Spotlight on response to signs of recovery … In a week light on data releases, the focus of the markets is likely to be on policymakers as they grapple with how best to respond to the tentative global economic recovery. The British government will attempt to walk a path that neither stifles growth nor imperils the country's fiscal position when it unveils an emergency Budget tomorrow. In the US, the Federal Reserve holds a two-day interest rate-setting meeting with an announcement on Wednesday. And the leaders of the Group of 20 industrialised countries will meet over the weekend as they try to reach agreement on reforms to reduce the systemic risk in the financial sector. The debt difficulties in the eurozone that have buffeted global markets and sapped confidence are likely to make central bankers and politicians more cautious as they wind down the policies put in place during the global crisis to stimulate their economies. Analysts expect the Fed to keep the benchmark federal funds rate on hold at the record low 0 to 0.25 per cent range at its federal open market committee meeting on Wednesday. However, in common with recent meetings, the market's focus will be on the minutiae of the language used in the text accompanying the rate decision. The recent statement of Ben Bernanke (left), Fed chairman, to Congress reinforced the impression that a significant monetary tightening remains a long way off. – Financial Times
Dominant Social Theme: It's tough, but recovery is coming …
Free-Market Analysis: For the last umpteen months, beginning with sightings of "green shoots," the powers-that-be have been trying to gin up a recovery. It is a kind of dominant social theme of course, the idea that after a painful "recession," economies begin to rebound and life gradually returns to normal. Those who held onto their blue chip stocks and didn't sell are rewarded with dividends and occasionally receive mention in an article or two, or even a soundbite on a business channel.
Inevitably, financial planners emerge blinking into the sunlight from the caves where they have hidden. Their pallid faces are illuminated by the morning's bright rays. A new day dawns. Their clients, they tell us, proved difficult this time round. Much hand-holding was necessary when the Dow plunged by 50 percent and even their wealthiest customers face near-ruin. But now the bitter winter has eased. Spring is in the air. Investments are budding; rates are rising.
That is how the theme is supposed to sound. But this time round, mainly because the bust phase of this business cycle basically destroyed the West's 20th century fiat-money structure, the tune has soured and the right notes are not being struck. The downside of this business cycle has been so extreme that the power-elite, which is used to handling these sorts of crises and milking maximum benefit from them, has been struggling mightily too keep even the pretense of a recovery going. And we would argue that it is getting more difficult, not easier.
In America, the unemployment rate is staying stubbornly high despite an onslaught of "recovery" stories and a resurgent stock market. In Europe, confidence that a "soft-landing" would give way to a gradual recovery is in tatters as the sovereign debt crisis takes it toll. Country after country teeters on the brink of bankruptcy and talk of even modest progress has given way to bailout strategies and speculation over the fate of the euro and even the EU.
In China, the remaining prop of the worldwide economy, the yuan is to be unpegged, but this simply puts more pressure on the domestic Chinese consumer to purchase the baubles that China has made, with considerable disdain, for the outside world. The jury is yet out on whether China's "miracle" can continue, or whether inflationary pressures and a lack of demand will finally to catch up to the biggest Asian tiger of them all.
It wasn't supposed to happen this way, of course. The crises were supposed to be resolvable in our opinion. The American economy was supposed to get better along with the EU. China was supposed to go on without disruption. The elite, we have noted, likes its crises hot but not too hot. A crisis that bubbles over is not controllable. An uncontrollable crisis is unpredictable. Unpredictability makes the elite uncomfortable. Here's some more from the article:
"It's not clear that the recovery will be robust enough – V-shaped enough, if you will – to get us back to normal levels of employment in a short time," Mr Bernanke told the House budget committee. Some in the market may view any reference to the situation in Europe as a signal that rates are likely to be kept on hold for longer than previously thought. Economists at HSBC said that "given the emergence of strains in financial markets due to worries about the solvency of important sovereign debtors in Europe", the majority of the FOMC was likely to argue in favour of keeping rates on hold for some time.
In the UK, the focus will be on the emergency Budget, where George Osborne, the chancellor of the exchequer, is expected to unveil a raft of cuts aimed at bringing down the national deficit. Markets are concerned, however, that the austerity programme will constrain the economy's growth. This week, the crucial releases are expected to be downbeat on the US economy. Economists expect new home sales to fall to 430,000 in May from 504,000 the previous month, while durable goods orders are forecast to drop 1.1 per cent following 2.8 per cent growth in April.
In Europe, the closely watched Ifo survey of the business climate is expected to remain broadly unchanged, in spite of the eurozone's debt woes. Economists at ING said: "Normally, German manufacturers can look through the volatility of financial markets and focus on the upside of the current debt crisis, i.e. the weaker euro and low borrowing costs."
Usually at the end of a "recession," the Fed (central-banking engine for the world) prints money and that salvages bank balance sheets. Some of the money is retained but some goes into the stock market, especially the US stock market. The helpful mainstream media begins to point to the rising stock market as "leading the recovery." The higher prices kick-start the biggest blue chip companies which start to hire more and do better. As the stimulative fiat-money begins to flow to the bottom line, international corporations sell more products and the mainstream media grows positively euphoric. A recovery is declared.
Of course as we have pointed out before, this is mainly smoke and mirrors. Every recession since the end of World War II has damaged the West in indefinable ways. But America, with the most to lose, has lost the most. Its industries are hollowed out. Quality of life has plummeted. The city of Detroit is razing houses and returning large sections of its downtown to woodlands. California, Chicago and New York are likely facing unbearable budget imbalances that the federal government will have to bail out – begging the question as to who will bail out the Feds.
And now, of course, there is the BP/Gulf crisis. We have no doubt that the oil spill was initially greeted with enthusiasm from the Obama administration, which hoped to capitalize on the disaster by using it to leverage increased Green regulations and legislation. But as the spill continues, the US is looking at a catastrophe that is poisoning its entire Southern coastline. So far, the economic costs have not been factored into any potential US "recovery" but we imagine, when they are, the picture that emerges shall not be pleasant.
And so to war? The UN has passed more resolutions. The convoys steam toward Iran. Elite promotions fizzle, and disruptions to civil society must be maximized. Out of chaos, of course, comes order. Or that is the plan. But we wonder how well it will work this time as it all plays out under the scrutiny of the Internet and tens of thousands of blogs. The crises are worse and worse and the masses of the West are awakening in our opinion. We are not sure the elite will get the increased power centralization they seek – and more global governance – not any time soon. These are unprecedented times.