PIIGS bailouts

It seems that the UK is preparing to participate in an Irish bail-out, presumably on the grounds that the UK cannot ignore what is happening next door. The whole euro-zone crisis is increasingly becoming an exercise in papering over cracks as they get larger and larger. So far, there has not been a proper restructuring exercise putting the various PIIGS on a sustainable fiscal path going forward. Rather, it has been a serious of manoeuvres to keep the financial sector afloat with any pain being forced on local populations, so far most notably on the Greeks. We can tell that nothing substantive has been achieved as PIIGS bond yields have yet to return to pre-crisis levels and in most cases are at unsustainably high levels. The sole achievement of the EU has been to seriously compromise the financial strength of the ECB as it has taken on low quality debt as collateral and bought what are effectively bankrupt countries national debt. We are talking about bail-outs, throwing good money after bad just like the Japanese did in the early 90s and so socialising risk.

Global PMIs

Although we are still waiting for the services PMIs from Europe and the US, it seems likely that the global PMI for October will be higher than that for September. Certainly, the manufacturing PMI rose from 52.5 to 53.7 with an encouraging rise in the new orders sub-index from 51.4 to 53.7.

Much has been made of the rise in US inventories over the last two or three months, with the argument being that once this had been stripped out of the GDP figures, final demand remained weak. This argument never really made once sense. Why would companies want to increase inventories if they knew demand was weak? And surely they knew enough about the state of final demand not to allow an involuntary build-up in inventories.

That said, the strong build-up in inventories over the last six months remains something of a puzzle. It has corresponded with a deterioration in the US (and UK) trade deficits. Logic dictates that if final demand in the US is weak, then the trade deficit should be improving as US companies seek new markets overseas to compensate for domestic weakness. Hopefully, the answer to this conundrum will become clear over the next few weeks.