Tags: PMI | dollar | shutdown | euro

The Abnormal Has Become the New Normal

Tuesday, 01 Oct 2013 01:00 PM

By Hans Parisis

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So the U.S. government started its new fiscal year with a "partial" shutdown. Lawmakers in Washington have been unable, as expected, to reach an "agreement" for funding the government of the United States. Please keep in mind the shutdown will mean that U.S. government economic statistics will not be published.

As long as this "budget crisis" remains short-lived I can't see, at least for now, an immediate danger for serious broad-based consequences for the United States and especially to its economic recovery, for which many expect now damage to be limited to less than half of a percent of GDP growth in the third quarter. By the way, the shutdown is generally expected to shave off two-tenths of GDP per week.

The situation could rapidly become much more serious when the crucial debt ceiling deadline comes to its climax around mid-October and the government's $16.7 trillion debt ceiling should be raised. If it isn't raised within 15 days, this would bring us, without any doubt, into a worst-case scenario whereby the U.S. government could end up failing to service some of its outstanding debt obligations because of brinkmanship between the two political parties in Washington.

How the different rating agencies would consider such an event remains an open-ended question and we'll have to wait (hopefully not) until it occurs.

It might be good to remember it was that kind of brinkmanship between the political parties in Washington that has already caused the United States losing its triple-A rating by Standard & Poor's in 2011.

No, if failing to raise the debt ceiling in time gets out of control (let's hope not!), it wouldn't be a laughing matter at all, because that would put the United States immediately in a situation of what's called "selective default," and that negative qualification would "stand" until the default would have been "cured" in full (the sooner, the better!) Yes, this would be an "unprecedented" situation and the fall-outs for the United States, as well as for the world as a whole, is extremely difficult to imagine let alone calculate. But, in my opinion at least, it would have sufficient power to pull the rug from under the global economy.

I repeat, that's the worst-case scenario and I still don't think it will happen, but, unfortunately, I must also say it can't be ruled out completely, especially under the actual state of brinkmanship in Congress.

As a long-term investor, I will try to remain calm, but nevertheless remain prepared for the worst and, in case that should happen, even only in part, having cash available to snap up buying opportunities that should unavoidably present themselves in different markets and places. Of course, I wouldn't start "leveraging" what I have to expand my buying power. I'd leave leveraging to the speculators.

I wouldn't be in a hurry to start buying because I still expect a multi-year correction in the foreseeable future that could easily stretch over several years.

I still can't believe that the newly created economical "pillars" generated by so-called "financial engineering" — to which all forms of quantitative easing (QE) belong, as well as "forward guidance = cheap talk" — have sustainably replaced what always has been considered as "solid" and confinable "real" economical fundamentals.

I'm still convinced that one day all these recently created financially engineered "pipers" in all those different places in our still unbalanced world will have to be paid, no doubt about that. How these "pipers" will be paid is a question nobody has a serious answer for yet. Most of the time answers remain somewhere hidden under what's called "unintended" and still unknown consequences of QE. We have already seen the disruptive upheaval that merely talking of the Fed's tapering its QE undertaking caused, especially in emerging markets.

Besides all that we also received some interesting Manufacturing Purchasing Managers' Index (PMI) sentiment readings.

The eurozone PMI was 51.1 for September, down from 51.4 in August, which was a 26-month high. It remained in what we could call "light" expansion mode, while the recovery remains "fragile" so far and employment remained the weak part of the eurozone's recovery story. The Eurostat unemployment rate of 12 percent for the euro area in August was unchanged from July and up from 11.5 percent a year ago.

Youth unemployment came in at 23.3 percent, up a notch from 23.1 percent in August 2012. The highest youth unemployment rates were noted in Greece, with 61.5 percent, and Spain, with 56 percent. No, a sound Euro area recovery remains far away.

For China, both the government and HSBC's Manufacturing PMIs came in lower than expected. China Federation of Logistics and Purchasing Manufacturing PMI edged up one notch to 51.1 in September, up from the 51 in August. Also here, employment weakened and came in at 49.1, down from 49.3 in August. A reading below 50 means contraction. The HSBC Manufacturing PMI edged up one notch to 50.2 up from 50.1 in August. Also here we saw employment continuing to decline. All that shows China is growing at a slow (for China, of course) pace.

In interesting contrast to the mostly stagnating or even slowing manufacturing PMIs of those huge economical blogs, the Swiss manufacturing PMI rose to 55.3, from 54.6 in August, and the Norwegian PMI came in at 52.3, from 53.2 in August.

By the way, the Swiss franc and the Norwegian kroner still remain two of my preferred safe-haven currencies alongside the U.S. dollar. Yes, regardless of the headwinds for the dollar, I'd be inclined to start accumulating extra dollars at lower levels than those of today, of course if we come that far, which would be around 79 for the U.S. dollar index. Today the dollar index, which is a trade-weighted index, quotes at around 80.

As a long-term investor, I certainly wouldn't get complacent and will keep a close eye on all that's going on in this "crazy" world in places like Washington, but also in countries like Italy and Germany where the abnormal has become the new normal.

O tempora! O mores! (Oh what times! Oh what customs!)

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