G20 Communique opens up the exploration of an exit strategy but dances around other topics. IMF increases in importance.

Although the G20 communique stated that employment is likely to continue to suffer, the idea of an “exit strategy” was discussed. Specifically, they asked the IMF “to undertake the necessary analytical work to assist us with this process.” 

The mention of the IMF seems a deliberate measure to put more emphasis on the IMF as a global bank in a global economy and divert the emphasis on the individual countries.  Whether this is “passing the buck” onto a 3rd party, or simply the realization that exit strategies are more likely to be beneficial to “all” in this global economy, if they are coordinated by a global central bank like the IMF.

In either case, it does seem to me, that the IMF is certainly becoming more and more of a force in this new global economy.

Another example of this was the comment later in the communique, that the G20 was ”exploring ways to substantially increase the IMF capacity for concessional lending through the sale of gold or other means, consistent with the new income model, and we encourage the Fund to explore the scope for increased concessionality to low-income countries.”

Last week it was reported that Russia was selling 10 billion of US debt to purchase IMF debt instruments (the debt instruments are generally thought to be a blended rate of country’s debt from the US, Japan, UK, Eurozone).   This action scared the forex market (dollar selling) as funds are diverted away from US debt obligations and spread out amongst all countries (including the US).  It also helped contribute to the back up in rates.

The use of the words “other means” in the communique, seems to be an intentional way to keep “diversification out of US debt”, out of the official communique for fear of its implications for the US dollar and the US debt market. 

In the same sentence, I found it curious that they were not shy in specifically mentioning the “sale of gold”.  The IMF holds gold on behalf of developed countries, and there has been talk in the past that they would sell these reserves for the purpose of aiding least developed countries.    By mentioning gold specifically, perhaps they are trying to keep speculators from buying gold and in the process diverting some of the fear of inflation that the market now has.  

The central bankers of the world cannot control the longer end of their respective  yield curves  – the market does that – but central bankers and finance officials, seem to be in agreement that the economies remains on a knifes edge – higher rates don’t help. 

With higher global yields (see chart above) , the threat is for the cutting off of gains made in stabilizing the fragile real estate market – especially in the US.   Supply is still too high.  Unemployment is likely to continue to rise (according to the communique) and with it comes the potential for even more foreclosures, lower home prices and more write offs on bank balance sheets.  A stable market with stable rates would allow for supply to continue to be absorbed and allow banks to replenish reserves via higher carry profits (and hopefully slowing  foreclosures). 

Commercial Real Estate is murmured as the next shoe to fall but you can bet, no one wants that to happen.  So businesses have to stay in business and pay rent/mortgages.  They have already let go of all the workers for now, and in the process  lowered their costs and hopefully profits.  Rents may still be high. Property may have lost value but as long as earnings are back on the right track, the higher costs may be absorbable.  Some businesses – still on the brink of going out of business – may be looking to move locations to lower costs, but it is not cheap to move and the next decision is likely to be to sink or swim – especially small businesses who have little choice.    

So it boils down to the consumer again and how they feel.  They will feel better if home prices remain steady and foreclosures go away.  They will feel better if jobs can be preserved not lost.  They will feel better is gas does not go up and they will fell better if the talk of inflation and higher rates stop (and perhaps that the dollar will get killed). 

In the past, the Goldilocks economy was for win – wins everywhere.  The Goldilocks of today seems more like just stay steady.  Make the necessary adjustments but don’t rock the boat too much.  We will see.

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