We have some new figures relating to the Debt Deflation process and its implications on future macro data, with the inflation statistics published Wednesday on the eurozone and the United States.
Check out the graph, below, on core data (excluding food and energy) for these two regions and Japan.
The figures confirm that the United States has, for the time being, avoided a Japanese-style trap, thanks to the treatment applied by the good Doctor Bernanke (QE + 0% rates + weak dollar), while the eurozone seems to be heading straight for record low price movements.
The end of the base effect, highlighted by the ECB to justify its reticence in following the footsteps of the United States, Japan, the UK, Switzerland and other countries, will have little effect on these core data, monitored closely by monetary authorities since they exclude the cyclical fluctuations from energy and food items.
What will count are the evolution of the credit aggregates and their velocity as well as the size of the output gap.
This is the main reason we remain convinced that the United States will come out of this situation in decent shape, despite the Fed’s giant balance sheet and a dollar in the pits.
The item of the US price index which most contributed to November’s figure of just 0% m-o-m, vs an expected +0.1%, was housing costs, which include rents from the principal residency (-0.2%) and seasonal rentals (-1.5%!).
The Bureau of Labor Statistics emphasised this point heavily, which constituted a major surprise
for economists, who had thought up to now that this CPI component could never decline.
That sounds a bit like the former belief that residential real estate prices could never decline overall in the US.
It is thus important to keep a close eye on the residential real estate market, because if prices do not stabilise, rents should logically continue to decline.
In this regard, the NAHB/Wells Fargo US real estate index unexpectedly fell back
in December to 16, the lowest since last June. Remember that the neutral threshold figure for this index is 50!
Here is how NAHB chief economist, David Crowe, explains this pessimism:
Tight lending conditions for both consumers and home builders continue to pose considerable obstacles on the road to a sustained housing and economic recovery.
There's a fine case of a vicious cycle…
As for Europe, Ralph Liebke, the chairman of Aon (AOC) (the world’s biggest insurance broker) for Germany, Austria and Switzerland, had this to say about the German government’s efforts to stimulate export insurance, a victim of the
While it’s highly pleasant that the government acknowledged the existence of a credit insurance problem, the offered model is limited to Germany-based corporations and German customers only.
Thus German exports won’t benefit.
The price for the government’s coverage, an annual premium of 2.88%, is also “rather high” and the limitation of the support program until the end of next year raises the question of what will happen in 2011.
Core CPI in the US, Europe and Japan
Inflation is not created by decree, especially when the euro's guardians are so proud of having the world's strongest currency! (Click to enlarge)
We are maintaining our asset allocation choices (positive on eurozone 5-year government debt, negative with little conviction on risky assets) and continue to favor the short time value option strategies, below, although current implied volatility levels are less and less attractive.
Disclosure: Long 20 years OAT 0% Coupons, EDF Corp 5 Years 4.5%.