July 8, 2012 8:56 pm

Eurozone crisis will last for 20 years

I always wondered who buys risky assets after one of thesehistoricstatements from the European Council. Sometimes the rally lasts for hours. Other times it lasts for days. The last one ended after less than a week; Italian and Spanish spreads are now above pre-summit levels.



The consensus among observers had been that the EU had taken an important step in the right direction by agreeing a pathway towards a banking union, but that they did not do enough on crisis resolution. I disagree with that statement. I think it was a very large step – in the wrong direction. The summit made a concrete crisis resolution decision contingent on a future decision, which will be even harder to reach, and thus even more likely to fail.



They agreed that there shall be no common bank recapitalisation until a full banking union is established. And the Bundesbank has reminded us that the latter is not possible without a political union. The logical implication is that we won’t solve the crisis for the next 20 years.




What we know now is that Germany will not agree to mutualised deposit insurance. It cannot even agree to give the European Stability Mechanism a banking licence so that it can leverage itself. If Germany cannot do the minimum necessary now, why should anybody think it can agree a political union? This is less credible than the promise by an alcoholic to give up drinking in five years.




The politics of the euro rescue has crossed an important threshold in Germany. A narrow majority is still in favour of the euro, but a majority is against further rescues. A group of 160 economists, led by Hans-Werner Sinn, president of the Ifo economics institute, last week published a manifesto against a banking union. It was full of sound and fury, but the importance of this document is that it reflects a consensus view.




Angela Merkel’s answer was revealing. She told them that there is nothing to worry about. The banking union was about joint supervision, she said. There will be no joint deposit insurance. She has a very different understanding of a banking union than the European Central Bank. At most, I expect this new banking union to cover the 25 largest banks, and leave those cajas and Landesbanken in national control. This is like an alcoholic who promises to drink only the better cognacs from now on.




The banking union that is required is the one Germany will not accept: central regulation and supervision, a common restructuring fund and common deposit insurance. It would take years to create. If done properly, it would require a change of national constitutions and European treaties, if only to redefine the role of the ECB. It is sheer madness to make crisis resolution contingent on the success of what would be the biggest European integration exercise in history.




With interest rates on 10-year government bonds over 6 per cent, neither Italy nor Spain can sustain their membership in the eurozone. This is what Mario Monti and Mariano Rajoy should have made clear to Angela Merkel at the summit. They should have told her that their governments would make preparations for a withdrawal from the eurozone if there was no change in policy. A resolution requires either a eurozone bond – or some other form of debt mutualisation –in both the public and private sectors, and ECB bond purchases. Germany does not accept the former. The ECB does not accept the latter.



If something is neither sustainable nor self-correcting, there are only two courses of action left. The first is to wait patiently until the situation breaks down. This is the strategy pursued by the European Council – and by alcoholics. The alternative is to start making preparations – and be careful not to trigger abreakdown in the process. It is hard to envisage an exit without breaching hundreds of national and European laws. This is why nobody is doing it. One would have to use a force majeure defence. One cannot prepare for such an event. It took a decade to create the euro. It will take more than a long weekend to undo it. A collapse would constitute the biggest economic shock of our age.


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But among a list of bad breakup choices, some are a better than others. I will write about these in a future column.



Back in November, I wrote that the European Council had ten days to save the euro. If they had laid the groundwork for a banking and a fiscal union back then, they might now be in a position to agree an effective crisis resolution strategyconsisting of bank recapitalisation and bond purchases. They did not do it then. And they are not in a position to solve the crisis now.



The message I took away from the summitis that the eurozone will not resolve the crisis. In that sense, it was indeed a “historicmeeting.


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Copyright The Financial Times Limited 2012

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July 8, 2012

Europe Needs a Legitimacy Compact




Whenever I travel around the globe these days I am asked how is it that Greece, a tiny economy, can have such a huge impact on Europe as a whole?


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It is the lack of public confidence in the European project itself that is the problem. Citizens and markets have suddenly discovered that Europe can move backward, that integration can turn into disintegration and that the European edifice is not as strong as we thought.



How did this happen? Economic and political integration in Europe are built on a fine balance of three elements: discipline, solidarity and legitimacy. Economic integration presupposes common disciplines to regulate economic activity and create trust. But because it increases competitiveness, it also requires solidarity. Discipline and solidarity can only be held together in a legitimacy space; that is, if citizens share a feeling of belonging. Political integration is about defining effective common institutions capable of creating this feeling.



In its 60 years of integration, accident or will have repeatedly moved the European edifice out of balance, each time requiring a new equilibrium between these three elements. The euro crisis shows that Europe’s institutions of political integration do not correspond to the economic integration that has been built. This imbalance is not sustainable, and new forms of discipline, solidarity and legitimacy have to emerge.



The euro crisis is actually three crises: one economic, one institutional and one of legitimacy. The economic component is the symptom — a dangerous combination of a lack of competitiveness, fiscal problems and shaky banks. The institutional component reflects the original sins in the design of the Monetary UnionEurope’s insufficient central powers in supervision, resolution and risk-sharing that subsequent constitutional reforms have failed to address. Lastly, the euro is also plagued by a legitimacy crisis in which support for the common currency — and, more broadly, for the European project — is in decline.



The E.U. has made some progress in resolving the crisis. A few months ago, the debate revolved around a fruitless discussion: austerity or growth? More discipline or more solidarity? In fact, we need both.


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The adoption of the Fiscal Compact has improved discipline; a Growth Compact will provide new tools for solidarity. But fixing the institutions of the monetary union requires more: moving toward a banking and a fiscal union.


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Stability in the euro area calls for forms of risk sharing, such as a common deposit insurance. The E.U. also needs independent resources, such as a common tax on financial transactions, a climate tax and project bonds, to finance its growth plan.



Recently, a new angle to the euro crisis debate has emerged. This is political union. More stringent disciplines and stronger solidarity can only be held together by a leap forward in political integration. What would a European Political Union look like? It would be based on four pillars: the Community method; the centrality of the European Commission; effective but limited central powers; democratic legitimacy. Some of these steps do not require amendments to the treaties, others do. If no broader agreement can be found, progress will have to move on through forms of enhanced cooperation.



If some headway in Europe has been made, why has confidence not been restored? We lack a common narrative over the crisis, over the answers to the crisis or over the manner in which citizens will be asked to contribute. Europe needs a “Legitimacy Compact” to complement its Fiscal and Growth Compacts.



The survival of the euro hinges on the revival of the European integration process. The E.U. needs clear proposals linking short-run actions with long-term reforms; linking disciplines, solidarity and legitimacy. It needs a collective European enterprise that will deliver concrete results that meet the demands and expectations of European citizens.



Europe also needs a new headline. What are the shared gains of integration? The preservation of peace; a model of environmental protection; a broader economic market; a voice in world affairs; a unique social welfare system: This is the European DNA, the raison d’être of the European common house.


      
Who shall frame a new narrative for Europe? Who shall propose a new European project? I am convinced that this is the task of the E.U. common executive, the European Commission. It is its mission and it is its duty. Individual national governments or various forms of directorates simply lack a view of the common interest.


      
For this to happen Europe needs an open political process. There can be no real sense of belonging unless Europe finds a way to have a debate that transcends national borders, national issues, national parties. The E.U. needs to be ready to listen to its cities, to its regions, to its civil societies. In sum, the E.U. needs to be ready to listen to the European citizen.




This is not a recommendation for a distant future, but for the European elections of May 2014. Start today by implementing a proposal Jacques Delors made more than a decade ago: linking the choice of the Commission president to the results of European elections, with each political grouping proposing a candidate during the campaign, with each candidate proposing a program, a European-wide project.




The European stage must be lit up for the European project to advance. As Abraham Lincoln used to say,With public sentiment, nothing can fail; without it, nothing can succeed.”



       
Pascal Lamy is director general of the World Trade Organization.



Will the oil stabiliser prevent global recession?

July 8, 2012 12:42 pm

by Gavyn Davies



The past week has seen the publication of generally weak economic data which suggest that the global GDP growth rate in 2012 Q2 will be the lowest recorded since the “recovery” began three years ago. Many of these data were analysed here on Friday. Since then, the US jobs data for June were anaemic at best, indicating that American business spending is now slowing in both capital expenditure and job creation.



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Furthermore, the eurozone crisis has moved in the wrong direction in the past week. The ECB cut interest rates on Thursday, but Mario Draghi poured cold water over the idea that the central bank balance sheet could be used to purchase significant quantities of Italian and Spanish debt, or to leverage the inadequate balance sheet of the ESM. Even more worrying, the Wall Street Journal reports that last week’s summit did not, after all, agree that bank capital injections should by-pass the balance sheets of sovereign governments. Instead, governments will reportedly be expected to guarantee these capital injections, which greatly waters down the force of the statement made after the summit.



 
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European activity data stabilised somewhat in June, but the absence of a genuine resolution to the crisis will hang over the region’s economies for many more months. The key near term question for the global economy is whether the serious effects of the eurozone shock can be mitigated by the renewed operation of the oil stabiliser, which has been growing in importance in the last few years. Here lies the silver lining, if there is one.




The eurozone crisis has reduced the growth rate of the world’s second largest economy from about +2 per cent to about -1 per cent in the past 12-18 months. Using the normal elasticities between eurozone GDP and trade flows, this 3 per cent swing implies that the growth in eurozone imports from the rest of the world is about 10 per cent lower than it otherwise would have been. The consequent direct effect on the GDP growth rate of other regions is around -0.5 per cent. Multiplier effects will make this impact larger, as will financial spill-overs from the reduction in the balance sheets of eurozone banks in the rest of the world.



Overall, the eurozone shock has probably slowed the growth rate in the rest of the world economy by about 1 percentage point since the beginning of 2011, which (in broad terms) is about half of the total slowdown which has occurred over this period. As discussed here, the rest is due to a combination of tighter fiscal policy, higher oil prices and adverse confidence effects on business spending. Easier monetary policy is helping, but most of these other effects appear destined to remain adverse for the foreseeable future.




The important exception, however, is the recent drop in oil prices. If maintained, this will have a powerful stimulatory effect on the developed economies in the second half of 2012.




The behaviour of the Brent oil price ($ per barrel), compared to its one year moving average, is shown here:
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In recent weeks, Brent and other oil prices have been somewhat volatile, but have been hovering around $90-100/barrel, which is about 25% lower than the peaks which were seen earlier this year. In the bottom half of the chart, I show the ratio of the oil price to the one year moving average, which in the past has been a useful indicator of the contractionary or stimulatory effect of oil prices on short term economic activity.


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In some ways, this can be treated as equivalent to an “interest rate” which tightens or eases demand conditions in the world economy. I call this the “oil price regulator”.




The precise impact of changes in oil prices on US and global GDP has been much studied by economists in the past decade, and it remains a subject of some dispute. James Hamilton published a highly influential paper in 2003 which suggested that the impact of oil prices on US activity was non linear. Large increases in the oil price relative to previous highs caused a great deal of economic dislocation with significant recessionary results, but declines in the oil price had little or no effect in boosting GDP.




If Hamilton’s conclusion is still valid, then the recent drop in the price of oil would not be a silver lining at all, since it would be irrelevant for world activity.


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However, recent work by Lutz Kilian and Robert Vigfusson casts doubt on the asymmetric nature of oil shocks, arguing that the 3-year change in oil prices have important effects on GDP in both upward and downward directions. Furthermore, a paper published last week by Kamakshya Trivedi and Stacy Carlson of Goldman Sachs shows that the impact of oil prices on GDP not only works in both directions, but has also increased in size in recent years.




The second graph shows the oil price regulator (plotted inversely, and shifted 6 months forward), compared to the global manufacturing sector PMI, which is used to represent the global economic cycle...



It is clear that variations in the oil price have been somewhat correlated with activity six months later, though the relationship is far from perfect. The Goldman economists estimate that a 20 per cent change in oil prices has impacted the global PMI level by about 5 index points in the period since 2007. This operates with a time lag of a few months.





If these results are correct, and all else being equal, then the recent drop in oil prices might be expected to take the global PMI back about 53-54 before the year end, which is consistent with positive, but below trend, global GDP growth. A similar conclusion is reached from the work of Bruce Kasman and others at J.P. Morgan, who suggest that the recent drop in oil prices will boost annualised global GDP growth by 0.8 per cent in the second half of 2012, taking it back above 2 per cent.
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The conclusion of all this is that the oil price regulator may be able to offset the eurozone shock over the balance of this year, assuming oil prices do not rebound. Global GDP growth would remain unsatisfactorily below trend, but would not fall into recession.



Krugman and Layard suffer from optimism bias

Stephen King

July 9, 2012



It feels like one more throw of the dice for central bankers stuck in the Last Chance Saloon. Last week’s rate cuts from the European Central Bank and gilt purchases by the Bank of England were certainly better than nothing. We shouldn’t kid ourselves, however, that they’ll provide the answer to life, the universe and everything. Our economic and financial problems are too big to be fixed with a simple flick of the interest rate switch or an extra £50bn of quantitative easing.


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Yet, until now, the puppet masters who pull our economies’ strings have persuaded themselves they know how to deliver us to the Promised Land. Central bankers have persistently provided forecasts for economic growth which, in hindsight, have proved to be far too optimistic.



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In the summer of 2010, for example, the sages of the Federal Reserve thought US economic growth would be between 2.9 per cent and 3.8 per cent in 2010 and between 2.9 per cent and 4.5 per cent in 2011. The actual outcomes were 3.0 per cent and 1.7 per cent respectively. The BoE was similarly optimistic, believing that the most likely outcome for UK growth in 2011 was around 3 per cent, a view conditioned on £200bn of asset purchases. The actual outcome was a rather more modest 0.7 per cent.



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Does this mean monetary policy has lost its capacity to have any influence on economic outcomes? That, I think, is too pessimistic a conclusion. As the Bank for International Settlements notes in its 2012 Annual Report, the policy stimulus on offer post-Lehman was far greater than anything provided during the Great Depression. As a result, the economic outcome has been far superior: the overall peak-to trough decline in US GDP this time around was 5.1 per cent compared with a whopping 30 per cent or so in the early-1930s.


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The problem, then, is not so much that policy hasn’t worked but, instead, that we expect too much from it. Stagnation is a lot better than Depression but there are still plenty of people out there who believe that, with a bit more effort and a few more macroeconomic policy wheezes, the good times will returndespite the evidence of persistentoptimism bias” in official forecasts based on no more than blind faith in the potency of policy.



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For those who seem addicted to stimulus, the answer to monetary impotence is more fiscal stimulus. This, apparently, costs nothing (unless you happen to be unfortunate enough to be living in the eurozone). As part of the correspondence generated by their original provocative article (“A manifesto for economic sense“, 27 June 2012), Paul Krugman and Richard Layard argued that “If public sector deficits were increased, interest rates would rise little, especially if, as is desirable, the extra government debt was largely purchased by the central bank” (Letters, 1 July 2012).


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It would be a cheap shot to mention the Weimar Republic or Zimbabwe in this context. Nevertheless, Messrs Krugman and Layard are making a highly-suspect assumption about the response of nominal activity to this kind of unconventional stimulus.


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Quantitative easing was supposed to boost UK growth but, instead, the UK ended up with higher inflation, squeezing real take-home pay and making debt repayment a lot more difficult. This was totally unexpected and thus provides a significant challenge to those who continuously demand even more stimulus. Can we be sure that the stimulus will affect real economic activity and not, even if indirectly, the price level?



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Krugman and Layard’s manifesto stated that “today’s government deficits are a consequence of the crisis, not a cause.” Tautologically true (how could today’s deficits have caused the failure of Lehman?), the authors conveniently ignore the fact that fiscal positions had already deteriorated a great deal pre-financial crisis. During the good times, fiscal policymakers simply hadn’t been sufficiently frugal. Their subsequent firepower was, as a result, necessarily diminished.




.The OECD estimates that, at the end of the 1990s, both the US and the UK were running cyclically-adjusted budget surpluses of around 3 per cent of GDP, excluding interest payments on existing debt.


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Long before the financial crisis, however, these 3 per cent surpluses had turned into 3 per cent deficits, thanks to big tax cuts and spending increases (the US) and spending increases alone (the UK). The subsequent collapse in economic activity obviously made fiscal positions far worse.


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Today’s fiscal predicament, however, stems in part from a lack of budgetary control during the good times. The convenient assumption was always that the good times would roll, a reflection yet again of a built-inoptimism bias”.



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Promising a pot of gold at the end of the policy rainbow is all very well, but the public is surely now cottoning on to the fact that a succession of post-Lehman policy wheezes hasn’t delivered a sparkling recovery. Maybe they have recognised that, in a heavily-indebted world, there are limits to what policy can actually achieve. Yes, it can prevent the worst outcome but, no, it cannot take us back to “business as usual”. There is, of course, an obvious reason for that: business as usual would require a continuously-inflating housing boom, a persistent increase in household indebtedness and, as it turns out, ongoing fiscal stimulus. We won’t be returning to those conditions any time soon.



Those who think we can must, then, be suffering from optimism bias.



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Stephen King is HSBC Group’s chief economist and the bank’s global head of economics and asset allocation research. He is a member of the Financial Times Economists’ Forum



Most Accurate Stock Market Predictions – Next Major Move

Chris Vermeulen .
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July 8th, 2012 at 2:02 pm




The term Stock market predictions is a very controversial topic and does seem to give off a negative/non-credible overtone to most traders, investors and the general public. We all know you cannot predict the market with 100% certainty, but knowing that you can still predict the market more times than not if done correctly. Keep in mind that the termmarket prediction” is also known as a market forecast or technical analysis outlook and is nothing more than a estimated guess of where the price for a specific investment is likely to move in the coming minutes, hours, days, weeks and even months.
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Getting back on topic, this report clearly shows how the US dollar plays a dominant role in the price of other investments.


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Understanding how to read the Dollar Index will make you a better trader all around when trading stocks, ETF’s, options or futures.




SP500 Stock Market predictions – 10 Minute Chart:


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These charts clearly show the inverse relationship between the stock market and the dollar index. Knowing how to read charts (candle sticks, chart patterns, volume etc.) is not enough to give you a winning edge. You must also understand inter-market analysis as all markets are linked together in some way and the dollar plays a major role in where stock prices will move next. Review the charts and comments below on how I came up with my stock market prediction and trade idea.
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Most Accurate Stock Market Predictions
Most Accurate Stock Market Predictions



Gold Market Prediction – 10 Minute Charts

Gold is another investment which is directly affected by the price of the dollar. Review charts for more details.

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Gold Market Forecast Procetions
Gold Market Forecast Procetions


Long Term Stock Market Forecast:


 


The weekly dollar chart is VERY IMPORTANT to watch as a short term trader and long term investor because trend changes in the dollar means you open positions will also likely change direction.


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So, if we apply technical analysis to the dollar chart as seen below. You will notice we are able to create a market forecast and predict roughly where price is likely to move and how long it should take to get there. If the dollar can break above the red resistance level then we can expect a rally for 4 – 8 weeks and a price target around the 87-88 level.



If this is the case then stocks and commodities would likely do the inverse price action and move lower, sharply lower



Dollar Long Term Market Forecast
Dollar Long Term Market Forecast
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Stock Market Predictions & Gold Market Forecast Conclusion:


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 In short, the next weekly candle stick on the dollar chart could be a game changer for those who are long the overall stock market.


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I will admit that the current market conditions are not easy to trade because of all the headline news rolling out of Europe each week along with economic data. And I feel as though we have been tip toeing through a mine field for the past 12+ months waiting for extremely negative news are extremely positive news to trigging a wave of buying or selling that will make our jaw drop, but it has yet to happen.


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Remember always use stops and don’t get over committed in a headline driven market.