Status Report

A new year with old problems: slow growth in the US, an imbalanced economy with insolvent banks in the EU and a slowing China. In the near term for the US: will the jobs numbers continue to improve? Will the government lead a deal to clear the single family home inventory? Will the government act on anything? When will the US worker and investor realize the 3%+ growth days are behind us? 

In the EU the next milepost is the Greek bond refunding in late March. They must reach an agreement on a debt restructuring deal with the private sector in order to receive more funding. The deal must be "voluntary" or it will mean default and CDS contracts will come into play and we don't really know the size of various financial institutions' sovereign EU CDS exposure.

We do know the EU is likely in recession and the US must be close and we do know the ECB must continue to provide liquidity by buying sovereign debt. They introduced a long term funding program in December that provided about 500B euros in liquidity, using sovereign debt as collateral, and they are expected to introduce a second facility in excess of 1T euros in February, god willing.

For China, we don't know how to use their "official" statistics, but we do know the transition from a fixed investment focused economy to a consumer driven economy must happen soon. New leadership comes at the end of the year so we must also assume any tough adjustments will be delayed. While that might mean a return to easy money, they are not in a position to spend like '09.

Governments everywhere continue to delay the long, slow deleveraging process as much as they can to ease the correction. They are searching for some balance between short term deficit issues, long term obligations and an aggressive monetary policy that will allow for a solution. For the US and the EU, this solution must include higher inflation and negative real rates to deflate the debt to manageable levels, and improved productivity to rebalance current accounts.