● The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs
By Hans-Werner Sinn
Summary via publisher (Oxford University Press)
This book offers a critical assessment of the history of the euro, its crisis, and the rescue measures taken by the European Central Bank and the community of states. The euro induced huge capital flows from the northern to the southern countries of the Eurozone that triggered an inflationary credit bubble in the latter, deprived them of their competitiveness, and made them vulnerable to the financial crisis that spilled over from the US in 2007 and 2008. As private capital shied away from the southern countries, the ECB helped out by providing credit from the local money-printing presses. The ECB became heavily exposed to investment risks in the process, and subsequently had to be bailed out by intergovernmental rescue operations that provided replacement credit for the ECB credit, which itself had replaced the dwindling private credit. The interventions stretched the legal strictures stipulated by the Maastricht Treaty which, in the absence of a European federal state, had granted the ECB a very limited mandate. These interventions created a path dependency that effectively made parliaments vicarious agents of the ECB’s Governing Council.
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Growth in private-sector payrolls rebounded strongly in September, according to today’s update from the US Labor Department. The revival isn’t particularly surprising (the crowd was expecting a sizable improvement), although the sharply higher gain is reassuring after August’s weak advance. Indeed, the companies added 236,000 jobs last month, a sizable improvement over August’s revised increase of 175,000 (initially reported as a mere 134,000 gain). It’s unclear if today’s print is a sign of stronger growth to come vs. a one-time payback after an unusually soft month. Only time will tell. Meanwhile, the numbers du jour look quite good.
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The US stock market has taken a hit lately, presumably because various geopolitical and macro risks around the world are starting to resonate with formerly complacent investors who have been inclined to drive American equities higher in recent history no matter the headlines du jour. But to the extent that the worries are focused on the US economy, the worst fears still look overblown. Or so this week’s updates on the labor market suggest, including today’s encouraging numbers on initial jobless claims for the week through September 27.
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Private nonfarm payrolls in the US are projected to increase 208,000 (seasonally adjusted) in tomorrow’s September update from the Labor Department, according to The Capital Spectator’s median econometric point forecast. The prediction reflects a sharply higher gain vs. the previously reported increase of 134,000 for August.
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Private-sector employment continued to rise at a moderate pace in September, according to this morning’s ADP Employment Report. Last month’s 213,000 increase in jobs (seasonally adjusted) was slightly higher than the consensus forecast, but generally in line with the pace of growth in recent months. In fact, once you consider the year-over-year trend—payrolls advanced 2.2% last month vs. the year-earlier level—today’s release looks a lot like the August report. In other words, the economy continues to create jobs at a steady rate in the low-2% range.
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September was a complete rout. All the major asset classes suffered losses last month—the first calendar month of across-the-board red ink since June 2013.
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The ISM Manufacturing Index is expected to decline slightly to 58.1 in tomorrow’s update for September vs. the previous month, based on The Capital Spectator’s median econometric point forecast. The estimate is still well above the neutral 50.0 mark and so the current outlook remains firmly in growth territory.
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Private nonfarm payrolls in the US are projected to rise 204,000 (seasonally adjusted) in tomorrow’s September update of the ADP Employment Report, based on The Capital Spectator’s median econometric point forecast. The expected monthly gain matches August’s increase.
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The Treasury market’s inflation forecast via 10-year Notes continues to fall and the US stock market has turned wobbly too. That’s a troubling combination… if it continues. The antidote to this mini re-run of heightened disinflation risk is economic growth. This week’s updates on payrolls will stress test the case for expecting moderate growth to roll on, starting with tomorrow’s estimate on private-sector jobs for September via ADP, followed by Friday’s official numbers from the Labor Department. Meantime, Mr. Market is downsizing his outlook for inflation. The yield spread on the nominal 10-year Note less its inflation-indexed counterpart slipped to 1.95% yesterday (Sep. 29)—the lowest in more than a year.
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PIMCO’s star manager, Bill Gross, is moving on to Janus. By some accounts, the Janus brand will be rejuvenated with the arrival of the “bond king,” a moniker earned over a long run of outsized returns in plying the waters of fixed income. But his track record in recent years has looked increasingly wobbly, a familiar strain that tends to arise eventually as the challenge of beating the market rises for everyone through time. The main lesson here, however, is less about quantitative results vs. what might be called manager risk. When your favorite stock picker (or in this case bond picker) abruptly heads for the exit, for whatever reason, dealing with the blowback can be cumbersome.
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