Global Growth Struggles, Fed Stands Still

The news from Japan tonight:

Japanese business mood turned pessimistic in the three months to December, the central bank's tankan survey showed, a sign the stubbornly strong yen, Europe's debt crisis and slowing global growth were taking their toll on the export-reliant economy.

Earlier this week:

India's industrial production slid 5.1 percent in October, helping drive the rupee to a fresh record low against the dollar — more signs of the reversal of fortunes in Asia's third-largest economy.

The decline in output from a year earlier was driven by mining and manufacturing, as well as waning consumer demand and lackluster investment, according to government figures released Monday.

Another one, via Bloomberg:

Brazil’s real fell to a two-week low after data showed Latin America’s largest economy shrank for a third month in October...

..Brazil’s seasonally adjusted economic activity, a proxy for gross domestic product, fell 0.32 percent in October from the previous month, capping its longest contraction since the bankruptcy of Lehman Brothers Holdings Inc. in 2008, according to central bank data. The real fell along with other currencies of commodity-exporting countries such as the Australian dollar and South African rand after the Federal Reserve dashed some investors’ expectations yesterday for monetary easing.

And a depressing global outlook via the Financial Times:

Cargill has become the Dr Gloom of the commodities trading sector.

The Minnesota-based company was the first big trading house to warn about the economic slowdown; its latest quarterly results reflected a sharp drop year-on-year; and now it is firing 2,000 people due to the “continued weak global economy”.

This is no small matter: Cargill is at the centre of global trade, shipping commodities from wheat to beef, and the wide reach of its business network helps it anticipate changes in the economic cycle. Other top commodities trading houses – particularly Glencore and Noble Group – are, however, painting a much rosier outlook, offering a much more positive view both about the global economy and their businesses.

It is too early to say whether Cargill’s bearishness is justified. But it is worth noting that Cargill is a privately-owned company – still controlled by the MacMillan and Cargill families, descendants of the founders who set up the group in 1865 – so it does not feel obliged to put as brave a face on in a bad economic environment as its publicly-listed rivals...

..Back in September, Paul Conway, Cargill deputy chief executive, said that the company felt that global economic growth was “weak and weakening”. He said: “We are going through a long, slow, anaemic, tough recovery”. The statement over the weekend indicates that Cargill’s view has not changed at all, further pointing to a global economic slowdown. Mr Conway indicated back in September that the problem was that the economic slowdown was not only affecting the US and Europe, but was then already spreading to several Brics countries – Brazil, India and China.

In contrast to much of the globe, and despite Cargill's assertions, the United States is seen as weathering the storm, at least so far.  From the FOMC statement:

Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth.

The expectation is that the Fed's next move will be to alter its communication strategy at the January meeting.  Whether or not they gear up for another round of QE, this time via mortgage assets, remains dependent on the economy.  Since I tend to be cautious that the US can forever resist the global drag now firmly in place, I expect additional easing.  That said, I also believe the Fed will delay until the strains become more obvious, which may not be until deep into the first or second quarters of next year.  In other words, hopes that the Federal Reserve would jump in with QE3 to save financial markets from the European disastor were simply premature.  They should get ahead of this curve, in my opinion, but they won't.

For those that believe the Fed has the tools to stop another crisis in its tracks, FT Alphaville has some sobering news.  Covering a report by Lewis Alexander, formerly of the US Treasury and Federal Reserve, currenty Nomura Chief US economist, they spot a particularly disconcerting element of Frank-Dodd:

DFA expressly prohibits the Federal Reserve from using 13(3) to support individual institutions. The legislative record on this provision indicates that Congress’ intent was to rule out the sorts of interventions that the Federal Reserve implemented to support the sale of Bear Stearns to JP Morgan and the backstop that was provided to AIG...

...In particular, the Federal Reserve could not have supported the Bear Stearns transaction, the backstop for AIG would not have been possible, the guarantees provided by the TLGP program would have required Congressional approval, and the ring fences provided for assets owned by Citi and the Bank of America would not have been possible.

It is not inconceivable that another US institution gets pulled in the European economic vortex. It would be unfortunate if, should that institution be in fact too big or connected to fail, the Fed could not be a backstop to hold the system together.  While I think many of us were initially shocked by some of the Fed's actions, particularly salvaging AIG, in retrospect we realize it would have been a bad time to start playing moral hazrd games.  Note also the process of winding down a too big to fail firm is untested.  I have to admit that an orderly wind down during a crisis is something of a contradiction.  Immovable object meet irresistable force.  

Read the whole piece, and part I as well.  They are worth the time, although they leave me feeling despite the lessons of the past few years, we are less prepare than we think we are.

Bottom Line:  The global economy is hitting turbulence, just as the US data turns more sanguine.  Can this decoupling be sustained as Europe sinks deeper into recession?  I would like to think so, but remain very cautious that the US can escape without some significant cuts and bruises.  So far, the Fed remains in a holding position.  I expect them to stay there until more significant signs of economic distress emerge.