Hi there,
The removal of the Mr Bo Xilai suggests that the Communist Party is opposed to any particular individual seeking populist based power, with a clear signal for individuals to move back to the traditional consensus driven model to govern the country ie for the leaders to be elected by the party, with support from the military. Indeed, Mr Xi Jingpin, the likely next President, stated that the party “must oppose all actions that harm and split the party”. He added that the Communist Party needed to “resolutely oppose all erroneous political tendencies contrary to the party’s basic line”. It is clear that Mr Xi does not want any possible threat to his ascendancy, particularly by individuals who want to gain power by attracting support from the people – what agree to democracy, certainly not, basically. Later this year, 7 new members will be chosen – out of the 9 member State Council – which control China. Given the impending changes, it is unlikely that the current regime will want to undertake major policy initiatives. It will be interesting to see what happens to Mr Bo, following his fall from grace;
A number of us have been deeply suspicious of Chinese economic data for quite some time now. Well, the Chinese Statistic’s Bureau confirmed that officials in the provinces, in particular, were “encouraging” a number of businesses, including hotels, coal miners and aluminium factories to falsify (clearly to report better data), which they submit to Central authorities. The problem is that Chinese provinces are given a target that they need to achieve. Their jobs/benefits etc depend on meeting these targets. Well guess what – you guessed it
Bloomberg cites the data submitted by Heijin, which the Statistic’s bureau reports was “seriously untrue” in 2011. To give you an idea of the fiddles, in 2011, the 31 provincial lead governments reported a combined GDP of Yuan 51.8tr (US$8.2tr), Yuan 4.6Tr higher than the national figure reported by the Statistics office. Chinese data is reported earlier than is the case in the US and Europe and is never revised – never revised !!!!, simply impossible. Basically, all Chinese data must be accompanied with a serious health warning !!!. The Statistics Bureau is setting up an unified system to collect data to address this issue – however, it will be a very long time before Chinese data can be relied upon;
The Indian Government announced it 2012/3 budget today. They forecast a reduction in the budget deficit to 5.1% of GDP for the year ending 31st March 2013, from an expected 5.9% for the current fiscal year – the previous 2011/12 forecast was 4.6%. The Finance Minister, Mr Mukherjee announced that subsidies would be reduced, so as to exceed 2.0% of GDP. In addition, he announced an increase in service tax and excise duty to 12% and 10% respectively. He also announced an increase in tax on imports of Gold, which resulted in gold declining today. However, the budget was seen as lacking sufficient fiscal constraint, which suggests that the Central Bank will find it difficult to reduce interest rates, by as much and/or as quickly as needed – the RBI kept rates on hold at 8.5% yesterday. The Finance Minister forecast that inflation would decline and that GDP should rise to 7.85% for the upcoming year – both unlikely. All in all, a disappointing budget, particularly as it was the last realistic opportunity to act, before the Federal elections – assumed to be in 2014;
Mrs Merkel hinted that the EFSF/ESM could, in effect, be increased in size to at least around E700bn, from E500bn at present – with the announcement to made prior to the 30th March meeting in Copenhagen. Mrs Merkel is keen for the EZ to announce its decision ahead of the IMF’s spring meeting. In addition, other countries are likely to contribute (via the IMF) to the EZ bail out fund. I continue to believe that the EZ (with support from Mrs Merkel and EZ countries) will increase the size of the bail out fund and that countries (China and Brazil for example – possibly including some Middle Eastern countries) will also contribute, increasing the size of the bail out fund to, at least E750bn, though quite possibly even higher;
Spain’s debt to GDP rose to 68.5% at the end of last year, exceeding Governments forecasts of a rise to 67.3%. The increase was as a result of increased borrowings by the 17 semi autonomous regions, whose borrowings rose by 17% last year. The EU has forecast that Spain’s debt to GDP will rise to 78% by the end of this year – likely higher. With the IMF predicting that the Spanish economy by -1.7% this year, Spain remains, as I keep banging on, the biggest threat to the EZ. In spite of signing the fiscal compact, Spain unilaterally announced that it’s budget deficit would amount to 5.8% for the current year, as opposed to the previously agreed 4.4%. The EU has agreed to raise its target to 5.3%, as the 2011 deficit came in at 8.5%, much higher than the target of 6.0%.
All of these forecasts are likely to be pie in the sky targets, I regret to say. Personally, the current austerity measures (without some form of growth policy) ain’t going to work, though the EZ continues to pursue this ludicrous policy. There are also serious threats of social disorder, not only in Spain, but in other EZ countries this year. Whilst Greece will default yet again (the new bonds are trading at below 30% of par ie at distressed levels), it is not important and the market expects it. Portugal and Ireland are small and can and will be saved. Italy, especially the North of the country, is in much better shape than the market believes. However, Spain is far to big to rescue and far too big to fail. The problem is that the EZ has no policy to address this (very likely) impending crisis at the moment – they better do;
US March consumer sentiment (University of Michigan) unexpectedly declined to 74.3, from 75.3 – the forecast was for a rise to 76. Increasing petrol prices was deemed to be the reason. Consumers expect inflation to rise to +4.0% over the next 12 months, as compared with +3.3% in the previous survey. However, US citizens are becoming far more optimistic about job prospects. Whilst the index for current conditions was higher in March (84.2, from 83 in Feb), the more important future expectations (6 months ahead) declined to 68, from 70.3 previously;
Following the New York Times op ed, which is a real PR disaster for Goldman’s, Morgan Stanley apparently was paid US$3.4bn by Italy to exit a derivative contract. This payment allowed MS to announce in January that they had “reduced their net exposure to Italy”. Hmmmm. In total, Italy is thought to have lost more than US$31bn, in derivative contracts at current market values, claims Bloomberg. What these countries were doing by entering into these contracts, I just do not understand;
Outlook
Apologies for not sending out a note yesterday – I attended a superb all day conference by You Gov in association with Cambridge University, on the future of the EZ/Euro, in the main. I will summarise in due course. In addition, You Gov released a lot of very interesting polling data on the EZ/Euro – they polled the public in various countries in the EU – the differences between individuals in various countries is fascinating and highly relevant.
I continue to believe that a system which was put together with little regard to the economic and financial realities of life, is going to be near impossible to fix. As a result, I just cannot see how all 17 members of the Euro will remain in. The solution which is a political, fiscal union and transfer union, will not be accepted by the major Northern European countries (Germany, in particular) at present, even though politicians in these countries know that has to be the solution, if they want top keep the Euro with all 17 countries. In addition, politicians in these countries have not even tried to explain the situation to their public – they fear voter backlash. As a result, I just cannot see how the current situation is sustainable for any length of time. A core EZ, with a number of the weaker countries out ie Greece, but others as well, is probably the most likely outcome, but even this solution is fraught with difficulties. However, I totally accept that to get rid of the Euro is far too expensive.
Basically a complete and total mess, as is inevitably the case with Europe. EZ politicians react to events – they do not try and stem (very likely and obvious) problems – completely crazy. As far as the UK is concerned, we will (unfortunately) be impacted, as a downturn in the EZ will hurt us, given that the EZ is our major trading partner – which is why Cameron/Osborne cannot remain silent. However, thank God, we retained Sterling, which provides us with far more flexibility than members of the EZ – amusingly, an Irishman (only half jokingly) asked whether Ireland could use Sterling in the future, rather than the Euro !!!!.
The only near term positive for Euro land is that the EZ is likely to increase the size of the EZ’s (EFSF/ESM) bail out fund, but this, I expect, is merely a short term reprieve with the problems persisting. Accordingly, I remain bearish, particularly of the EZ. The Euro should, short term pop on confirmation of an increase in the size of the bail out fund. Great opportunity to enter into short (against the US$) at a higher level, a short while thereafter, in my humble opinion.
Have a great weekend
Best
Kiron
