Article / 12 October 2012 at 13:37 GMT

Is IMF short for I must fail?

Chief Economist & CIO / Saxo Bank
Denmark

Source: http://www.polyp.org.uk/general_cartoons/cartoons_various2.html 

Fiscal Multipliers are wrong,  IMF admits - the biggest macro story this year
The big story this week is the International Monetary Fund's (IMF) admission that the fiscal multiplier is not 0.5 but really 0.9-1.7. (Source: FT.com)

This is actually not just big news, but massive news! For the IMF to let alone realise and then admit this is central to the outlook for growth and fiscal deficits across all economies. Let's walk through the maths here:

The fiscal multiplier defines that 1 percent of austerity will net cost 0.5 percent of gross domestic product (GDP) - but now the IMF says it is higher. Hence, its whole approach of austerity at any cost is losing its academic as well as practical application. If the fiscal multiplier is larger than 2.0 percent you have an extremely vicisous circle. You are enforcing a diet which will kill the patient rather than heal him, as for every percent you reduce in spending you lose 2 percent in growth. The bigger the hole you dig, the harder the climb back up! Do you think it is a random decision that the IMF made 1.7 percent the top of its range? Hardly!

The fact that only FT Alphaville in its "The IMF game changer" has spotted and written about this is close to being scandalous. It tells us that the Anglo Saxon press' need for supporting Keynesian intiatives (buying time, maximum interventions and pretend-and-extend) at all costs is done for political reasons rather than for finding real solutions to this crisis which is now spinning out of control as systemic risk is at an all-time high.

The IMF has increased the systemic risk by extending the payback period of central planners' calculations (much lower growth and higher fiscal/structural deficits). The market knew this, but it is such naive forecasts produced by the IMF which dictate policy recommendations for the debt crisis. The IMF is ironically seen as the 'expert' although it has experiences considerably more failure than success in its "helping efforts" - think Asian Crisis, Russia, EU debt crisis! The IMF is asking for your patience - extend-and-pretend squared is here!

It is sad that it took this long though! This has been discussed at length before by me (interview in April with TradingFloor.com), plus in the FT (whose writers deserve much credit). The most prominent voice on this topic has been Soc. Gen's excellent economic team led by Ms Michala Marcussen (Souce: zerohedge.com) - who I happened to study with a couple of 'wars' ago at the University Of Copenhagen.

What we need now is for policymakers to start producing credible forecasts which politicians cannot misuse. The IMF started this, so will the Federal Reserve, European Central Bank and Bank of England take note? Will the Congressional Budget Office in the US reduce its growth forecast? (See link for how this has been done in the past). Probably not, but the IMF's admission this week is a game changer. You can't save yourself to prosperity, not even in the eyes of central planners anymore! The IMF admission also proves what we have known for a long time: Macro stinks!

Finally, and most importantly, this creates a need for something new - which is the very theme I keep emphasising. Let's work on creating the fundamentals for the micro economy which will create more jobs. The strongest multiplier, after all, remains taking one person out of the unemployment que and putting them into a job. This reduces the subsidies needed as the person earns a taxable salary, is probably less ill, feels better, spends more etc. So the real challenge the IMF and other central planners need to realise is: You can help, but only by going away and taking a holiday. The S&P 500 (excluding financials) has a Return on Equity (ROE) in excess of 20 percent this year. It is based on an economy growing at 2.0 percent! So, do you need more proof?

President Clinton is in growth terms one of the most succesful US presidents in history. What did he do politically for eight years - except for smoking cigars? Nothing! Belgium was without a government for almost two years and every single macro indicator improved during this spell. I rest my case! Let's have total radio silence for five years and we will all be in a better place!

Strategy
Still same medium-term core views:

  • FX: Short AUD vs. USD - most overvalued currency. Short EUR vs USD. Long USD vs. JPY (new and long-term trade)
  • Equity: Took some profit on short S&P (60%) - keeping balance, short CAC-40 naked still.
  • Fixed Income: Looking to sell bonds. Needs angle. Inflation rising?
  • Commodities: Long Nat. Gas - stoped in coffe and corn. Think we will see a down move into December, which should be bought hard.
  • Keep a lot of cash.

Safe travels,

Steen

7y
eskippyskip eskippyskip
Excellent piece. Thank you.
7y
FRivera FRivera
and the Trade of the Day when will return?
7y
FRivera FRivera
I will look.
7y
benlouro benlouro
totally agree again. thanks

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