The FT has really gone to town on the subject of European deleveraging in the past 24 hours. Chris Cook, writing on Martin Wolf’s Exchange, points out that the IMF projects positive private sector financial balances in every Eurozone country (apart from Estonia) in 2013, and that the swings in private sector balances over the past five years have been enormous (around 20% of GDP for Spain). Anyone who has read Richard Koo on balance-sheet recessions will know that a positive sector financial balance can be indicative of a deleveraging — and, in this case, it probably is. What is more, it seems likely that the deleveraging is accelerating and taking hold in more of Europe: the periphery may already have suffered huge swings in private sector balances, but now French household credit growth is flat YOY and the trend appears to be downward. Gillian Tett, in the paper, points out that the Eurozone ratio of household debt to GDP is now higher than that of the US — 110% compared to 105% — and that the former has been rising while the latter has fallen. She quotes Willem Buiter on the subject of European banks, arguing that the “evergreening” of loans means that the process of balance-sheet repair in Europe has barely begun.

This last point is important: people who lived through the financial crisis are inclined to think that high debt levels are a problem per se, but that is not necessarily true (South Korea’s debt to household disposable income has been over 110% since at least the early 2000’s, for example); it is the combination of declining asset prices (or, in the case of a zombie bank, restatement of asset prices to reflect reality) and high debt that forces deleveraging to begin. That is actually an argument for optimism about the Eurozone’s prospects, in theory: perhaps evergreening could continue for many years until the economy begins to recover. But in practice, a) the presence of hidden impaired assets on bank balance sheets reduces the banks’ willingness and capacity to lend, and b) to return to Mr. Cook, it appears that the entire Eurozone is in fact deleveraging anyway.

Deleveraging cycles mean weak economic growth.

Robert Shiller’s website has a number of charts that look at the stock market in different ways. One that struck me was a chart of the inflation-adjusted PE ratio. This really does not look very high at all. It is clearly true that one reason that US stocks are rallying so strongly is the absence of a strong argument that they are overvalued. It would probably be too much to suggest that a particular few months’ moves represented a secular shift to higher PE ratios as the economy returned to normality; but it is worth bearing in mind that, if the economy does finally return to normality, that will happen, although it will perhaps be so dominated by short-term movements that the reality of the shift will not be discernible until it has gone on for quite some time.

Several central banks have cut interest rates at about the same time, and that has inevitably led to stories linking the moves and identifying a trend. I am sceptical of such stories — after all, sometimes events do just happen at the same time, without having the same cause — but in this case there may be something in it, inasmuch as it is related to the continued weakness of the Eurozone and the slower rate of Chinese growth, through the medium of weak trends in world trade (some trade figures released in the past 24 hours highlight this weakness — see below). A corollary of this is the apparently global weakness in indices of industrial production. I am not sure exactly what to do with this observation yet, except to note it.


UK trade balance narrowed a little in March. Exports were -2% 3m/Y, and imports -1% on the same basis. Exports to the Eurozone fell 3.9% 3m/Y, while imports rose 2.9%, suggesting weakness in the Eurozone as a reason for the lack of an export pick-up in the UK.

China M2 16.1% YOY b.e. and rose.

China new loans 793bn for April. On the high side on a monthly basis, but the real story is the strength of new loans so far in 2013. The social financing aggregate was CNY 3.88tr in Q1, only 0.35tr less than the same period last year.

Italian IP -0.8% d.e. Mar.

German trade balance 17.6bn a.e. Mar. Exports -4.2% YOY, imports -6.9% YOY (!).

Japan current account was positive again after a zero reading last month. Exports +0.3% YOY, imports +3.9% YOY.

Initial jobless claims in the US fell to 323k, a new post-crisis low.