Starting this week, Red Bull Money Talk will be posting Macro: The Bottom Line, a weekly column covering the top macroeconomic movers affecting the markets today. The inspiration behind this column is simple: in an age of unprecedented policy intervention by central banks and governments alike, it's impossible to make isolated investment decisions without considering the broader picture. But with the likes of Bloomberg, CNBC, WSJ, FT etc. bombarding us from all sides with information 24/7, how do busy working professionals like you keep track? This column will present you what you need to know, without the frills.
- Yellen comments signal no change in Fed's easy-money policy
- China introduces bold reforms, but the devil is in the implementation
- Spain exits its bailout, but Eurozone issues not over yet
Yellen comments signal no change in Fed's easy-money policy: Despite
all the hype leading up to Fed Chair-nominee Janet Yellen's
confirmation hearings, her initial comments to senators on Capitol Hill
last week revealed little that we didn't already know. In a nutshell,
Yellen repeated what she and her mostly dovish colleagues on the FOMC
(including outgoing Chairman Bernanke) have said over and over again: without strong signs of growth, the Fed's printing presses will stay on.
And we'd better take her word for it. For all the panic over
"tapering," it's worth remembering that Yellen is an unconditional
believer in an activist Fed. The era of easy money is here to stay, and
don't expect any rate hikes from the Fed anytime soon. What we've
been warning about on this blog from the start - that (1) inflation is
set to trend higher over the long-term, and (2) favor gold and real
assets over the dollar - remains very much the case.
China introduces bold reforms, but the devil is in the implementation: The
key measures unveiled following the Communist Party's Third Plenum
meeting included: (1) allowing farmers to buy, sell, and collateralize
land; (2) loosening the household registration system to facilitate
migration to urban areas; (3) scrapping the one-child policy under
certain conditions; (4) upgrading the role of the private sector in the
Chinese economy. In a nutshell, the idea of these reforms is to lift the
purchasing power of ordinary Chinese consumer, halt the demographic
ageing of Chinese society, and sustain the country's growth momentum.
All very noble goals, and the reforms are certainly a step in the right
direction. It's too early to pass judgment though, as these reforms will
not be fully implemented by 2020. And the details on other key areas -
such as reining in the shadow banking system (which now eerily resembles
the CDOs and ABS markets of the pre-Lehman US) and tackling surging
local-government debt levels - remain lacking. So the risk of a
financial crisis in China still cannot be ignored. But these risks
aside, the reform efforts in China are nonetheless a positive
development. In fact, they serve as another reminder that the sources
of growth will increasingly come from the world's emerging markets, and
not from a nation governed by a dysfunctional Congress and
"kick-the-can-down-the-road" policies.
Spain exits its bailout, but Eurozone issues not over yet: It's
true, you've seen quite a lot of Euro-bashing in this blog. But we see
the need to do so again in light of the Eurozone finance ministers'
decision this week to allow Spain (yes, that's not a typo) to exit its
100 billion-euro bailout program. True, the situation has calmed down,
Spanish bond yields are no longer at stratospheric levels, and the
bleeding in its banking sector has been bandaged. But does this mean
that it has fully reverted to being a "normal" economy? It suffices to
look at the the 25%-plus unemployment (more than 50% for youths), the
hundreds of billions of euros of bad loans on bank balance sheets, and
the absence of a viable growth model (after years of a construction-led
boom) to answer the question. The broader issue is that markets appear
to be taking the European Commission's bait, and the Euro currency has
recovered the 1.35 mark against the dollar. Don't read too much into
it - while Europe appears to have stepped back from the brink for now,
the region's economic misery is set to continue.
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