Just One More Thin Commentary

Draghi cancels his plans to attend the Jackson Hole Fed conference. Immeidately, the chatter in the equity markets is that he has a bond buying plan to announce and does not wish to upstage Fed Chairman Bernanke. Here is how we see it: He had nothing constructive to say. If one has nothing constructive to say, it is better to say nothing. He also might be running home to deal with Spain. Today’s Spanish GDP report for Q2 2012 indicated the recession deepened. Spain’s GDP contracted, coming in at -1.3%. This follows a Q1 2012 read of -0.6%. Martin van Vliet, economist at ING Bank in Amsterdam, stated: “We fear that things are likely to get worse before they get better. With much more fiscal austerity in the pipeline and unemployment at astronomic highs, the risks are clearly tilted toward a more protracted recession.” Adding to Spain’s troubles, Spain’s bank deposits fell by 74.2 billion euros ($93 billion), or 4.7 percent, to 1.51 trillion euros as capital seeks safer harbors. Also, Catalonia has requested $5 billion of assistance, almost one-third of the current assistance fund. It appears as if the entire eurozone will fall into recession. Making policy decisions in Europe is difficult because, monetary policy decisions which help the periphery (in the near-term) could cause unwanted inflation in core countries while doing little (if anything) to solve the real problems afflicting the eurozone. The problem is that the periphery does not believe there is a problem, other than core nations not agreeing to policies which would permit the periphery to continue on as it has in the past. With sub-par growth in the U.S. and economic contraction in Europe, we have argued that it would be virtually impossible for China to avoid a slowdown and, possibly, a so-called “hard landing.” Last week’s HSBC PMI report, which measures manufacturing in China, indicated that manufacturing activity contracted further, falling to 47.8 fro, 49.3 (a reading below 50 indicated contraction). HSBC data is seen by some market participants as being more reliable than official Chinese Government data. China’s Industrial Profits index declined to -2.7% from -2.2%. Many investors had pinned their hopes on China carrying the world on its back. It is China which has been carried by exports to the U.S. and Europe. Hard laning for China? We are waiting for the "thud."