Will the ending of the Zero Interest Rate policy produce a credit crisis?

The lead story in today's FT says quotes the Glaxo's CEO as saying that easy money has led drug companies to make bad investments. "It's a little bit reminiscent of the early 2000s where every bit of new scientific news was good and would be permanent and would lead to great value creation." The article notes that a record $460 bn of pharma deals have occurred since the beginning of 2014.

I suppose that a lot of this spending has been debt financed. If the assets aren't good, then debt service will become increasingly onerous as interest rates rise. This is another reason for the Fed to keep interest rates below the rate of inflation indefinitely.

Meanwhile, the head of the European Securities and Markets Authority (ESMA), Steven Maijoor, said yesterday that "The very historically unusual monetary policy is raising risks for the non-banking sector." He said investors and companies were investing to an excessive degree in illiquid assets in a search for returns due to the overvaluation of liquid stocks and bonds.

Every day that ZIRP persist makes more severe the subsequent credit crisis, n'est-ce pas

Chinese oil imports are steadily trending upward. Global demand is not the source of price volatility.

We already knew that supply/demand imbalances in the oil market are caused almost entirely by supply deviating from trend. The fifteen year chart of Chinese oil imports in today's FT illustrates this. Not even the great recession seems to have made much difference.

In fact, world oil demand seems to grow 1% or 2% a year, year after year.  The only declines in world consumption in the past 25 years were in 2008 (-0.78%) and 2008 (-1.25%).  The Chinese slowdown, which is real and which heralds a new, lower growth trajectory, won't affect the oil price very much.

Supply is the source of price volatility, and supply depends on production costs (in North America) and politics (in Saudi Arabia and environs.)

Has America become a mall. If so, will it remain one?

A friend sent me an article sounding the alarm that 6,000 big retail stores in the US would be closed in the coming months. He wondered why. I replied as follows:

"The amazing thing is the fact that we have so much retail space in the first place. Why has retail space per capita tripled (about) since the 1980's? Why has my town of Hingham gone from one to three supermarkets, each twice as large as the original one, resulting in 6x as much space, since then while the population has remained flat? Why does the US have over 3x as much retail space/person (46.6 sq.ft.) as Canada (13.0)? (And now we have the Interest and the the goods go directly from the warehouse to the doorstep.

I look forward to the day when the excess malls become corn fields.

Per Capita Retail Space Comparison

US:             46.6 square feet
India:          2.0 square feet
Mexico:      1.5 square feet
UK:            23.0 square feet
Canada:      13.0 square feet
Australia:    6.5 square feet"

If you have any thoughts on this matter, let's meet at the mall and talk about it.

The ECB is now calling the shots worldwide

Manufacturing is heading down in Asia and heading up in the Eurozone. The US and UK remain positive.

Europe is China’s largest export market. It looks like the weak Euro is having the logical effect on China and surrounding Asia. One may surmise that the euro-effect will prevent anyone in the world from raising interest rates until inflation fears emerge.



-CHINA: PMI was 48.9 in April (preliminary; they may decide to change it later)

–SOUTH KOREA: PMI was 48.8 in April from 49.2 in March.

–INDONESIA: PMI was 46.7 vs. 46.4 in March.

-JAPAN: PMI was 49.9 in April

–INDIA: PMI was 51.3 vs. 52.1 in March.

–EUROZONE: Flash PMI was 52.0 vs. 51.9 for mid-April flash reading and vs. 52.2 end-March.

–GERMANY: PMI was 52.1 vs. 51.9 for mid-April flash reading and vs. 52.8 end-March.

–FRANCE: PMI 48.0 vs. 48.4 for mid-April flash reading and vs. 48.8 end-March.

–ITALY: PMI 53.8 vs. 53.5 expected and 53.3 in March.

–SPAIN: PMI 54.2 vs. 54.3 in March.

-UNITED STATES: PMI 54.1 in April.

-UNITED KINGDOM: PMI 51.9 in April

Serbia becomes the 24th central bank to cut rates so far this year

From: www.centralbanknews.info

Serbia cuts rate 50 bps after IMF deal, lower risk premium

Posted: 12 Mar 2015 06:37 AM PDT

Serbia's central bank cut its key policy rate by 50 basis points to 7.50 percent, a move expected by many economists, and said further changes would continue to depend on international risks, along with changes in commodity prices, and how they impact inflation.

It is the first rate cut this year by the Bank of Serbia (NBS), which cut its rate by 150 basis points in 2014.

The central bank said last month's 1.2 billion euro stand-by agreement with the International Monetary Fund (IMF) along with consistent government budget cuts and structural reforms had helped raise the interest of investors in Serbia, resulting in a fall in the country's risk premium.

Together with inflationary expectations around the NBS' target, this had "opened up the room for monetary policy to contribute to long-term sustainable recovery of the domestic economy," NBS said.

Serbia's inflation rate rose to 0.8 percent in February from a historical low of 0.1 percent in January, mainly due to the comparison with an increase in value-added-tax, and the NBS expects inflation to return to its target range in the second half of 2015 due to its policy measures and the waning impact of low growth in administered prices and low commodity prices.

The NBS targets inflation at a midpoint of 4.5 percent in a range from 2.5 percent to 5.5 percent.

Serbia's Gross Domestic Product contracted by 1.8 percent in the fourth quarter of 2014 compared with the same 2013 quarter, the fourth consecutive quarter the economy has shrunk, but the central bank has said the economy is recovering and the impact of floods in May 2014 is wearing off.

South Korea becomes the 23rd central bank to cut rates so far this year

NYT:

"SOUTH KOREA: The Korean central bank cut its base rate by 0.25 percentage point to 1.75%.

"Falling manufacturing, electronics and car exports amid aggressive competition from Taiwanese, Chinese and Japanese rivals prompted the South Korean central bank to join a plethora of Asian banks in trimming interest rates. South Korean rates are now at record lows. (AM)"

I wonder if the Fed is still planning to raise rates?

Poland's Central Bank 22nd this year to cut rates

If the Fed raises rates this year, it (along with Brazil) may stand alone.  Meanwhile, the strong dollar is damaging US manufacturing and agriculture.

Wednesday, March 4, 2015

Poland cuts rate 50 bps as deflation deepens

    Poland's central bank cut its monetary policy reference rate by 50 basis points to 1.50 percent, a move that was largely expected following last month's guidance by the National Bank of Poland (NBP) that it did not rule out further rate cuts if deflation continued.
    The NBP's previous rate cut of 50 basis points was in October 2014 but since then the fall in consumer prices has deepened. Since the NBP embarked on a monetary easing cycle in November 2012, it has cut the benchmark rate by 325 points.
    Polish consumer price inflation fell to minus 1.3 percent in January from 1.0 percent in December, the seventh consecutive month of deflation.
    Inflation has now been below the NBP's target of 2.5 percent for 26 months and below the lower bound of its 1.5-3.5 percent tolerance range since February 2013.
    The NBP will later today issue a statement about its decision and is also due to update its inflation and growth forecasts.
    In addition to cutting the reference rate, the NBP also cut the deposit rate by 50 basis points to 0.50 percent, the lombard rate to 2.50 percent and the rediscount rate to 1.75 percent.
    This year's strength in Poland's zloty currency against the euro has been worrying Polish policy makers with Marek Belka, NBP governor, signaling that the central bank was keeping an eye on zloty and was likely to act if there was further appreciation.
    The zloty was quoted at 4.17 today, up 4.6 percent against the euro this year though slightly weaker than last week's close around 4.15 to the euro.

    Poland's Gross Domestic Product expanded by 0.7 percent in the fourth quarter from the third quarter for annual growth of 3.10 percent, down from 3.3 percent in the third quarter.
    On Tuesday Poland's Deputy Prime Minister Janusz Piechocinski told Reuters that the central bank should cut rates by more than 25 basis points, saying the country was in no risk of excessive credit growth and that there was "huge space here for such bold action."

    www.CentralBankNews.info