This week’s economic calendar is dominated by the Federal Open Market Committee Statement on Wednesday. Markets are on tenterhooks following better than expected US Unemployment Claims data last Thursday and their implication for an imminent Fed rates increase. Commodities continue their decline since last week and equities are now beginning to teeter on the edge. Stakes are raised in the deflationary end game of decades of credit expansion.
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Mon 27 July
German Ifo Business Climate (expected: 107.6 previous: 107.4)
Tue 28 July
UK Prelim GDP q/q (expected: 0.7% previous: 0.4%)
US Consumer Confidence (expected: 100.1 previous: 101.4)
Wed 29 July
Federal Funds Rate (expected: <0.25% previous: <0.25%)
Australia Building Approvals m/m (expected: -0.9% previous: 2.4%)
Thu 30 July
US Advance GDP q/q (expected: 2.6% previous: -0.2%)
US Unemployment Claims (expected: 264K previous: 255K)
Fri 31 July
China Manufacturing PMI (expected: 50.2 previous: 50.2)
The US economy reported, on Thursday last week, another decrease in Unemployment Claims to 255k. The US jobs market is a key metric that the Fed has set as a benchmark for planned US rates increases. The market and media began speculating that rates may increase this year – sooner than expected. Over the weekend an accidentally published Fed staff report proved the speculation to be well-founded.
Reuters reports on a blundered staff publication of Fed policymakers’ forecasts on its website:
According to projections prepared in June and this past Friday, Fed staff expected policymakers to raise the benchmark Fed funds rate to 0.35% in 2015.
The implication is a 0.25% increase this year, from the current 0.13% rate.
According to the leaked document all but two of the Fed’s 17 policymakers agreed, last month, to an increase in 2015. Furthermore, there was some disagreement about whether to raise rates once or twice this year.
CCN.LA previously described the dilemma of a Fed rates increase as follows:
The implications of a US rates increase is that global rates will increase and that market shifts will happen very quickly in both anticipation of, and response to, the event. Turmoil is guaranteed and – while not desirable – it will generate volatility and liquidity crises, as explored in last week’s GEO, that will initially affect emerging markets and potentially all markets negatively.
The South African Reserve Bank responded to last week’s Unemployment Claims figure by raising rates by 25 basis points to 6% shortly after publication of the data.
David Hensley, the New York-based director for global economics at JPMorgan, told Bloomberg:
The South African Reserve Bank move foreshadows a broader shift toward emerging market tightening late this year and in 2016 that is not priced into financial markets.
Hensley went on to explain: “When the Fed starts raising rates, these vulnerabilities will show through, pressuring currency rates and creating problems with inflation, currency mismatches on dollar debt and higher debt servicing costs.”
Credit expansion always ends in a credit contraction – there is no historic example where the former did not result in the latter. The violence of the contraction is, typically, proportional to the preceding depth and degree of societal debt build-up.
The current era’s rate and extent of credit adoption is unprecedented and has continued , and accelerated, since the start of the fiat currency experiment in the 1970s. Fiat currency is created from debt and expands debt, exponentially, with each conjured dollar, euro, or what-have-you. As Part 3 of the xbt.social series “Liquidity Crisis and Deflation” explains:
The money “created” – or “printed” – by the Fed is, itself, a clever accounting trick – a slight of hand. The Fed has a legal mandate to buy US Treasury bonds from banks and other third parties, but in reality the Fed simply creates a US dollar denominated current account to the value of the bonds and allows the seller (bank, foreign government, etc) to write cheques against that account. The current account, by circular reference, is backed by the US Treasury bonds the Fed just “bought”. As per common definition, the bonds are certificates of debt, and the process of creating a current account for the seller of the bonds is called “Monetizing Debt“. Properly described it is make-believe Alchemy.
Also from the xbt.social series:
Consider that the present gorge on credit is not isolated to one country’s economy. The global economy is interconnected and every economy is soaked to many multiples of its GDP in debt. The precipitating “outside” events that Hamilton Bolton refers to can, therefore, come from any market or geography. Consider the following data releases from late last week:
New Zealand released June Trade Balance figures yesterday (Thu 23 July) and the data is shocking. Trade Balance reflects the difference in value between imported and exported goods during the reported month:
While trade balance has seasonal shifts – and we know New Zealand is an exporter of diary products and mutton (predominantly to neighbor Australia) – the fact remains that New Zealand’s own expectation was for a positive trade balance of 100M. A figure of negative 60M implies that exports have slumped and that the country imported 60M worth of goods more than they exported. In isolation, this is a sign of domestic economic contraction, but consider the following:
This document reports China Manufacturing PMI – an index that reflects the manufacturing growth as reported by a survey of purchasing managers in the Chinese manufacturing industry:
The index value for July is 48.2 (it was 49.4 in June) – the July figure represents a 15-month low and implies continued contraction of the Chinese manufacturing industry – this is at the base layer and impacts jobs, and reflects decreased consumption, lower domestic and international demand, as well as lower eventual export figures, and down the line: lower Trade Balance and GDP. It is significant, because China still holds the QE card, and economic contraction will force their hand.
With the prospect of the Fed increasing rates, and global central banks forced to follow suite – to protect their markets and trade and to prevent US dollar debt mismatches – the stakes are increased that liquidity crises and credit defaults will happen more easily and more frequently. Deflation of the global credit bubble is a matter of “when”.
The dynamics of credit deflation affect all markets and all asset classes – history shows that nothing is spared – not even “safe haven” gold. In the coming weeks we’ll consider the market effects and what prudent Bitcoin holders can do to financially survive this major risk event.
Greek newspaper Ekathimerini reports on a secret plot whereby Former Finance Minister Yanis Varoufakis claims that he was authorized by Alexis Tsipras, last December, to investigate a parallel payment system that would operate using wiretapped tax registration numbers (AFMs) and could function as a parallel banking system.
No doubt, Tsipras will have some explaining to do to the ECB and IMF.
Having secured a 7.2bil euro “bridging loan”, that Tsipras campaigned against and that Greeks agreed they didn’t want, the ECB is allowing Greece to reopen banks, with more restricted withdrawal limits and capital controls in place.
According to Reuters, a spokesman for the Athens Stock Exchange has said a proposal to reopen the exchange, submitted to the ECB, remains unanswered. The proposed opening day was today 27 July. Talk to the hand, perhaps?
As discussed in the grave Deflationary Vortex section above, no asset class is spared from devaluation during a deflationary episode, and GEO will be tracking major commodity and index charts to discover if this time is different. The one exception we expect in the current regime is the US Dollar Index. As credit evaporates and the US dollar reflates after years of devaluation, we expect to see the value of hard cash dollars soar – and the chart implies 105 and 110 are likely. Let’s see.
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This analysis is provided by xbt.social.
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The writer trades Bitcoin. Trade and Investment is risky and subject to probability and market changes. CCN.LA accepts no liability for losses incurred as a result of anything written in this report.
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