Shock The Monkey To Life!

Although Americans remain in staunch denial about their economic prospects as I described yesterday, it is somewhat easier for them to understand that the global economy is on the ropes. Europe is hosed, and most observers think Greece will soon leave the European Union. Spain just got bailed out to the tune of 100 billion dollars, which doesn't really address their insolvency, and Italy (and Ireland or Portugal) can't be far behind bail-out wise. Remarkably, 20% of the loan to Spain is supposed to come from Italy, which must borrow at 6-7 percent to get interest payments from Spain of 3 percent! Nigel Farage called this move "genius" and "brillance" and it's hard to disagree.

Everybody knows Europe is hosed. The more interesting breakdown is happening among the so-called BRICs (Brazil, Russia, India and China). The world is facing an economic crisis which threatens to be deeper and longer than the one it already had in 2008-2009. The second crisis is the real crisis because it happens after the utter failure to fix the global imbalances which caused the first one. We've already fired off all our bullets trying to fix the first crisis. We're out of ammo. We've shot our wad.

We've got nothing left. Kaput. Finished.

Let me also say at the outset that humans (members of H. sapiens) should never be put in charge of managing something as large and complex as the global economy here on Earth. Unfortunately, there is no other crack team of highly trained monkeys we can hire out to manage the thing. Even worse, there is no team of alien experts we can bring in to clean up the mess we've made. To my knowledge, no off-world consultants have offered their services. We are entirely are on our own here. We are going to have to make do with the clueless, self-serving monkeys who have been so often blindsided by their own Egregious Errors, many of whom are central bankers. For this reason alone I don't like our chances much.

Anyway, let's move on the the BRICs. This text is from Bloomberg Business Week's O’Neill’s BRICs Risk Hitting Wall Threatening G-20 Growth.

Jim O’Neill, chairman of Goldman Sachs Asset Management, says his thesis that Brazil, Russia, India and China would together increasingly buoy the global economy faces “a more challenging test” as investors dump the countries’ stocks. China pared its growth target to the lowest since 2004, Standard & Poor’s may cut India’s investment-grade credit rating, Brazil is on pace to expand less than 3 percent for a second straight year and falling oil prices may hurt Russia.

A prolonged slowdown in the four countries poses a fresh threat to a world economy suffering its weakest spell since the end of the 2009 recession, which the BRICs helped shorten by contributing about half of the international expansion since 2007. Leaders attending next week’s Group of 20 summit in Mexico are already expressing concern, with Brazilian President Dilma Rousseff warning June 4 that emerging markets can’t carry the weight of the world on their shoulders.

Rich-nation policy makers “are so wrapped up in their own problems they’re praying some of this weakness is just temporary in the BRICs,” London-based O’Neill, 55, said in a telephone interview. “If it’s not, then it’s pretty worrying.”

While O’Neill is standing by his call that China will remain robust and the BRICs will together grow 7 percent this year after 7.5 percent in 2011, economists at Morgan Stanley, Bank of America Merrill Lynch and Citigroup Inc. are scaling back their forecasts for emerging markets.

Surprise Index

In a sign of the economic threats surrounding the BRICs, Citigroup’s surprise index, which measures how much data miss predictions, is at minus 81.10 for the group, down from 15.8 three months ago and the weakest of all its gauges.

You gotta love it! The Citigroup Surprise Index stands at  minus 81.1, way down from the postive territory it occupied only three months ago. Jim O'Neil of Goldman Sachs Asset Management is standing by his call that China will remain robust, and the BRICs all together will grow 7% this year. I suspect that Citigroup's Surprise Index will soon be further in the red. This would be a good time to re-read my remarks above about clueless, self-serving monkeys. It goes without saying that Goldman Sachs has been well represented on the crack team of highly trained monkeys which led the global economy to its present glorious condition.

Here are some quotes from The Global Economic Slowdown by Jerry Jasinowski, former head of the National Association of Manufacturers.

When a nation's banking system craters, the overall economy soon follows. Some would argue that several big Spanish banks are effectively bankrupt. To further complicate the picture, unemployment in Spain is about 22 percent, and much higher for younger people.

Consequently, capital has been fleeing Spain for havens in Germany and the United States. One result has been a spike in Spain's borrowing costs which have been above 6 percent for several weeks. The much-ballyhooed loan package for Spain announced last week was insufficient to calm European bond markets. In fact, Spanish bonds were downgraded again yesterday.

The other great economic engines of the world are sputtering. The manufacturing PMI in China declined for the third straight month. Brazil showed virtually zero growth in the first quarter of 2012, and economic growth in India dropped from 8 percent to 5 percent. The United Kingdom has also turned to negative growth.

Back in the United States, we have seen the manufacturing index in durable goods drop in May and first quarter GNP revised down to 1.9. The U.S. payrolls report for May showed only 69,000 new jobs for the month, against expectations of twice that, and the employment rate rose from 8.1 percent to 8.2 percent. It's clear that U.S. exports and employment are being adversely affected by the recession in Europe and other parts of the world.

Think back to 2007 and early 2008, think back to a happier time before the shit hit the fan. If you can remember what was happening back then, despite all the wonderful developments which have occurred since, you will find that what is going on now is eerily similar to what was going on during those still unspoiled days when expectations of continued growth were high. The complacency, at least here in the United States, is the same. No doubt the Citigroup Surprise Index, if it existed, was still in the black during those halcyon days.

And there are more "surprises" to come.

Cover me when I run
Cover me through the fire
Something knocked me out' the trees
Now I'm on my knees
Cover me, darling please
Monkey, monkey, monkey
Don't you know you're going to shock the monkey...
Shock! - watch the monkey get hurt, monkey
Shock the monkey
Shock the monkey
Shock the monkey to life

Comments

[John D]

Some thoughts:

Dave, you are not being fair to monkeys. I'm sure the one from Every Which Way but Loose could do a better job than Bernanke, Obama and Geithner.

I have to laugh when I see the headlines saying that the market is up based on expectations of easing. Huh? The economy is so bad that the Fed considers having to resort to printing more money, as they are out of any other ideas, and that buoys the market?

I am wondering if somewhere somehow there is a hedgefund based on the Surprise Index and banks are feeding leveraged QE money into it in an attempt at a high return? How perverse would that be?