A few embryonic trade ideas to start with. Along with long UST, short European equities (mentioned earlier this week), I wonder about being long AUD/USD, which has not rallied with US real rates as I would have expected. It is early days, though, and it might be wise to let the divergence grow before attempting to trade it. Also, I wonder about India’s rather strong stock market. With huge capital outflows and the RBI raising interest rates to prop up the currency, I wonder whether the stock market’s high valuation is sustainable.

Mr. Hamada, an advisor to Mr. Abe, has said that “it is possible to postpone” the sales tax increase due in the Autumn. I tend to think it would be sensible if Mr. Abe did postpone it. The Bloomberg article seems to suggest that this question is more about internal LDP politics than good sense, however — the party may not be fully behind the increase. Either way, it might not happen.

Various analysts are quoted as saying that Japan needs the sales tax increase to help its fiscal situation. I don’t think that is right at all. First, obviously, it could have other tax increases or spending cuts. Second, more importantly, it seems to escape everybody’s notice that Japan has been trying for years, on and off, to improve its fiscal situation. As in Europe, it doesn’t really work (unless you have a catastrophic recession, as in the Eurozone periphery, and even then it is fiscally counterproductive in the short run). To a first approximation, high debt/GDP is the result of weak GDP growth, not fiscal incontinence. I can’t believe, after everything that has happened in the past few years, that analysts are still serious talking as if the reduction of debt/GDP were simply a matter of manning-up and tightening the belt!

Mr. Schaeuble has said that if Greece successfully implements the current plans and achieves a primary surplus by 2014, then “if necessary, other measures will be negotiated”. The “other measures” would be further deferral of interest and principal repayment, and reduction of coupon — these are already the kinds of things that happened in November, when Eurozone finance ministers last attempted to make Greece’s debt burden a bit more reasonable.

A feature of the Eurozone crisis has been a lack of understanding among the public (and politicians!) of the effects of the single currency. People don’t understand that the euro is responsible for what is happening in Europe — which is why local populations are unlikely to revolt against the currency per se in response to their suffering under austerity. In the Greek case, the lack of public understanding of economic matters — viz, the difference between nominal par value and present value — allows politicians effectively to write off loans to Greece without causing a political scandal, as long as nominal par value is maintained. It would be reasonable to expect this solution to be more widely applied as time goes on.

US building permits and housing starts looked rather weak in the June release. I wonder whether fiscal austerity is starting to bite. Both series are quite correlated with residential investment, and residential investment is the best leading indicator of the economy. If only I had access to my Bloomberg charts (one of the problems of being unemployed!) I could see what the latest data did to my residential investment tracking index.


  • Building permits dropped quite a lot, to 0.91m d.e. Jun. vs. 1m e.
  • Housing starts were also weaker, at 0.84m d.e. Jun. I wonder whether this is in some way an effect of the fiscal tightening in the US. Analysts seem to be expecting growth of 1% or less SAAR in Q2.
  • Eurozone current account remained in strong surplus, slightly disappointing expectations, May. Goods, services and income balances have all increased over the past year. Net portfolio investment has been quite strongly positive on a 12-month basis (having been weak through 2012), while net direct investment remains negative.
  • UK retail sales 0.2% MOM a.e. Jun. 2.2% YOY. Discounts appear to be driving sales. On a trend basis, nominal retail sales have increased quite sharply in recent months after a period of weakness. Retail sales volume basically flatlined from Dec 2006 to Q3 2012, but the past few months have shown a new, stronger pattern.
  • Initial claims 334k b.e.
  • Philly Fed 19.8 b.e., and the strongest reading since 2011.