Let’s start with Japan, where the recent consumption tax hike is threatening to choke off the recovery. Here is how the impact of this year’s increase in taxes compares to the previous such move in 1997.
Source: Reuters
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Speaking of Japan, here are the 10-year government bond yields for Germany versus Japan... convergence.
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This next item is a gold bull’s fantasy come true (potentially). The Swiss are preparing to vote on the so-called "Save our Swiss gold" referendum. The law would require the Swiss National bank to hold at least 20% of its assets in gold, and gold held elsewhere would have to be repatriated to Switzerland. Furthermore, the SNB can never sell any of its gold. If the law passes, here is what the gold holdings ramp-up would look like.
The “unintended consequence” of the law is that it would put pressure on the EURCHF peg that is currently in place. The SNB has been a buyer of euros (and a seller of Swiss francs) in order to keep the Swiss franc from appreciating further. But if forced to buy gold, the SNB will need to sell the euros it currently holds to make room for gold. The Swiss franc will appreciate and Switzerland will likely go into deflation again (as was the case during the Eurozone crisis).
Source: Swiss Federal Statistical Office
While I don’t think the resolution will pass, it’s too close to call. A GFS Bern poll for the November 30th referendum shows that 44% of respondents currently support it, 39% are against it and 17% are not yet decided. For those who think this may actually happen, go short EURCHF (in addition to long gold, of course).
Now, a quick look at global oil dynamics. According to Deutsche Bank, the Saudi government can sustain itself for almost eight years with Brent crude at $83 per barrel. The nation's government has accumulated sufficient "rainy day funds" to withstand a prolonged period of budget deficits driven by low oil prices.
Source: Deutsche Bank
Armed with such staying power, Saudi Arabia is undercutting the competition in order to expand its market share. The goal is to pressure OPEC cheaters as well as to shake out US "tight oil" producers. The Saudis could presumably deal with the notion of US "energy independence", but having Americans export large amounts of crude (currently being debated in the US) and compete head-on with OPEC is not acceptable. While Saudi Arabia cannot entirely stop the growth of North American production, it is going to try slowing it.
Saudi Aramco already started undercutting the competition by sharply lowering prices. It’s a major market share grab at the expense of having to dip into savings. The Saudis know they can outlast everyone else.
Source: Deutsche Bank
The November OPEC meeting is expected to be tense, with a number of nations pushing for production cuts. But ultimately the Saudis will prevail and the pressure on high-cost crude producers will continue. Pain will be felt in Iran, Russia, Venezuela, as well as across the North American energy sector.
In the US, I am hearing that homebuilders seem to be willing to lower margins in order to generate sales. With wages stagnant and mortgages still not easily available for many, the growth we’ve seen in new house prices is not sustainable. The latest data seem to support that.
Source: Federal Reserve Economic Data
Now some food for thought. According to many, the Germans’ deep fear of inflation is rooted in history. These inflation concerns in Germany are part of the reason the European Central Bank has been unable to undertake a full-blown quantitative easing programme.
“The hyperinflation left behind a national trauma that can be felt to this day. The experiences of 1923 have etched themselves into the German psyche. Fear of inflation is widespread, and German economists feel more duty-bound than others to vouchsafe economic stability.” — Der Spiegel
Here is a table showing prices of bread and butter through the 1923 madness (until the US dollar peg was put in place).
Source: Deutsche Bank
Yet others argue that there must be another explanation for Germany’s inflation aversion, because other nations also experienced hyperinflation in the past and yet don’t share the same deep-seated fears. Perhaps. But I am not aware of other nations dealing with a supposed mental disorder the Germans called “zero stroke” (in the 1920s).
A one million Reichsmark note from 1923. Photo: iStock
Apparently the afflicted would find themselves obsessively writing endless rows of zeros as a result of being forced to constantly track the ever-increasing number of zeros in prices of everything. The following is from an issue of Time magazine published around that time (via Wikipedia):
With the price of bread running into billions a loaf the German people have had to get used to counting in thousands of billions. This, according to some German physicians, brought on a new nervous disease known as “zero stroke,” or “cipher stroke,” which may, however, be classed with neuritis as cipheritis. The persons afflicted with the malady are perfectly normal, except “for a desire to write endless rows of ciphers and engage in computations more involved than the most difficult problems in logarithms.” — Time