Recently, Fed Chairman Ben Bernanke mused that the current expansion of the potential money supply by $85 billion per month might be tapered in the future, as the economy recovery continues. Markets reacted violently to this threat. Reduction to the Fed's monetary stimulus reverberated globally. Equities stopped going up and debt rates soared higher.
Bernanke, aware of the global reaction to his vision of the Fed's future stimulus, had to backtrack. There will be no tapering until there is convincing evidence that the recovery has passed stall speed. The U.S. Richmond Manufacturing Index (M/M) numbers were announced, and instead of a positive 9, a negative 11 was reported. This major underestimating of the recovery might make those formerly fearful that Bernanke would taper feel better. Hopefully -- for them -- more bad news will come later in the week.
During the weekend G20 meeting, China volunteered that its actions would help stimulate its economy. China said it would ease lending rules that were constraining bank loans. And in Beijing, Premier Li Keqiang said growth would not be allowed to fall below 7%. China has been trying to navigate a soft landing after years of a building boom, financed by cheap money. Confronted with the possibility of expanding bankruptcies, it looks as if the Chinese are again going to be turning on the stimulants. Among those mentioned are the traditional centrally planned investments like roads and bridges.
There are doubts this will work. The Telegraph reported the following:
Mr Li's implicit argument is that kicking the can down the road buys time to push through the market reforms needed as China abandons its obsolete, top-down, investment-driven, 1980s catch-up model, and switches instead to a grown-up economy.
No doubt Mr Li genuinely hopes to push though these reforms, but he is up against an army of vested interests, and half the Standing Committee.
As the IMF's Article IV report makes clear, very few reforms have actually happened. Investment is still 48pc of GDP. The savings rate is still rising. China still has the most deformed economy of any major country in modern history.
The only conclusion we can come to is that the future growth rate will be 7% -- believe it or not. And conditions improved in Portugal over the weekend where austerity is working true to form. The unemployment rate is headed toward 20%, the economy is contracting, and the debt-to-GDP percentage is rising. No problem, though, because President Anibal Cavaco Silva has the answers. He said:
I think in the current context of national emergency, calling elections is not a solution for the problems Portugal is facing. ... I think the best solution is to keep the current government in power.
As the national salvation compromise was impossible to achieve, I consider that the best alternative solution is for the present government to remain in its functions, with reinforced guarantees of cohesion and solidity of the coalition, until the end of its term [in 2015]. ... It is important to show our European partners that Portugal is a governable country.
Perhaps this speech will help the politicians in Portugal keep their jobs a little longer, but what about the nearly 20% who are unemployed in Portugal? Perhaps the promise of free bailout money from the EU keeps them appeased, but remember that the Cyprus bailout money was not so cheap. In such a write-down, they take money from whoever has it. It might be better to give the people a vote than to show reverence to their European partners.
In the meantime, markets are responding to glib talking bankers and politicians, but a problem postponed is not a problem solved. It looks as if this might be the cause of some of the EUR/USD (FXE, UUP, UDN) strength combined with the weaker U.S. numbers. Though the recent COT Report shows there is a big spec short position in the euro, how far can this propel the euro?
Still, should we get some more bearish U.S. numbers, this could cause a further euro rally. If it happens, we wish to be a seller of the EUR/USD around the 1.33 handle.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.