By Raúl Ilargi Meijer, editor-in-chief of The Automatic Earth, Cross posted from Automatic Earth
Last week, I was reading parts of a report issued by Japanese investment bank Nomura, which started out saying that the “Global Financial Crisis” is over. If I lay out a statement like that side by side with a lot of other things I see, I can only conclude that Nomura doesn’t reside in the same universe I do. Well, it’s either that or they have the idea that a financial crisis is something that exclusively plays down in, and affects, the “world” of investors. If the latter is true, that would of course be some pretty myopic thinking.
So I’m left with just one possible conclusion: that we live in parallel universes. And I understand from perusing the notions about such universes in physics theories that they tend to include every possible universe. Therefore, if some of the best and brightest physicists who live in the same universe that I do tell me that there are other universes in which Elvis is very much alive, I must acknowledge the possibility that there are also some in which the Global Financial Crisis is indeed over.
That still leaves me with the fact that I live in the universe I live in, and not in Nomura’s one. And even though the theory states that I may live in many others as well, that part of the theory is simply not of much practical use. So, given the fact that Nomura’s analysts write reports about a universe that may be parallel to mine but is decidedly different, these reports don’t seem to be of much practical use either. I therefore hope these analysts won’t be too disappointed that I don’t intend to turn to them for advice.
They picked a nice title:
There wasn’t any memo, but FYI the Global Financial Crisis is over. Not that clocks have simply rewound to 2006, but: the US property market has been recovering for no less than 20 months, the US household balance sheet is largely repaired, the renminbi is stronger and the US-China current account imbalance vastly reduced, China is grasping the nettle of structural reform, European core-vs-periphery cost differentials have substantially narrowed, and Europe is growing again.
Looking forward, we thus see 2014 as a year in which macrosystemic risks will not dominate equity performance – unfinished QE ‘taper’ business notwithstanding – but equally as a result, a year in which returns will not be spirited along by ‘risk compression’ and multiple expansion either. Rather, global stocks in 2014 will stand or fall in large part simply on whether they deliver earnings. The good news is, 2014 should serve up a reasonably robust growth platform for global corporate earnings: Our economists expect global nominal GDP growth to rise to 7.0% next year from 2013’s 6.1% — leaving our strategy preferences inclined toward cyclical- and reflation-sensitive sectors. But the acceleration will be unevenly skewed toward the Developed Market economies, while Emerging Market growth plateaus and China’s growth further moderates (to 6.9% in real terms).
Looking toward 2014, we believe much of the ‘deep value’ argument for stocks has now played out as the Global Equity Risk Premium has fallen to just 0.4 standard deviations currently vs. its late-2011 high of 2.2 standard deviations. With this, global equities have outperformed the aggregate global bond index since mid-2012 by a sizeable 45% over the same time period.
From here, equities will increasingly require more of a growth rationale for upside, rather than the macro-risk compression of 2012-13. The fact is, after fairly undramatic passages (by 2010-12 standards) of such episodes this year as the Cyprus banking failure and October’s US fiscal standoff, very few developments from here are likely to rise to the level of true systemic contagion threats. But this also begs the question where the superlative earnings growth will be found.
Surely the Nomura people are aware of the fact that without the QE “family” of global measures, which in essence take wealth away from the public and give it to the financial system, broad asset valuation would be hugely different from what it is now? And while it is true that QE thus doesn’t entail new overall debt creation, it does create new debt for one segment of society: the public. That same public is good for 70% of GDP in the US, and a few percentage points less in other countries. And if you put more forward pressure on those 70%, how you’re going to create GDP growth is a really obvious and really big question mark. In my universe, that is.
The poster child for optimism of the blind variety, but in my view also the poster child for a mental and financial bubble, is Britain. In that regard, the Financial Times seems to play on the same team, or live in the same universe, as Nomura. And for a newspaper that’s got to be more worrisome than for an investment bank that simply talks it book.
The strength of the UK economy is drawing covetous and occasionally envious glances from the eurozone as investors from around the world size up the opportunity presented by Britain’s recovery.
The UK economic revival has taken almost everyone by surprise, confounding domestic and international forecasting groups. Having failed to predict the turn, most explain the sudden resurgence as a rebounding of confidence linked to the removal of previous impediments to growth, such as weak banks and fears of a eurozone crisis.
Some economists believe the UK will be the world’s fastest growing developed economy over the next five years. This is a tempting prospect for foreign corporates and investors, but they are weighing up potential opportunities against the political uncertainty of an EU referendum, as the coalition government staggers from one populist measure to another. [..]
Eric Chaney, chief economist at Axa, the French-based insurer, says he and his team think the British economy is more likely to surprise on the upside next year, partly due to more robust credit growth and a flexible labour market. [..]
Here the FT starts to defy its own chosen title for the article. And it does more of the same later on:
There is one stark exception – Germany – where the prevailing opinion among economists is sceptical. Holger Schmieding, chief economist at Berenberg bank, said that for German businesses “the UK is not on the list of top places to expand. The sentiment, especially in Germany, is that the UK is blowing up a property bubble, and it will end in tears. If it sucks in imports, we are happy to supply them – but we don’t think the UK is a wonder economy.” [..]
Outside the eurozone, some US investors also have a sceptical slant on the UK recovery. Marshall Stocker, global equity strategist at Eaton Vance, which has $280bn under management, says that while there is evidence of “onshoring” of manufacturing in the UK, the country’s exports had remained weak.
“To say we are off to the races in terms of GDP growth in the UK would be irresponsible,” Mr Stocker says. “[It] has been driven by increases in household spending, but there has been no real wage growth and it is very difficult to see sustainable economic growth until workers are feeling the benefit of a growth cycle. Household spending seems to be up because of confidence from housing, but one must worry about a bubble. The confidence that comes from the asset value of a house may not be there in the future.”
A “flexible labor market” is a questionable parameter. If it means it’s easier to fire people, it’s at best a toss up, with workers on the short end of the stick. “More robust credit growth” is not even questionable. With record debt levels, more debt is not a solution, it’s merely something that may make one look good until tomorrow morning (or the next election). It’s also what lies at the basis of the property bubble (and not just in the UK). Even the Bank of England has called a halt to what the government has been trying to do:
The governor of the Bank of England on Thursday reined in the mortgage market as he sought to prevent five years of ultra-low interest rates and George Osborne’s Help to Buy scheme from fuelling a pre-election housing bubble.
Amid concerns that the UK is in the early stages of a new property boom, Mark Carney announced he was refocusing the Funding for Lending (FLS) scheme that gave lenders financial incentives to provide home loans. The governor said it was “no longer appropriate or necessary for us to have our foot on the accelerator, better to shift into neutral”.
But as property prices go up, wages go down. How long can this last?
Britain’s wage-earners have taken a £5,000 pay cut in the past five years, according to government figures, suggesting ministers will struggle to engender a feelgood factor before the 2015 general election. The figures published by the Office for National Statistics show wages and salaries for the middle fifth of non-retired households fell from £33,100 in 2007-08 to £28,300 in 2011-12.
Wage earners lost 15% of their income. Young workers, who have much lower incomes to begin with, lost 12% since 2008.
The pay of workers in their 20s has tumbled by almost 12% since the peak of the recession, according to a leading thinktank. The Resolution Foundation said younger workers faced an almost unprecedented squeeze on both the wages and employment chances four years after the financial crash.
The same Resolution Foundation has another “nice” stat in its report:
Low Pay Britain shows that 4.8 million Britons (20% of all employees) earn below the Living Wage – a leap from 3.4 million (14% in 2009 – at the height of the recession.
UK incomes are down 15%. 20% of employees are below the “Living Wage”. Now please explain to me how the economy can be doing well, as the UK government and (most of) its media are proclaiming.
Oh wait, silly me. What am I thinking? Of course! Robust credit growth! Curiously, the following Telegraph article came with two titles. Once you opened the article, it was called: “UK mortgage approvals near six year high in October”, but the link on the business page was different. Can we read something into that?
Household debt touched a record high of £1.43 trillion in October, surpassing the levels seen at the start of the financial crisis. Amid renewed concerns that Britain’s economic upturn is being fuelled by debt, Bank of England data yesterday showed total net lending in the UK increased by £1.7bn in October, following an rise of £2.2bn in September. Including mortgage payments, Britons now owe a total of £1.4296 trillion, or around 22,000 for every man, woman and child in the UK. The previous high was £1.4294 trillion in September 2008, when Lehman Brothers collapsed.
I guess if you take away 15% of people’s wages, but you still manage to spend by convincing them to ratchet up their debts ever higher, you sort of have it made as a government, right? Though it might be better if you could get everyone to agree.
A growing band of credit-hungry consumers could trigger another financial crash in 10 years as banks, payday lenders and credit card companies add to the debts of low and middle income earners, a leftwing thinktank has warned.
The Smith Institute said policies adopted by the government and regulators since the crash had failed to prevent an escalation of debt among vulnerable younger workers and young families keen to establish a home and live independently.
In a report, Tomorrow’s Borrowers: Personal debt by 2025, the thinktank suggests that urgent action is needed “to stop the UK sleep walking into a major personal debt crisis“.
Too late for stopping that one, I would think. Now, you may claim this is all just Britain, but does anyone really believe the US housing market is not experiencing a similar bubble? Or that American wage or debt developments have been more benign than the British? Don’t think so. There are plenty examples like this one:
Student loan debt continues to pile up on America’s college graduates, topping an average $29,000 per student last year. The average debt load for the class of 2012 was $29,400 – up more than 10% from the previous year, according to a report released Wednesday by the Institute for College Access & Success’ Project on Student Debt.
At the same time, colleges across the country have been hiking tuition and fees and families’ incomes have been shrinking, student loan debt has risen at an average rate of 6% per year from 2008 to 2012, the report found. Seven in 10 seniors graduated with student loan debt, and a fifth of that debt was owed to private lenders, which often charge high interest rates.
And we haven’t even talked about the biggest spoke in the “GFC is over” optimism wheel.
The crisis facing the younger generation across the Eurozone worsened last month as youth unemployment hit a new record high of 24.4% with under-25s in Spain, Italy and Portugal finding it harder to get jobs.
The grim news on on employment came as the Netherlands was stripped of its prized AAA credit rating despite the country’s recent exit from a year-long recession.
The Eurozone jobless data showed Spain’s youth unemployment rate has now increased to 57.4%, only marginally below Greece’s August high of 58% – which remains the highest rate of youth unemployment for any country in the eurozone’s history. Italy’s youth unemployment rate rose to 41.2%, from 40.5% the previous month. In Portugal, it rose to 36.5% from 36.2%.
The startling figures from southern Europe contrast with rates in the north where Germany has a 7.8% youth unemployment rate and the Netherlands an 11.6% rate.
US youth unemployment was at 16.3% in July 2013. Not Greece or Spain, but a whole lot worse than Germany or the Netherlands. Feel lucky, punk?
If for a second we can delve into the worst case in Europe, don’t let’s forget that Nomura said “European core-vs-periphery cost differentials have substantially narrowed, and Europe is growing again.”. Athens University economics professor Yanis Varoufakis:
It takes a passionate disregard for the truth to suggest that Greece is recovering. Investment has fallen by 18% since the dismal levels of 2011/12, credit to non-financial institutions is 20% down from the asphyxiating depths of 2012, poverty has reached record heights, and is still growing, employment is at levels that are best narrated in the style of Steinbeck’s Grapes of Wrath, public debt is exceeding the worst expectations of the greatest pessimists, private debt is reaching for the sky at a time when the collateral posted (e.g. house prices) are sinking fast, the government’s tax take is trailing the worst forecasts.
The list of woes is endless and the so-called ‘Greek Success Story’, or ‘Greek-covery’, reflects nothing except the determination to reverse the truth, Goebbels-like, by those who insisted on the policies which resulted in this debacle.
All this leads to ever lower pay for those who even have jobs …
Living on low pay in 2013 is a rough and all too common experience, but being stuck on poverty-pay for a decade or more is tougher still. Yet for all the talk in Westminster about living standards, and the growing recognition that nearly five million workers are paid less than the living wage, there is very little understanding of the fact that many people survive on low pay for years on end. Low pay is too often thought of in terms of a series of snapshots rather than a motion picture.
… many cling to the complacent view that, yes, there is a lot of low paid work but it overwhelmingly afflicts young people before they go on to earn more (never mind the fact that the earnings of a typical twentysomething have plummeted by more than 12% since 2009). Poverty-pay, according to this argument, is a rite of passage, to be endured then exited. Over a lifetime, things even out.
Except, it turns out, they don’t. [..] If we look at the last decade, the great majority – nearly three-quarters – who started off on low pay failed to escape it. More than a quarter (28%) didn’t leave low pay at any point; 44% moved in and out of low pay but didn’t exit it; only 18% broke free of low pay altogether. Half of those stuck on low pay are aged between 40 and 60.
… while pensions go up in smoke (let Detroit’s bankruptcy be an example for you).
High levels of youth unemployment will lead to widespread poverty in old age as young people struggle to save for retirement, according to the Organisation for Economic Co-operation and Development. A new breed of private pension schemes, which are built on monthly contributions, will be undermined if younger workers stay unemployed for long periods, said the Paris-based thinktank.
[..] the UK has pursued every avenue to both improve the lives of older people and cut the cost of providing them with a decent income, said the OECD, [which wrote] in its report Pensions at a Glance 2013 that the UK had raised the average incomes of people above the retirement age and introduced plans to expand coverage through the workplace pension savings scheme Nest, which is expected to automatically enroll 10 million workers over the next three years.
But it said the knock-on effect of policy reforms, many of which protect the benefits accrued by older workers at the expense of young employees, was that in many OECD member countries younger workers were now more at risk of poverty than retirees.
Not only is the Global Financial Crisis not over by a long shot, it’s deepening and worsening for most people. And they haven’t even found out at what price, which they will be on the hook for, their governments have shielded the banks from the fall-out of their own losses, an ultimately useless course of action because of the size of these losses. More unemployment, lower wages, more poverty, these are not temporary phenomena, they are set to be everyday reality for fast growing groups of people for many years to come.
And while I’m sure there are different opinions on the matter, in the end you cannot solve a financial crisis by unloading its consequences on whoever happens to be weak and have no voice. By trying it regardless, our governments and other “leaders” are not just creating two different worlds, but different universes. However, if for a moment we allow ourselves to still see just one universe, it becomes painfully obvious that Nomura’s “the Global Financial Crisis is over” is a nonsensical claim.