Friday, April 14, 2017

Financial Market Snapshot April 2017

Financial Market Snapshot
April 2017
International tensions
Political events continue to overshadow the economy. Acute tensions are on the rise about North Korea’s nuclear program and the conflict in Syria. Although the head of America’s central bank has announced the commencement of a policy aimed at bringing down the overextended central bank balance sheet to begin this year, the central bank may delay the project because of the highly uncertain political environment. This would imply that stock markets, which are already overextended, would likewise delay their correction.
European uncertainties
Political events also tend to overshadow the economy in Europe. There will be elections in France, with a right-wing populist as one of the frontrunners. Later this year, Germany will hold federal elections. The incumbent head of the government faces a strong opponent. Britain has officially triggered its exit from the European Union. Yet no one knows how the terms of separation will play out. To make matters worse, hardly a week goes by without some terrorist event in Europe and other parts of the world. The crisis of immigration remains unresolved.
Europe’s economies march at different paces. While Germany keeps doing well along with some other Northern EU countries, Europe’s South has a hard time getting out of its stagnation. 
Quantitative easing in reverse
In reaction to the global financial crisis of 2008, central banks in the industrialized countries, particularly the US Federal Reserve and the European Central Bank, have practiced a policy of “quantitative easing”, which has led to an unprecedented expansion of the central banks base money. This way, commercial banks could easily obtain funds in order to consolidate their balance sheets. This policy is about to end. The financial sector seems robust enough to support a withdrawal of base money. What lies ahead is quantitative easing in reverse.
Outlook for interest rates
The reversal of the quantitative easing policy will require higher interest rates. A continuation of negative real interest rate would drive up asset prices to unsustainable levels. In the area of monetary policy, the big questions for the rest of the year will be how the major central banks will manage to reduce their balance sheets. For this purpose, the central banks must sell a huge part of their assets, which largely consist in government bonds.
Asset prices
For almost ten years as by now, monetary policy has been extremely expansive. An enormous expansion of central bank money has taken place and interest rates have come down to zero and have turned negative in some cases. Now, as the major central banks prepare for a reversal, the question arises what will happen to the asset prices. As a reflection of the low interest rates, stocks, bonds and real estate are highly priced. In order to find buyers of their bonds, central banks must lower the prices, which will mean higher interest rates. GL
Economic growth
All major economies post relatively solid economic growth in the range of an annual growth rate of the gross domestic product between 1.5 to 2.0 percent. Germany’s export boom continues and private consumption is on the rise. In the United States, consumer confidence is getting stronger propelled by a favorable employment situation. It is doubtful, however, that any higher growth rates could be achieved in the future given low productivity growth in all major industrial countries.
Prices and interest rates
Global inflation remains low. Central banks wanted to get out of the deflationary drag and finally managed to obtain higher inflation rates. Currently, the U.S. inflation rate is close to two percent while in the Euro Area, the rate rose to 2.6 percent. With interest rates below this rate, real interest rate are negative. This constellation stimulates gross fixed capital formation. This should foster further economic growth. Negative real interest impact heavily on the German real estate market where there is no end in sight of the housing boom.
In the United States, Japan, and Germany, employment is surprisingly strong with unemployment rates below five percent. In the overall Euro Area, however, unemployment remains high. Europe’s unemployment rate has not yet fallen below the ten percent level. The highly uneven levels of employment in the Euro Area contributes to the general uncertainty about the future monetary policy actions. The absence of significant wage rises seems to be a major cause of the favorable employment situation. It remains to be seen if this situation can continue.
Current account and exchange rates
The exchange rate between the U.S. dollar and the euro has remained very stable over the past years and continues this way while the dollar has strengthened against many other currencies recently. In terms of purchasing power parity, the US-dollar is highly overvalued against almost all currencies. As a consequence, the U.S. current account deficit remains persistently high and America’s net foreign investment position is worsening. The recent meeting of the Chinese leader with the American president has defused the dispute about China’s exchange rate manipulation – at least for a while.

North Korea
All eyes are on North Korea and how the United States will react when Kim Jong-un should continue with his nuclear program. The fall-out of a military intervention would affect profoundly North Korea’s neighbors such as South Korea, China, and Japan. All three of these countries have close links with the world economy and thus any serious conflict would be strongly felt in the whole world.
President Trump has tried to find help from China in dealing with North Korea. This way, trade tensions between the United States and China have been kept low for a while. Yet the military expansion of China to South China’s seawaters does not bode well for a real détente. China tries to bring down its huge position in U.S. government bonds, which will require a shift in economic strategy from exports to domestic consumption.
Middle East
The importance of the Middle East for the world economy results from its huge oil and gas reserves. Although the West is no longer as dependent on Arab oil as it was in the 1970s, the contribution of the region to the global oil supply is still important enough so that a stop of oil deliveries would severely disrupt the world economy.
Latin America
Latin America is at the fringe of global politics. Various countries in this region have enough domestic trouble to keep them busy for years to come. Different from Asia, almost no Latin American country has shown superior economic growth over the past decades. On the contrary, countries like Argentina and Venezuela are falling back and Brazil, which promised to move ahead, could not maintain its growth pace of the first decade of the new mellenium. 
Africa presents a highly mixed picture. Some African countries move steadily forward, such as the Ivory Coast, Kenya, and Mozambique, while others move backward, such as South Africa and Nigeria. Like some Latin American countries, parts of Africa have become a domain of China’s economic expansion in search of securing raw materials, space and food supplies.

Antony P. Mueller
The Continental Economics Institute
April 15, 2017

Saturday, March 11, 2017

Tranquilitiy before the crash

Tranquility Before the Crash

Main Topics

Asset markets
Since the election of Donald Trump as President of the United States the US-American stock market has rallied and with it those in many other countries. Market values have risen by the trillions. There are reasons for doubt whether gains of this dimension are justified. After all, interest rates have reached their bottom.  What will happen when interest rate start to rise? The expansive monetary policies since the crisis of 2008 have led to historically low interest rates. In some countries, even negative rates have emerged. The concerns are justified that when the phase of extremely expansive monetary policy will end, the current levels of asset valuation will fall. The fear of some observers that a crash of historic proportions is in the making is surely justified.  

U.S. Interest rates
The American central bank has been waiting patiently for quite some time to get the timing right with a further interest hike. Such a step towards higher interest rates was not opportune during the presidential election campaign even if it had been justified from a pure macroeconomic standpoint.  In the meantime, the expectations as to economic growth have become more confident and the labor market in particular has shown a very good performance recently. With the inflation rate rising, further procrastination with an interest rate hike can hardly be justified. It is unlikely that current assets valuation could withstand an increase of the interest rates that typically comes in various steps over an extended period.

President in twilight
Donald Trump has not yet achieved full recognition of his Presidential authority. Large segments of the American population still show a deep-seated mistrust against the President and his team. The President has had serious setbacks with his appointments to administrative top positions.  Trump’s announcement of protectionist measures has scared many foreign leaders, including friends and allies of the United States. The American relationship with Mexico is in shambles. The relationship with Europe has considerably cooled down.

European elections
There will be elections in France and Germany this year and all eyes are on France where the right wing nationalist candidate Marine Le Pen is a front-runner for the presidency.  A victory of her “Front Nacional” in the upcoming elections on April 27 and the run-off on May 7 would be a disaster for the European Union and probably lead to a break-up of the euro zone.  German general elections will be held on September 24, 2017 with the current chancellor Angela Merkel as the top candidate for the ruling Christian Democratic Party and its Bavarian collaborate, the Christian Social Democratic Party. The social-democratic party (SPD) has launched Martin Schulz, a former European Union politician, as its candidate who is currently leading a very successful election campaign in favor of the more social justice and closer European Union.  It is hard to imagine that if elected Schultz could cooperate with Le Pen as the new French President.

Global Scenario

Trade and foreign debt
In 2016, Germany was the country with the highest export surplus.  Germany’s current account surplus is on the way to record a surplus of almost nine percent of its gross domestic product (gap). The current account surplus comes largely from the trade balance. Germany’s annual exports amount to EUR 1.2 trillion. A current account surplus of one country implies deficits in other countries, which, in turn, mean foreign debt accumulation. The current process is not sustainable, neither for the export surplus country nor for the debtor country. The United States under Trump tries to do away with America’s persistent trade deficits, which have made the U.S the largest international debt with a negative “net international investment position” of around eight trillion US dollars in mid-2016.

Prices and money
Since the financial crisis of 2008, there have been a series of quantitative easing in the United States and Europe. These have led to an unprecedented increase of base money. The aim was to bring down interest rates. When interest rates hit zero bound, re-inflation became the aim monetary policy. In the meantime, price inflation is on the rise. The price inflation rate in the United States rose from under one percent in July 2016 to 2.5 percent at the beginning of 2017, and in the Euro Area, price inflation accelerated from a negative rate in the first half 2016 to two percent at the beginning of 2017.

Economic growth
The outlook for economic growth in the U.S. and Europe is at a solid level. In the United States, the annual economic growth rate was temporarily more than three percent in 2015 yet and has currently steadied about two percent in the beginning of 2017. In Europe, the annual growth rate of gdp oscillates between 1.5 and 2 percent since the beginning of 2015. As to the further outlook, all will depend on how markets react to a coming rate hike by the U.S. central bank.

Employment is very strong in Germany with an unemployment rate of 3.8 % and a labor-force participation rate of 75 %. In the United States, the unemployment rate stands at 4.7 %, yet the employment rate is still weak at 63 %. Despite its several decade-long stagnation, the unemployment rate has held steady at around three percent. Yet the Japanese labor-force participation rate remains to be very low at around of 58 %.

The greatest concern as to the long-run growth aspect of the industrialized countries is low productivity growth. After a rise in the aftermath of the financial crisis of 2008 due to layoffs, productivity growth has been largely stagnant in the United States with the index rising from 104 to only 107. In the United Kingdom, productivity growth has been nil since 2005 as it has been likewise the case in Japan.

Emerging Markets


After a slight recovery from stagnation in the second half of 2015, Argentina fell back into recession in 2016. The economy contracted 3.8 percent on an annual basis in the third quarter of 2016, following 3.7 percent decline in the previous period. Gross fixed capital formation fell 8.3 percent, following a 4.1 percent drop in the previous period and private spending declined 3.1 percent. Yet government spending is on the rise again since January 2016. Unemployment has risen sharply in 2016 and stands now at 8.5 percent. The inflation rate was around 15 % in in 2015, shot up in 2016 to over 40 percent.


Different from some expectations, economic growth of Brazil has not yet recovered. In the last quarter of 2016, the Brazilian economy contracted by 2.5 percent on an annual basis after a fall of 2.9 percent in the previous period.  The main factors that contribute to Brazil’s economic contraction are sharp declines in household consumption and of fixed investment.  After sharp falls in 2015 and 2016, industrial production is on the recovery and registered a 1.4 percent gain in January 2017. Brazil’s economic contraction continues. Unemployment is on the rise and increased to 12.6 percent. A lower inflation rate – down from around 9 percent in 2016 to 4.76 in January 2017, has allowed the central bank to lower its policy interest rate by 75 basis points to 12.25 percent on February 22nd 2017.


China unexpectedly reported a trade deficit of 9.15 billion dollar in February of 2017, compared to a surplus of 28.2 billion dollars the year before. While imports rose, exports fell in February 2017 by 1.3 percent compared to the same period last year while imports jumped by 38.1 percent. China’s economic growth is slowing down but still relatively high at annuals rates of over six percent since the middle of last year. Inflation is well under control at currently as China's consumer prices rose 0.8 percent on an annual basis in February 2017, compared to a 2.5 percent annual rise in January.


Venezuela is on the brink of total collapse. International reserves are down to 10657 USD Million in January from 10977 USD Million in December of 2016. Inflation is rampant, reaching an increase of 800 percent in 2016. According to preliminary figures, the Venezuelan economy contracted by 18.6 percent in 2016, following a 5.7 percent decrease in 2015.

Antony P. Mueller

March 11, 2017





Friday, January 20, 2017

The world economy at the start of 2017

The world economy in early 2017 Antony P. Mueller…/20…/01/texto_discussão_2017_01.pdf

Monday, January 16, 2017

Financial Market Snapshot January 2017

Financial Market Snapshot January 2017


Presidential transition
The transition in the United States from President Barack Obama to Donald Trump does not run smoothly and adds to the general uncertainty that clouds the beginning of 2017. As the inauguration of the new president gets nearer, the controversies mount. While fierce disputes marked already the electoral campaign, these became even more severe after the election. The quarrels are not confined to the United States. Already during his campaign, the incoming president has provoked severe concerns in Mexico, China, and Europe. Trump has put the role of NATO into doubt and stands for a complete turn-around as to its relation with Russia. Across the globe, concerns are on the rise that the United States will lead the world toward the abyss of protectionism.

New populism
With economic growth relatively weak in most places of the world, protectionism gains popularity. Populism is on the rise also in countries that have seemed immune. The Brexit vote came as a shock. More news that is unpleasant can be expected with the elections that are scheduled in Europe in 2017, particularly in Germany and France. Concerns are on the rise that the European Union will not be sufficiently resilient to weather the storms while at the same time a deep split divides the United States.

The greatest concern for the world economy refers to protectionism. As economic conditions deteriorate and domestic controversies rise, governments tend to resort to protectionism as a way to safeguard domestic jobs. Protectionism is ruinous not only because it invites retaliation but also because in tends to escalate. In the end, each country will be worse off.
Historically, such beggar-thy-neighbor policies have often been the prelude to wars. During the Great Depression, protectionism has massively contributed to the length and depth of the crisis.

While in some countries, such as in the United States, the official unemployment rates have come down, employment has remained weak. Long-term unemployment brings with it, that more and more people leave the labor market and the official statistics does no longer register these persons as unemployed. This has happened in the United States where the unemployment rate has fallen over the past couple years below five percent, relative employment has hardly recovered and the so-called labor participation rate is still below 63 percent.
With the exception of Germany, most countries in the Euro Area suffer from persistently high unemployment rates. In Spain, unemployment has shot up to over 25 % and has only come down to under 20 % in the past year.

Exchange rate and current account
The dollar continues being strong and correspondingly other currencies, particularly the euro and the Chinese yuan have been weak.
In order to stabilize its currency, China sold part of tis dollar assets and thereby diminished considerably its stock of foreign exchange reserves by one trillion US-dollars to three trillion.
The strength of the US-dollar will further deteriorate the persistently high US current account deficit and exert additional pressure that the new US administration my resort to protectionist measures.
China still depends on its exports to keep its economy going while Germany’s export performance is strongly linked to both the US and the Chinese economy.

Prices and Money
There are signs that consumer price inflation is on the rise. Since July 2016, the American inflation rate has risen from below one percent to close to two percent.
In the euro area, the deflationary trough in the first semester of 2016 has ended and inflation rate have now risen to over one percent.
There is a huge monetary overhang in the world just waiting to get rolling. Over the past ten years, the major central banks has flooded the globe with base money.
A large part of these funds has been used to bolster the balance sheets of commercial banks. This way, there has been little transmission to the real economy. This, however, could easily change, once inflation rates pick up more markedly.

Interest rates
Knowing that an increase of interest rate my abort economic recovery, central banks in the industrialized countries have been very reluctant to raise interest rates. Central banks are still behind the curve. While the U.S. central bank has lifted the FED rate to 0.75 %, the European Central Bank still sets its basic rate a zero percent, while Japan has kept its policy rate at -0.1 %.
Historically, a massive monetary overhang has always led to price inflation, which has come upon the countries like an avalanche.

Economic growth
The future course of the world economy depends on economic growth, and economic growth depends on productivity. Over the past couple of years, U.S. productivity growth has been quasi stagnant as has been the case in the Euro Area and has even slightly fallen in Japan.
Public expenditure programs will fail to stimulate the economy, when productivity remains low. Likewise, low interest rate will not stimulate economic activity, when the return on investment remains meagre.


The downward trend of the economic growth rates continues. See GDP quarterly rates below:
Private investment is paralyzed by uncertainties. Many of big Brazilian companies are deeply involved into the corruption scandals. The present government is almost as unpopular as the preceding one. Private consumption is held back by rising unemployment and high interest.
In order to avoid outright government bankruptcy the public sector has frozen expenditures. As of now it is hard to see from where there should come a way out, particularly because Brazil’s major trading partners, such as China and the United States are in trouble and Brazil’s neighbors such as Argentina and Venezuela experience even deeper crises.

Mexico is experiencing a crisis of its development model. The country has relied on an ever-closer relationship with the United States. This strategy is now in doubt. The fallout from the incoming new American president is already severe. Tensions are on the increase. As the Mexican economy deteriorates, domestic conflicts are also on the rise. From around five percent, Mexico’s annual economic growth rate has fallen to around two percent.
In past couple month there has also been a sharp depreciation of the country’s currency.
This has forced monetary authorities to raise interest rate from around three percent in 2015 to almost six percent recently.

Russia suffers from the severe sanctions imposed on it by the Western countries. Additionally, NATO has increased its presence in Eastern Europe and Baltic states. Russia’s annual economic growth rates has turned negative since the beginning of 2015.
Yet the unemployment is still low and the inflation rate has come down from 17 percent in 2015 to 5.4 percent by the end of last year.
The rate of government debt to gross domestic product has risen drastically over the past years, yet by the end of 2016, this rate is still under 18 percent.
A new chapter in U.S.-Russian relations will most likely begin when Donald Trump will assume his presidency after his inauguration in January 2017. When Western sanctions will be lifted and oil prices will recover, the Russian economy could experience a period of excellent performance.

China’s annual economic growth rates have come and seem to stabilize around six percent.
The official inflation rate has been relatively stable and stands currently at 2.1 percent.
The same holds for the official unemployment rate, which has been steady over the past decades at around four percent. In order to stabilize its currency and counteract the outflow of money, Chinese monetary authorities sold US dollar assets to the amount of one trillion over the past year.

Antony P. Mueller 
January 16, 2017

For an analysis with more data, check:

Wednesday, January 4, 2017

Financial market snapshot Dezember 2016

Economic growth
GDP numbers for the industrial countries show that economic performance is actually not as dismal as often complaint. Taking into account that these countries show moderate or no population growth at all, economic growth rates above one per cent are not bad at all.  In the third quarter of 2016, the US economy grew 1.6 % down from 2.8 % the year before, while the economic growth remained steady in the Euro Area at 1.6 %. Japan is still struggling as its growth rate fell from 1.9 % to 0.8 %. Britain is doing fairly well with an economic growth rate of 2 % in the third quarter of 2016, only slightly down from the third quarter of 2015 when the economic growth was 2.2 %. While there is much lamentation about low growth, the numbers are actually better as the public mood and media discussion seem to suggest.

The growth rate so-called fixed capital formation fell in the United States from 4.7 % to 1.4 % and in the United Kingdom from 5.1 % to 1.2 from the third quarter of 2015 to the third quarter of 2016. In the Euro Are, investment growth was relatively strong as it rose from 2.2 % in the third quarter of 2015 to 3.2 % in the same period of 2016. Japan, which experienced still a strong growth of investment in 2015, suffered a setback in 2016 when investment growth slowed down to 0.5 % in the third quarter of 2016
Private consumption continued to grow strongly outside of Japan. In the United States, after rising 3.3 % in 2015 (3Q), private final consumption receded to 2.6 % in 2016, while the rate for the Euro Area remained steady at 1.8 % and accelerated in the United Kingdom from 1.3 % to 2.8 %. In Japan, the growth of consumption has not yet recovered at a rate of -1.1 in the third quarter of 2015 and 0.1 in the third quarter of 2016.  Austerity, as it is often claimed, happens  neither in the US nor in Europe.
Official unemployment nearly disappeared in the United States as the unemployment rate fell to under five percent in the third quarter of 2016, well below the rate of over ten per cent, as it is still the case in the Euro Area. Even lower than in the United States is the unemployment in Japan, where in currently stands at three per cent. Putting these figures in perspective, however, requires taking into account the peculiarities of the individual labor markets. While in the United States, for example, the unemployment rate has fallen, the labor participation rate has fallen as well, while labor participation has been increasing in Europe over the past couple of years.

Global Scenario
Exchange rate and current account
There has been a steady trend of appreciation of the U.S. dollar that as lowered the euro exchange rate almost to parity. The Chinese yuan continues to depreciate together with the British pound, which is still suffering from the Brexit blues. Not least because of the depreciating euro, the Euro Area enjoy a huge current account surplus that rose from 3.8 % of GDP in the second quarter of 2015 to 4.3 % in the same period of this year. Even worse than for the U.S., which has a current account deficit of 2.5 %, is the balance for the United Kingdom that rose from 4.7 % of GDP to 5.9 %.
Consumer price inflation is still extremely low in all of the industrialized countries. However, with the exception of Japan, price inflation has been rising since 2015. While in October 2015 the rate of consumer price inflation in the United States was still as low as 0.7 %, this variable rose to 1.9 % in October 2016. A major rise, albeit at very low levels, occurred also in the Euro Area and in Great Britain, where prices rose from a rate of 0.3 % to a rate of 0.7 % in the Euro Area and from a rate of 0.2 % to 0.9 % in the United Kingdom over the same period. Only in Japan did the rate fall from 0.30 % in October 2015 to a rate of -0.06 % in October 2016.
Interest rates
Before long-term interest rates rose in November of 2016, they have fallen until October 2016 to 1.76 % in the United States, to 0.78 % in the Euro Area, to 1.08 % in the United Kingdom and to a negative rate of -0.06 % in Japan. The decline of long-term interest rates happened in the United States although short-term interest rates rose from 0.25 % to 0.72 %. Deflationary expectation were still well in place and have changed only recently. Until October 2016, the Euro Area experienced negative short-term interest of -.05 % in October 2015 and -0.31 in October 2016. Both in the United Kingdom and Japan, short-term interest rates also declines over this period to 0.37 in the United Kingdom and to 0.06 in Japan.

Money growth accelerated in the United States, Japan and the United Kingdom, but slowed down in the Euro Area. In the U.S., the rate of growth of narrow money (M1) rose from an annual rate 3.8 % in October 2015 to a rate of 8.2 % in October 2016, and slowed in the Euro Area from a rate of 10.3 % in October 2015 to 6.1 % in October 2016. In Japan the annual rate of the growth of narrow money accelerated from 4.1 % in October 2015 to 7.8 % in October 2016, and in the United Kingdom during the same period from 6.5 % to 10.6 %.

Emerging Markets
Political uncertainty continues under the new government. The legal procedures in connection with the corruption scandal involving the Brazilian oil company Petrobras affect the heart of the Brazilian political system. All political parties, so it seems, are involved in widespread corruption. Hardly a day goes by without some news about another prominent politician who is involved in a corruption scandal. In the meantime, new areas of corruption are under investigation that affect also local politicians. Consequently, there is not yet green light for a solid economic recovery.
Over the past two decades, Mexico has experienced a period of strong growth with low inflation. There has been a massive inflow of foreign direct investment. Employment has grown steadily. Yet now dark clouds appear on the horizon. It still must be seen whether the threats of the new U.S. president-elect can be taken seriously or not, but nevertheless, growth outlook is already dimmed and there are growing inflationary pressures. The first signal that riskier times are ahead will come from the currency market when the Mexican peso begins to weaken.
South Korea
South Korea, one of the economic star performers of the past couple of decades, enters troubled waters. Korea’s first female president who has been in office for nearly four years faces impeachment on ground of her influence paddling. When the Constitutional Court confirms the impeachment, there will be a new elections in 60 days. There should be little concern, however, as to the economic performance of the South Korean economy. The one thing South Korean has to fear are incalculable threats by North Korea that could go so far as to escalate into a military confrontation.
Russian president Putin tries hard to define his country’s global role. Russia has increased its military presence in the Middle East and is actively involved in the Syrian war theater. At the same time, NATO is moving eastwards in an attempt to protect the states that have gained independence with the fall of the Soviet Union.US-Russian relations have deteriorated during Obama’s presidency. A new chapter in U.S.-Russian relations will begin when Donald Trump will assume his presidency after his inauguration in January 2017. When Western sanctions will be lifted and oil prices will recover, the Russian economy could experience a period of excellent  performance for long period of time.