Last night, before embarking to Shanghai for the G20 meeting, US Treasury Secretary Jack Lew gave Bloomberg an interview.
I don’t expect any government official to not promote what is the best interest of their country. Obviously if that path crosses a road which is also in the best interest of other countries, a cooperative solution is much easier.
And don’t get me wrong, I don’t blame Jack for trying to encourage cooperation. He seems like a well spoken thoughtful gentleman.
But he is completely out to lunch about the severity of the situation. Not only that, his desire for the finance ministers to hold hands and sing Kumbaya to fix the world’s problems is thoroughly naive. Especially since the United States’ previous aggressively easy monetary policy (which is now being reversed too quickly by Yellen & Co.) is one of the main reasons the world is in this fix.
During the interview Jack was keen to stress the United States was not the problem:
What is different is that these last months have made it clear the weakness in demand globally is a problem that can’t be solved by everyone looking to the United States.
And not only that, Lew believes the US economy is actually hanging in there:
I have been telling my counterparts, I think we are doing pretty well. This is not a moment of crisis. It is a moment where you have real economies doing better than markets think.
Lew is obviously firmly in the same “the US economy is doing just fine” camp as the Federal Reserve Open Market committee members. These bozos stare at lagging out of date unemployment figures and proclaim everything hunky dory.
Meanwhile all forward looking economic indicators are screaming a global economic slowdown is upon us. Have a look at the chart of the Citibank Economic Surprise Index for the G10. This index measures the difference in economic releases versus expectations. A declining index means the economy is underperforming expectations:
The markets have figured it out. Long rates are plunging as the Fed’s “tightening right into the recession” is obvious to all participants except US government officials.
It is condescending for Jack Lew to lecture the world about maintaining the status quo when it is so clearly not working.
I don’t want to argue about who is to blame. The reality is that all governments can take ownership for many stupid policies that got us into this mess. And even if you could piece out blame, what good would it do? Our job as traders is not to argue about what is or what should have been, but merely to acknowledge what is and profit from it.
The main takeaway from Jack Lew’s interview is the United States is still far from admitting and responding to the global economic slowdown. Instead of focusing on solutions, Lew is busy lecturing everyone to not engage in competitive devaluations:
…have a clear understanding that it is unacceptable to target exchange rates to gain unfair advantage outside of your country is a beggar thy neighbour strategy. …that’s just a question of who gets more of the existing pie, it doesn’t grow the pie.
Of course this comment makes sense. But where was this sort of reasoning in 2009 when the US was drowning Brazil and the rest of the world with Greenbacks? At that point the Americans rightfully put their own interest first and did what was needed to be done to save their economy. To expect any different from other countries today is the stuff of fairy tales.
A little part of Lew must realize how close we are to the precipice.
Let me put it this way, if the conversation went the other way and you saw some reluctance to make the commitment to refrain from competitive devaluation, that would be a case of real concern. Now is a moment in time if one country were to move in that direction, there is a triggering effect on policies and that would be a very bad thing for the global economy.
Yet, Lew’s final message is the reason the financial markets have taken a turn to the worse this week:
My response is sending a clear message: don’t expect a crisis response in a non-crisis environment.
The United States is busy explaining why it is every else’s problem, and arguing if the status quo is maintained, the global economy can prosper. They are refusing to acknowledge their role as the reserve currency liquidity provider. Without the US taking their foot off the brake, a crisis is almost a certainty.
I had thought the Federal Reserve and the other US government officials were about coordinate a reliquidification of the global financial system. It is now obvious there is not yet enough pressure. Ironically the recent market rally has reduced the need for action. Officials have been fooled into thinking things are not that bad.
They are right that things aren’t that bad - they are terrible! Time to lean on the short side again. This bear market won’t end until guys like Jack Lew change their tune.
CNN recently reported that China has more billionaires than New York.
Personally I am sick of all these billionaires. Too many of them are just talk.
I am hopeful maybe a Chinese billionaire will step up and be the first Chinese batman.
Thanks for reading,