The uptake of the ECB’s first three-year long-term refinancing operation was much larger than expected, at EUR 489bn. This may be, as the ECB hopes, an indication that banks see plenty of opportunities for lending and were not making new loans because their funding was previously constrained. However, it is more likely that banks a) took the opportunity to borrow against as much of their dodgy collateral as possible and b) wanted to have three-year funding in place because they fear another credit crunch. I expect the depressed state of the European economy and the requirement to raise capital ratios to continue to drive deleveraging by European banks. 

Paul Krugman has been saying that the US is in a “lesser depression,” and I am inclined to agree. A good indicator of the depressed state of the economy is real GDP per capita, which remains far below its pre-crisis peak and looks set to take years to regain even that level, let alone to hit current estimates of potential output. That is why things still feel bad, despite positive economic growth. What does this mean for equities? It is probably consistent with a market that behaves like the Japanese market since 1989 — i.e. one that has rallies on waves of optimism, followed by declines on waves of realism. Eventually, of course, the optimism will be right, which means it is important not to become cynical about the prospects for economic growth. Several other developed countries look as bad as, or worse than, the US, including the UK, Japan, France and the PIIGS. Germany looks better, but I am inclined to qualify that statement with “for now.” What is striking is that the BRICS (including South Africa) have already surpassed the pre-crisis peaks in their real GDP per capita. This tells us that there has been a kind of decoupling — an idea of which I have long been very sceptical — and suggests that the recent market declines that have been caused by developed-world problems present a buying opportunity for EM stocks.

The situation in North Korea briefly interested the market. Nightwatch ( has a good piece today on the subject. Apparently there were several assassination attempts on Kim Jong-Il after he took power, and it is reasonable to assume that Kim Jong-Un fears the same thing. Army units have been told to return to their barracks, despite having recently started their annual training cycle — something that would be consistent either with a move towards a war footing (either offensive or defensive) or with a lack of trust in junior officers and a desire to keep them under control. It is worth reading the whole piece.


Existing home sales fell, d.e., Nov. Recent data suggest that more new homes are being built (mainly multi-family structures) but that there is still a large shadow inventory of new homes to work through. I expect the housing market to remain subdued for the time being.
UK current account widened sharply in Q3, d.e. Further evidence of a collapse in import demand in Europe?
UK final GDP Q3 revised up from 0.5% to 0.6% b.e.
UK business investment revised up from -1.4% to +0.3% Q3.

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Initial claims
Final GDP
Revised Michigan sentiment