As I see things, these may not be ‘jump over a 100 foot high fence assumptions’, but given all the attendant circumstances they are certainly ‘jump over a much higher than 5 foot high fence assumptions’. As a result, I do not place much weight on yesterday’s IMF World Economic Outlook.
The IMF’s Global Financial Stability Report begins by saying “risks to financial stability have increased since (our) April, 2012 report”, and focuses on what the IMF sees as:
- the importance of “timely implementation of the recently agreed measures” announced two weeks ago at the European Union leaders’ summit meeting then held in Brussels. The IMF Report makes no mention of that agreement being ‘conditional’, and by chance the IMF Report was released on the same day the German Constitutional Court announced it was postponing its decision on the constitutionality of the European Stability Mechanism until mid-September; and,
- uncertain U.S. fiscal outlook and federal debt ceiling issues that “present a latent risk to financial stability”.
An underlying dependence on the European leaders summit agreement being implemented as ‘conditionally agreed’ and in a ‘timely manner’ both seem questionable to me.
Because of the importance of all of this, I strongly suggest that if you read this commentary that you read both IMF Executive Summaries – then reach your own conclusions.
Concurrently, in yet another IMF statement, the IMF said that it was now forecasting improved fiscal deficits for Greece, but higher public debt:GDP numbers for this year and 2013 for Greece. This makes sense if the Greek government succeeds in enforcing meaningful austerity measures immediately if not sooner, and in circumstances of what appears to be Greece’s continuing drop in GDP.
I generally pay close attention to what is said by Christine Lagarde, the IMF Managing Director. While I understand why the IMF can’t come out and say “nothing is happening fast, and as a result the world economic situation, particularly that of the Eurozone and the United States is likely to continue to deteriorate”, I am less impressed with yesterday’s World Economic Update and Global Financial Stability Report than I am with the typical statements made by Ms. Lagarde.
Topical References:
World Economic Outlook Update – New Setbacks, Further Policy Action Needed, from
The International Monetary Fund, July 16, 2012 –
important reading time 5 minutes (Executive Summary 1 minute);
Global Financial Stability Report GFSR Market Update – Intense Financial Risks: Time for Action, from
The International Monetary Fund, July 16, 2012 –
important reading time 5 minutes (Executive Summary 1 minute);
IMF raises its two-year forecast, from
Ekathimerini, July 16, 2012 – reading time 1 minute;
As IMF trims global growth outlook, Canada continues modest growth, from
The Financial Post, Gordon Isfeld, July 16, 2012 – reading time 2 minutes; and
IMF cuts global growth forecast, from
The Financial Post, from Reuters, Lesley Wroughton, Gordon Isfeld, July 16, 2012 – reading time 2 minutes.
Snippets From Today’s Brief Commentaries
Snippet #1: This (
the financial markets pricing gold higher should incremental quantitative easing be introduced) seems oxymoronic with quantitative easing also resulting in the financial markets in recent years stabilizing or improving from current levels. This is because in ‘good’ theory ‘financial market values’ are at any given point in time ‘the present value of all future expectations’. A very important question: Has financial market practice parted ways from sound market valuation theory? This is something to think very hard about.
Brief Commentaries prompted by world headlines
Precious Metals >> Gold: The gold price and quantitative easing
If you read and accept the typical Internet headlines on the gold price you will no doubt believe that if the U.S. Federal Reserve and other central banks introduce more quantitative easing in the weeks and months ahead that will spur the gold price to new heights. It may well, but if that does happen an important question has to be: why will that occur?
Many reporters and commentators seem to link quantitative easing (as an ultimate cause) with in the end high rates of inflation (as the ultimate effect). Whether they do this or not, gold viewed as a ‘real money safe haven’ – terms often used in connection with gold – has to viewed in those contexts as a ‘place to be invested’ in the case of a cataclysmic financial event or series of events.
It follows, or so I think, that for the financial markets to price gold higher than it now is in the event of further quantitative easing is tantamount to those financial markets in essence saying “quantitative easing in the end will not result in long-term meaningful economic recovery”, but rather “will contribute to continued economic decline”.
This seems oxymoronic with quantitative easing also resulting in the financial markets generally in recent years stabilizing or improving from current levels. This is because in ‘good’ theory ‘financial market values’ are at any given point in time ‘the present value of all future expectations’. A very important question: Has financial market practice parted ways from sound market valuation theory? This is something to think very hard about.
While doing that you might want to consider:
- that today Goldman Sachs has been reported as suggesting the gold price may move upward to U.S.$1,840 by year-end on incremental quantitative easing; while,
- at the same time to the best of my knowledge Goldman Sachs currently is not predicting a major financial markets downturn.
Consider that the
physical gold price arguably ought not to parallel the financial equity market indexes – short of purely being ‘traded on the same parameters’. I suggest you think hard about this statement, and determine whether you agree with it.
Recall the negotiation story that suggests that when an American, in negotiation with Japanese businessmen, commented that they were really getting somewhere because they were thinking together ‘parallel’ the Japanese businessmen immediately terminated negotiations. The reason – parallel lines never meet.
Topical Reference:
Gold to remain glued to Bernanke’s testimony next week, from
Commodity Online, from Sharps Pixley, July 14, 2012 – reading time 2 minutes; and
Gold looks bullish, to reach $18,40 by year end: Goldman Sachs, from
Commodity Online, July 17, 2012 – reading time 1 minute.
Brief Country Risk Commentaries prompted by world headlines
North America >> United States: Interesting U.S. ‘formal environmental review’ twist
Last Thursday the U.S. House of Representatives passed, by a wide margin, legislation that would exempt copper, gold, silver and uranium mining on U.S. federal lands from formal review.
Seen as a form of jobs bill, it is assumed that will result in benefits beyond the mining industry. In this regard, consider that the ‘devil is in the detail’ and that one would have to read the fine print of the legislation to understand its implications.
That said, it will be interesting to watch what, if anything, is said from the ‘vocal minority environmentalists’ as this develops further.
Also consider, quite apart from this particular legislation, that it is not impossible if an economy deteriorates to the point of very serious difficulty – and in the end ‘desperation’ – that the vocal minorities who express themselves on many fronts may simply be ‘swept under the table’ as ‘necessity’ becomes the ‘mother of invention’.
Topical Reference:
Mining to benefit from new US bill, from
The International Resource Journal, July 13, 2012 – reading time 1 minute.
