6th September 2011, The Great Depression 2.0?

Another Jobless Recovery.

Quote of the Day:

…this is like 1931 midway through the Great Depression when a major banking crisis in central Europe, sparked by the failure of Creditanstalt, plunged the World into the Great Depression’s second and worst round.

Niall Ferguson – Historian and Professor at Harvard

Macro Overview

• Today’s Guardian gives are rather sick diagnostic for Europe’s countries in focus. But Europe’s woes may only just be beginning. Historian Niall Ferguson thinks that Europe’s deterioration resembles The Great Depression all too closely, with 2011 resembling the 1931 inflection point – when the crisis took a turn for the worse and crossed the Atlantic hitting the European financial system.
• Not to sound too dramatic, it’s a good exercise to consider how the global economy relapsed into an even deeper recession in 1931.  One uncovers worryingly similar developments to those occurring right in front of our very noses today (see this Business Insider article from a year ago – still very relevant).
• 1931 was the year things turned from bad to worse during The Great Depression. After an initial financial shock and a “severe recession” in America a couple of years earlier the markets actually turned up for a year.
• But the financial plague not been eradicated, rather, its symptoms had only been suppressed. Severe downturns are sometimes likened to diseases or viruses, their birthplace is not always important, it’s the contagion dynamic, it’s where they finish, that matters. Like true epidemic-level illnesses they are persistent, subsiding occasionally only to reappear elsewhere, mutated, opening up old wounds and preying on the weakest organisms.
• Thus, true to form, during The Great Depression this American-born virus spread to socialistic to a region known at times for their lack of economic coherence and complacent financial rigidity: Europe – specifically Central Europe (predominant economies: Switzerland, Germany, Austria).
• At the height of the crisis banks, teetering on insolvency, were forced to bail out their failing counterparts or risk collapse themselves, but this only transferred obligations to larger, more complicated, more infectious institutions. Eventually the sovereigns themselves were pulled into the crisis, but this was always a failure of the financial system at heart.
• As a result of both incompetence and various measures of political financial protectionism (akin to Swiss Currency manipulation today) during the early 1930’s, meant the European political elite were woefully unprepared for the rapid and relentless cascading capitulation that occurred, despite years of warnings to get their act together.
• Secret credit lines were hurriedly set up within the banking system to prevent financial institutions (which had bailed out other ailing financial institutions) from triggering a domino-effect in the European financial system. But alas it was too late. The collapse of a giant bank in Central Europe, Credit Anstalt, brought the crisis home to the continent East of the North Atlantic. It was on these European shores it would wreak the most destruction.
• As Bernanke himself said, when speaking about the causes of The Great Depression, in a Council on Foreign Relations presentation back in 2009.

Globally, there were massive bank failures.  I think perhaps the most critical, in May of 1931, the Creditanstalt, which was one of the largest banks in Europe, failed, which generated a wave of financial crisis around the world.  Up till early 1931, arguably the 1929 downturn was just a ordinary — severe but ordinary downturn.  It was the financial crises and the collapse of banks and other institutions in late 1930 and early 1931 that made the Great Depression great.

Market Overview

• The Swiss intervention was swift, harsh and unexpected. Everything that you need a direct currency manipulation to be. It’s like a guerilla ambush – striking fear into forex traders: buy our currency and we’ll come and get you… GRRRR!! But the same currency traders who slew Japan’s Ministry of Finance with ease will retreat, lick their wounds, then sit back and smile – OK you got me this time, they’ll say. But we’ll just come back with more numbers and smarter tactics. Fighting the market is a war of attrition not an act of financial terror. Each manipulation by the SNB will become harder and harder to execute with time. The crucial element of surprise will diminish with each act. Just ask Trichet – his institution is far more powerful than the SNB and he may be having difficulty keeping the market at bay himself – see El Erian’s comment on CNBC’s website today:

For a while, outright ECB purchases of Italian bonds on the secondary market had succeeded in keeping that yield at or below the 5 percent level for the “old” Italian ten-year benchmark bond. In recent days,

The jury is still out as to whether the ECB “allowed” the yield to rise, as a way of putting pressure on the Italian authorities (and other European fiscal agencies) to get their act together, or whether the ECB itself is getting “overwhelmed” by market dynamics. But either way, European markets are troubled.

• Perhaps buoyed by that ISM number the markets closed only down a smidge in the US (by current standards). In fact the UK and Brazil both closed up on the day. I’d say that was a result – we could easily rally into the end of the week now.

Chart of the Day

Consolidated European CDS (Source: Bloomberg)

Greek Borrowing Costs Back to the Highs (Source: Bloomberg)

Events

Macro Events:

• Update:
  • South Korean GDP +0.9%  — which I think is actually quite good, especially considering how poorly Korean markets have performed.
  • Filipino Inflation lower than expected — that’s the good thing about a global slowdown!
  • ISM Non-Manufacturing came out at 53.3 (vs 51 expected) – pretty good number in my opinion – what recession?
• Alerts:
  • Belgian GDP – more poignant that most think, actually. We want to know ifBelgium is going to slump – it has one of the worst balance sheets in the Eurozone (Debt to GDP at 100% – worse than Spain, Ireland and Portugal)
  • German Industrial Production
  • Hope you spotted my deliberate mistake last comment – Obama’s speech is not until tomorrow (8^th)!

 

Corporate Events:

• Results:
  • Vimpelcom [VIP],

• Dividends:
  • ADP [ADP], Baxter [BAX], BHP Billiton [BLT LN], CME [CME], Diageo [DGE LN], Glencore [GLEN LN], Henderson Land [12 HK], Kimberly-Clark [KMB], PetroChina [857 HK], Shire [SHP LN],

Reading, Links:

• European Abyss:
  • European Abyss #1
  • European Abyss #2
  • European Abyss #3