Inflation

According to RBA statistics, base monetary inflation has been runninng at 6.7% per year for the last 7 years, while broad monetary inflation has been running at 13.1% per year. The difference between these is the rate of increase of leverage within the economy - and the former number is the rate of printing. That printing may, in the case of Australia, be justified by population growth and the view that the total productive output of the country has truly been increasing. The latter number is the effective real rate of increase in money supply, for determining the nominal cost of everything.

In the past year, however, base monetary inflation has been running at 13.3%, while broad monetary inflation ran at 13.8%. This shows a few things - the economy has not been deleveraging and the RBA has been printing very hard to keep inflation going and prevent deflation from showing up anywhere.

On a related note, total credit growth has gone from 15.5% YoY 2 years ago to 3.4% YoY now, of which housing has gone from 12.9% to 7.1%, personal credit from 16.1% to -7.0% and business credit from 19.1% to 0.5%. We could go into 2nd derivatives, but the point is fairly clear - the credit train has almost stopped.

Of course, this is nothing like the US inflation - 98.4% inflation of the base in the last year and 8.8% broad inflation, demonstrating massive economic deleveraging and/or a Liquidity Trap.

As a final thought, an increase in inflation improves business and prosperity for everyone. At least according to the government, anyway. History shows that Roosevelt's inflation and New Deal didn't work so well.

US bond auction "failure"

The US is trying to spit out $235 Billion in debt this week to the bond market. The bond market has taken everything so far, but today the bid-to-cover ratio was 1.92. This is not a failure - anything over 1 means that all the debt sold. However, the Primary Dealers in the US must offer to swallow all debt issued, as a condition of being able to sell it - much like underwriting a share offering.

In short, anything less than 2 means that there was insufficient demand, and Primary Dealers were actually forced to swallow a portion of the debt. It's not that bad yet, but they should start running for the door. Dresdner Kleinwort fled a month ago.

Failed bond auctions - China

China has been failing bond auctions all week - now we have a third separate incident. China stimulus has been causing resources to soar, but they have to stop the stimulus, or do one of two things - print faster or sell US Treasuries. It's a very complex web, but suffice it to say, this places upward pressure on interest, which in turn rips down unsuccessful and fraudulent businesses.

The Recession is "Over"

According to the RBA's forecasts as of May:

The central bank predicts that the negative economic growth recorded in the December quarter will be repeated in the March and June quarters, with the economy shrinking by a total of 1.25 per cent before beginning to pick up from the middle of this year.

According to Merrill Lynch, it is now over:

"The recession is over" Merrill declared in a report Tuesday authored by Michael Hartnett, chief global equity strategist.

The brokerage’s famed horned mascot is snorting again: "We are bullish on global equities," Hartnett says in the report.

According to news articles quoting US Treasury Secretary Timothy Geithner, it will be over in a matter of months. Of course, he never actually says anything solid, he simply alludes:

"We have a powerful set of policies coming on stream," he said. "We have a very good chance of seeing the US economy and the global economy get back to the point where [they are] growing again over the next few quarters."

According to Dennis Kneale, it has been over since the start of this quarter.


The market has certainly reacted accordingly. That is to say, the stock market reacted, the futures market's message is plainly unchanged. I'm unaware of a history of successful predictions from any of these sources, and quite aware of a lack of success, so I'll add my own prediction to the pot:

The global economy will be out of "green shoots" in a matter of months - that is, the hope of an imminent recovery will melt away to be replaced by fear and then panic.

Futures spreads

I've been a bit out of things lately, a little dismayed at getting done by this rally. It appears that my experience is insufficient for predicting the timing of the future, so for this I turn to a source vastly better at making timing predictions - the futures market.

As I explained earlier, the futures market is chained to the stock market because it will be forced to match upon expiry of the contract, and so it never seems to drift more than about 35 points apart. From this I'll define a scale from -50 to 50, where -50 is "The End of the World approaches" and 50 is "Everlasting World Peace any time now".

The September spread is -35, or "Oh my god didn't there used to be an economy", the December spread is -30, or "Well, looks like the economy is still here... maybe we really have bottomed" and the March spread is slightly different because betting on it is less liquid - but it's between -36 and -60, which places it somewhere between "The economy is no more" and "The world is no more". I really hope it's the former.

Rates and Ratings

The outlook for UK credit rating was cut to negative by S&P.
There's talk of something similar coming down the line for the US by the head of a major investment company that specialises in bonds.

Meanwhile, US 10 year treasury interest rates went up 0.21% overnight, from 3.16% to 3.37%, continuing a recent run up from a bit over 2%. This is the rate that the US pays to borrow money. This is particularly significant, since most other debt is seen in the light of "is x% less safe than US government debt". This is directly and immediately impacting Australian government debt, which has gone from below 4.4% to 5.2% in the last month, with an expected translation from there into all long-term debt rates in Australia.

What this really means is that anyone refinancing debt now will have a much harder time, whether it be a personal loan, home loan, or large corporate loan, and they'll have to pay a higher rate. A number of on-edge companies will be pushed over really soon should this trend continue, and a number of on-edge individuals will find themselves in foreclosure/bankruptcy proceedings.

Australia swirls

Business Speculator has a nice article on the direction of the Australia:

The forward estimates period will produce government debt of at least $200 billion with no further fiscal stimulus or infrastructure spending.

With a conclusion that is exceedingly negative on Australia's outlook:

As a result the Australian dollar will fall. At 70 US cents it looks fundamentally overvalued.