[s] to be at an all-time high … [which is] fueling a drive to reclaim national identities.

The Economist devoted nine pages to that growing unrest in its January 4 article….”

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U.S. Justice Department Investigates Large Banks and Hedge Funds Over Pay to Play

“The U.S. Justice Department is investigating whether financial firms made improper payments to secure investments from sovereign wealth funds, according to two people familiar with the matter.

The probe, which grew out of a Securities and Exchange Commission inquiry, looks at firms including Goldman Sachs Group Inc. that sought business from Libya’s sovereign wealth fund before Muammar Qaddafi’s regime was toppled in 2011, said one of the people, who asked not to be identified because the investigation isn’t public.

The SEC put banks, hedge funds and private-equity firms on notice three years ago when it began scrutinizing how investment companies were competing to manage large pools of government-owned cash. Providing kickbacks or lavish gifts to employees of a sovereign wealth fund may violate U.S. anti-bribery law, which prohibits compensating government officials to win or keep business.

Investigators are focusing on whether firms used so-called placement agents to funnel improper payments, according to the people. The use of middlemen has drawn greater scrutiny in the wake of U.S. corruption cases in which money managers used kickbacks and campaign contributions to win contracts from public pension funds. The SEC adopted rules to curb so-called pay-to-play practices in 2010.

‘Undue Influence’

Practices at JPMorgan Chase & Co., Credit Suisse Group AG, Societe Generale SA, Blackstone Group LP, and Och-Ziff Capital Management Group have also come under scrutiny, according to the Wall Street Journal, which reported the Justice Department’s investigation earlier Monday…”

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House Republicans Ponder the Impeachment of Obamao

“The Republican congressman who walked out during President Obama’s State of the Union address January 28, Rep. Steve Stockman of Texas, has announced that he is considering filing articles of impeachment against the president.

“I could not bear to watch as he continued to cross the clearly defined boundaries of the Constitutional separation of powers,” Stockman said in a statement he issued following the president’s speech. He also posted the statement on his Senate campaign website, where he asked voters to register whether they are for or against impeaching the president.

“Obama defiantly vowed not only to radically expand the reach of government from cradle to grave, but to smash the Constitution’s restrictions on government power while doing it. His goal is to eliminate our constitutional republic,” Stockman said. “Last year I said I would consider impeachment as a last resort to stop Obama’s abuse of power. And, quite frankly, we’re running out of options.”

Stockman has arranged for all 435 members of the House to receive a copy of Impeachable Offenses: The Case for Removing Barack Obama from Office by Aaron Klein and Brenda J. Elliott. The books have been donated by the publisher, WND Books. Klein has described the book as “the first draft of articles of impeachment.” The long list of charges it describes include the shipment of guns to Mexican drug cartels in the Justice Department’s “Fast and Furious” operation; the U.S. and NATO 2011 bombing campaign in Libya without congressional approval; granting de facto amnesty to millions of illegal aliens by executive order; and the use of Department of Homeland Security’s Fusion Centers, together with the National Security Agency’s collection of e-mails and phone call records, to put the nation under surveillance.

The “Fast and Furious” sting operation, which has been linked to the shooting death of a U.S. border guard, is one of the Justice Department actions cited in the impeachment charges 11 House Republicans filed against Attorney General Eric Holder last November.

“There’s a lot to look at and I think, at some point, if the smoking gun leads to the White House, we have to take action,” Stockman told WND.com. The Texas representative, who has launched a long-shot Senate primary campaign this year against incumbent John Cornyn, is not alone among House Republicans in raising the specter of impeachment. Washington Post opinion writer Dana Milbank published a column in December about a meeting of the House Judiciary Committee  in which the “I-word” was discussed.

“We’ve also talked about the I-word, impeachment, which I don’t think would get past the Senate in the current climate,” said Rep. Blake Farenthold (R-Texas), a committee member who said he believed there would be enough votes in the House to pass articles of impeachment. Rep. Steve King (R-Iowa) was reluctant to use “the word that we don’t like to say in this committee, and I’m not about to utter here in this particular hearing.”

“I don’t think you should be hesitant to speak the word in this room,” Georgetown University law professor Nicholas Rosenkranz testified at the hearing. “A check on executive lawlessness is impeachment.”

Rep. Michelle Bachmann (R-Minn.) has accused Obama of “impeachable offenses.” Rep. Duncan Hunter (R-Calif.) warned last year that Obama could be impeached if he carried out his implied threat to intervene militarily in Syria’s civil war without congressional approval. Rep. Bill Flores  (R-Texas) predicted that if the House were to vote on it, it “would probably impeach” the president.

Republicans in the House, where they are in the majority, are not likely to push for impeachment, however, given the unlikelihood of the Democratic Senate voting to oust the president. Even if Republicans should win control of the Senate in this year’s elections, they would face a considerable uphill battle to gain the two-thirds vote required by the Constitution for removal from office. Charges in Congress that a president has abused his constitutional authority often fall on partisan lines. Republicans, who were mostly silent when Democrats voiced outrage over George W. Bush’s signing statements, indicating what parts of a new law he would not enforce, now find their protests over Obama’s revisions of the Affordable Care Act — granting exemptions and postponing implementations of various provisions by executive order — fail to resonate with their Democratic colleagues. Members of the Republican minority in the Senate have protested, to no avail, over what Senator Ted Cruz of Texas has called Obama’s “lawless” acts. …”

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Heads Up: This Week Has a Boat Load of Data to Digest

“This week will go a long way to determining whether the uncertainty hanging over the world economy and markets fades after a rocky January or lasts further into the year.

A raft of global business surveys, jobs data from the United States and central bank meetings in Europe should offer a clearer view on how well the global economy is faring at the start of 2014.

Most economists have been expecting a better 12 months after three years of slowing global growth, but the recent turmoil in emerging markets has given them pause for thought.

MSCI’s global index posted its largest monthly decline since May 2012 in January, sliding 4 percent.

Emerging markets were down 6.6 percent for the month — their worst January since 2009 — after another turbulent day on Friday, when the Russian ruble slid and bond yields rose sharply across the board.

“Markets in the major economies will continue to be subject to trends in emerging markets (this) week, both in terms of overall currency and stock market sentiment,” said Philip Shaw, chief economist at Investec.

First up are purchasing managers’ indexes (PMIs), which survey thousands of businesses worldwide. While the PMIs from Europe and the United States are expected to show more growth, particular attention will be paid to those from China.

“There are  potential flashpoints in the form of various Chinese PMI indices – signs of a slowdown in the pace of economic activity in China would result in the risk-off lights starting to flash again.”

The other key data will be Friday’s jobs report from the United States.

The world’s No.1 economy added the fewest workers in nearly three years in December – just 74,000 non-farm jobs – although the consensus of economists polled by Reuters points to a rebound in January.

Still, there could be potential for another nasty surprise.

“As if forecasting the monthly change in non-farm payrolls were not hard enough, the outlook for January payrolls is clouded by poor weather, difficult seasonal adjustment, annual benchmark revisions, and methodology changes,” said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.


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Eerie Charts Here

“In 1928, just as income inequality was surging, stocks were soaring and monetary distortions were rearing their ugly head, the now infamous words“a chicken in every pot and a car in every garage” were integral to Herbert Hoover’s 1928 presidential run and a “vote for prosperity,” all before the market’s epic collapse. Fast forward 86 years and income inequality is at those same heady levelsstocks are at recorderer highs, the President is promising to hike the minimum wage to a “living wage” capable of filling every house with McChicken sandwiches and now… to top it all off – Maserati unveils their (apparent) “everyone should own a Maserati” commercial. It would seem that chart analogs are not the only reminder of the pre-crash era exuberance and its recovery mirage and massive monetary distortions.


Income inequality – check

The last time the top 10% of the US income distribution had such a large proportion of the entire nation’s income was the 1920s – a period that culminated in the Great Depression and a collapse in that exuberance.


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Global PMI Data Turns in a Mixed Bag


China: Official PMI: 50.5 — down from 51 in December.
China: Non-manufacturing PMI: 53.4, down from 54.6 in December.
South Korea: HSBC Manufacturing PMI: 50.9 — up from 50.8 in December.
Indonesia: HSBC Manufacturing PMI: 51.0 — up from 50.9 in December.
India: HSBC Manufacturing PMI: 51.4, up from 50.7.
Russia: HSBC Manufacturing PMI: 48.0, down from 48.8.
Ireland: Investec Manufacturing PMI: 52.8, down from 53.5.
Netherlands: NEVI Manufacturing PMI: 54.8, down from 57.0
Poland: HSBC Manufacturing PMI: 55.4, up from 53.2.
Turkey: HSBC Manufacturing PMI: 52.7, down from 55.0
Spain: Markit Manufacturing PMI: 52.2, up from 50.8.
Czech Republic: HSBC Manufacturing PMI: 55.9.
Italy: Markit/ADACI Manufacturing PMI: 53.1, down from 53.3.
France: Markit Manufacturing PMI: 49.3, up from 47.0.
Germany: Markit/BME Manufacturing PMI: 56.5, up from 54.3.
Eurozone: Markit Manufacturing PMI: 54.0, up from 52.7.
Greece: Markit Manufacturing PMI: 51.2, up from 49.6.
UK: Markit/CIPS Manufacturing PMI: 56.7, down from 57.2.
Australia: Ai Group PMI — 5 a.m.
Brazil: HSBC Manufacturing PMI — 6 a.m.
U.S.: Markit Manufacturing PMI — 9 a.m.
Canada: RBC Manufacturing PMI — 9:30 a.m.
Global: JPMorgan Manufacturing PMI — 11 a.m.”

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SocGen Ponders The Perfect Storm

“Last weekend at Davos, Nouriel Roubini told BI’s Joe Weisenthal that it seemed   markets had sailing into a perfect storm, resulting in lots of volatility.

“…Between Chinese PMI of 50, Argentina letting its currency go, noises coming politically from Ukraine, Turkey, and Thailand … [the] contagion is not just within emerging markets but also affects advanced economies’ equity markets.

This evening Société Générale says, that, indeed it sure looks like we have.

In a note to clients titled “Perfect Storm Brewing As Policy Turns,” they write:

Following a week of extreme volatility in emerging markets, many wonder if we are now heading for a perfect storm, with China increasingly sucked in and Europe’s already low inflation falling further towards deflation. The current developments also mark a shift in markets’ focus on where the need for policy change is the greatest…”

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China Manufacturing Data Hovers Above Recessionary Levels Posting a Six Month Low

“A Chinese manufacturing gauge fell to a six-month low in January as output and orders slowed, adding to signs that government efforts to rein in excessive credit will cool growth in the world’s second-largest economy.

The Purchasing Managers’ Index was at 50.5, the National Bureau of Statistics and China Federation of Logistics and Purchasing said Saturday in Beijing. That matched the median estimate of analysts surveyed by Bloomberg News and compared with December’s 51 reading. Numbers above 50 signal expansion.

The survey showed jobs and export orders shrinking, amplifying risks of a deeper slowdown as Communist Party leaders clamp down on the $6 trillion shadow-banking industry and interbank borrowing costs rise. A separate manufacturing gauge released by HSBC Holdings Plc and Markit Economics last week pointed to the first contraction in six months.

“There is no doubt that the surging money-market rates have added uncertainty and dampened industry confidence,” said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. The central bank will “have to strike a delicate balance” between cracking down on shadow banking and maintaining financial stability, Liu said.

China was scheduled to issue a report on January’s non-manufacturing PMI Monday morning. That gauge fell to a four-month low in December.

Estimates for the official manufacturing PMI from 31 economists ranged from 50 to 50.9. The benchmark Shanghai Composite Index fell 0.8 percent on Jan. 30, capping the worst start to a year since 2010, on concern the economy is slowing as the U.S. Federal Reserve cuts stimulus. China’s markets are closed for the Lunar New Year holiday from Jan. 31 to Feb. 6.

Output Gauge

A gauge of output in January fell to a four-month low of 53 from 53.9, while the new-orders index declined to a six-month low of 50.9 from 52.0, according to government data.

The survey suggested manufacturing jobs are shrinking at a faster pace, with a gauge of employment declining to 48.2, the lowest since February 2013. HSBC’s survey showed companies eliminating jobs at the fastest rate in almost five years.

HSBC’s broader index, which showed a reading of 49.5 for January, is based on responses from more than 420 manufacturers and is weighted more toward smaller companies. The official PMI is based on questionnaires sent to about 3,000 companies.

Borrowing costs remain elevated, with the benchmark seven- day repurchase rate at 4.98 percent on Jan. 30, according to a daily fixing compiled by the National Interbank Funding Center, compared with the month’s average of 4.7 percent.

Tighter Credit….”

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