Europe. The economic focus is on Europe all the time, but it is no longer a singular event. This week Europe became the cue ball in a violent pool-table break, balls now ricocheting into each other, caroming off side rails, bouncing into thin air.
Weak domestic data had minor impact by comparison, but the last thing the global table needed was more doubt about recovery. New claims for unemployment insurance jumped back to 471,000 last week, the highest in three months.
Inflation numbers were the lowest since 1961 (year-over-year core only point-nine percent) — that’s good news, but not if we’re headed into deflation. Applications for purchase mortgages are in post-tax credit free-fall, with the low-down-payment FHA/VA loan applications off 34 percent.
Global cash raced to U.S. Treasurys for safety, the 10-year T-note at 3.21 percent. Mortgages are stickier but below 5 percent. They’re unlikely to go lower for a while — they’ve already fallen too far, too fast.
The table break is not chaos: each collision and rebound has perfect logic.
Europe has grossly mismanaged its predicament, ignoring imminent peril for a year. Then, last week’s inadequate rescue: the central bank undermining itself by buying "Club Med" nations’ bonds.
This week: first the market-frightening sight of leadership frozen in headlights, then Germany flinched, making short sales verboten. Two failures, there: it acted solo, not even consulting euro-zone partners, and worse, the action revealed that Germany thinks Europe’s only problem is "speculators."
The cue ball: the European economy is going to slow down, whether the euro currency zone holds together or flies apart. Then cue stick struck cue ball: euro currency at one point hit $1.21, down 20 percent in five months.
Then cue ball hit euro-rack. Whack. If I’m a euro depositor in Athens, or Barcelona, I want to get my euros into a German bank or German bonds. Could get converted to drachmas or pesetas any minute. The 10-year German Bund leapt in price, down in rate to 2.68 percent. Intra-Europe flight to quality … interbank lending shutting down.
Ricochet to U.S. ball. Crack. Stocks: half of S&P 500 earnings are from overseas, 65 percent of sales. All of that gorgeous revenue from Europe has collapsed 20 percent in value. U.S. exports to Europe just became noncompetitive, up 20 percent in price.
Cue-ball Europe can expect a future happy roll from its suddenly cheap exports, but right now taking harder ricochets in each ear. No matter what, "Club Med" will cut spending by 10 percent, which "Club Nord" will have to subsidize while recapitalizing its banks.
The China ball banked off a rail, only to receive a concussion: since it pegs the yuan to the U.S. dollar, all of its exports to Europe just jumped 20 percent in price, with Europeans instantly and desperately trying to cancel orders for goods too expensive to resell or consume.
China is only maybe five times as dependent on exports as the U.S. Shanghai stocks have bounced clear off the table, rolling toward the stairwell.
All the striped balls in the back took mighty blows from the China carom. The emerging world has emerged because China buys from them and re-exports. As China’s exports slow, so will its imports.
Brazil has nothing new going except selling raw materials to China. Even Australia is vulnerable. The intermediate re-exporters — Japan, Korea, Malaysia, Taiwan — all took head-snapping shots.
The overconfident traders around the table, so sure they have understood the game of growth pool, the inevitability of inflation … as a kid I lost a thumbnail in a contest to stop a fast pool ball with another one held in hand.
The overconfident this week lost more precious body parts than that: at one point Thursday, every commodity on the planet was down, even gold. If this is deflation-pool, the gold ball is no help.
Oil is down 18 percent this month — so far. Gold is down 5 percent this week.
The U.S. ball has rolled to rest, safely in a corner. Everyone here wins except the stock market boys who have some explaining to do. We’re less export-dependent than any competitor because they rigged the game not to buy from us.
Nobody will care for many months if we really intend to deal with our own budget. That eight-ball can wait.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
***
What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.
