Italy's Recent Election and Europe's Ongoing Struggles

On June 22nd I had the great pleasure of speaking with Ameera David on RT’s Boom Bust about Italy’s recent elections and Europe’s ongoing struggles, just on day before the United Kingdom holds a referendum on remaining within the European Union.

Rome has just elected its first woman mayor in nearly 3,000  years, the 37-year-old Virginia Raggi, who is a member of the Five Star Movement which was started by comedian Beppe Grillo. This election was highly representative of the challenges facing much of the western world. The campaign promises of those now in office have been forgotten and in their stead we get more of the same disappointing lackluster growth. Infrastructure from trains in Italy to roads in San Diego are in an embarrassing state, looking more and more like what one would expect to see in third world countries. Ms. Raggi campaigned on a platform of anger at frustration with the status quo, a sentiment that appeals to many across both the US and Europe, but her time in office is likely to be a big disappointment as Rome is a massive and incredibly complex city to manage and her background gives no confidence that she’ll be able to manage such an enormous challenge. I hope I’m wrong.

In the US, we have an unprecedented presidential election dynamic wherein the two presumptive candidates enjoy less support from within their own parties than has ever before occurred in modern history. In Europe faith in Brussels’ ability to help get economies within the union growing at a more tolerable rate are fading as is faith in the benefits of the European Union itself. The two largest economies on earth are experiencing heightened level of political turmoil that is likely to continue for some time, as the problems are structural and deep in nature, exacerbated by the aging demographics and under increasing pressure from the immigration/humanitarian crisis.

Things are going to get a lot more complicated before they get better. The asset price “put” assumed to exist through the omniscience and omnipotent of central bankers is becoming more tenuous. There are more and more potential major catalysts for a downturn out there, which means investors need to be prepared to manage heighten downside risks in a market that is already priced with a head-scratching level of optimism.


Elle On RT's Boom Bust Talking June Rate Hike

On May 4th I spoke with Ameera David on RT’s Boom Bust about the likelihood that the Fed will hike rates in June. We discussed the ongoing earnings recession facing companies, the continued decline in top line revenue and how that will affect the recent uptick we’ve seen in wage pressures. We also talked about the impact of the Brexit vote on any hike in June and what we can learn about the global economy by looking at what’s happening in China.

China and Emerging Markets – A tale of QE

China and Emerging Markets – A tale of QE

This week I sat down with Erin Ade on RT’s Boom Bust to discuss what is happening in China and emerging markets and how it may affect U.S. investors as well as our domestic economy.

When the Federal Reserve began its Quantitative Easing Programs, many feared that it woul16d lead to high levels of inflation. Today, after three rounds of quantitative easing, we have very little evidence of domestic inflation and with the dollar gaining strength against most all other currencies in the world, we are actually facing some deflationary forces.

First, what is Quantitative Easing and why do people say it is all about “printing money?”

Quantitative Easing refers to the process shown below wherein (1) the Treasury Department sells Treasuries to Banks in return for cash to fund the annual deficit. This money is then spent by the federal government. Banks then turn around and sell the Treasuries to the Federal Reserve in return for cash. This cash is typically in the form of a “ credit”  in their reserve account, but for all practical purposes it can be thought of as cash since these reserves can then be used to loan money to businesses and individuals, who then effectively have cash in hand.



So just how much of this did the Fed do?  The chart below from the Federal Reserves shows that it bought about $4.5 trillion dollars worth of Treasuries and mortgage-backed securities during the three rounds of quantitative easing.  To put that in context, that is over 25% of US GDP during that time.  With all that new money coming out into the economy, inflation was a very real concern, yet it didn’t happen.

2015-09-16 Fed Assets

So what did happen to all that “money printing?”  A lot of it went into emerging markets.

A recent working paper published by the Bank for International Settlements titled “Global dollar credit and carry trades” found that one of the unintended consequences of the Federal Reserve’s quantitative easing program, was the significant increase in issuance of dollar denominated corporate bonds by emerging market companies where the proceeds primarily fed into existing cash balances, a form of corporate dollar carry trade.  The paper cites a 2015 study that estimates that the outstanding USD-denominated debt of non-bank entities located outside the U.S was around $9.2 trillion at the end of September 2015, an over 50% increase from the beginning of 2010.

In an earlier post I pointed out just how much the USD has appreciated relative to most every other currency since the end of Quantitative Easing, making this carry trade increasingly untenable.  We’ve seen more and more slowing across the globe, with commodity-heavy countries like Australia, New Zealand and Canada, (who just reported that it is now in a recession after two quarters of negative GDP growth) engaging in pretty aggressive easing cycles, that will only further weaken their currencies relative to the dollar. What is even more concerning is that a rather large percentage of these firms are in mining, oil and gas sectors and we all know what has happened to prices for those commodities!  This means we have companies whose domestic currency is sliding further and further against the USD in sectors that have been utterly slammed, with outstanding USD denominated bonds, making those bonds more and more expensive every day – pushing an unwinding of this USD carry trade.  I suspect traders on Wall Street aren’t the only ones stocking up on Mylanta these days.

Our discussion begins at the 20 minute mark in the video below.

RT Boom Bust with Erin Ade talking about the Fed, Greece and Italy

On May 28th, I appeared on RT’s Boom Bust  with Eric Ade, talking about about the Fed, Greece and Italy.

For some time the Fed has been talking about raising rates, but the stream of economic data we’ve been seeing doesn’t give the FOMC, (Federal Open Markets Committee) much of an argument for raising rates.  Employment gains have also been exceptionally deceptive, with much of the gains in low paying industries.  However, if the Fed doesn’t raise rates, that significantly reduces the arrows in their quiver if/when the U.S. goes back into a recession, which given the normal business cycle timeline, would be reasonable to expect in the near-to-mid term.  That being said, with all the manipulations in the markets and the economies since the financial crisis, nothing is “normal” and the unreasonable has become the reasonable.  The single most important price in the economy is the price of money.  Once that is no longer priced freely  by the markets, which is impossible with all the interest rate manipulation by central bankers everywhere, the price of everything else gets seriously distorted.

We also discussed the prevailing narrative I wrote about in an earlier post surround Greece and the potential Grexit, which is based on the assumption that the nation’s problems stem from a workforce that is either lazy, stupid or worse.  Finally we discussed how much of what is happening in Greece, is present elsewhere in the world and in particular causing much of the economic angst in my second home, Italy.