For those of you who like a challenge and want to understand how markets shape the economy

 As with any forecast, this may not come to pass, but (for me) the signals are very troubling; after the GFC the Queen asked "Did no one see it coming?", to which the answer was yes, some did; everyone else chose to ignore the signs:

Is Britain heading for another Black Monday?

Worrying parallels emerge between 1987’s stock market crash and 2023’s bond sell-off

ByMatthew Lynn and Melissa Lawford8 October 2023 • 6:00am

Even almost four decades later, it remains an event scarred into the memory of the financial markets. After a violent storm had ripped across the country, knocking down trees and shuttering roads, trading systems that still relied on brokers shouting at each other across open floors had closed early for the weekend as the damage was cleared up.

As London trading re-opened on Monday, after closing jitters in New York the Friday before, the reaction was swift and brutal. The FTSE-100 fell 11pc in a single session, while in the United States the Dow Jones ended the day down by a terrifying 20pc.

It became known as Black Monday, the worst single day of trading since the great stock market crash of 1929, and one that shaped policy for the rest of the decade.

As we approach October 19th, the 36th anniversary of that fateful day, could the British and global markets be heading for a replay? To many financial experts, there are already worrying parallels between the two eras.

The bond markets are crashing around the world, just as they did in the run-up to the crash of 1987. Debts have been ramped up. The equity markets are overstretched, with company values stretched to the point of breaking in many cases. A seemingly indestructible bull market is coming to an end. It is not hard to see how that could end in a gale of destruction blowing through the markets.

If it came to pass, a market crash on the scale of 1987 would prove a cataclysmic political and economic event. It would send interest rates soaring, increasing costs for mortgage holders and for highly indebted companies, especially in the property sector. Business would fail and pension funds would be hard.

Perhaps most importantly of all, the already-high cost of servicing national debts would climb even higher. It would force profligate politicians to finally face up to the consequences of their wild spending.

There is plenty about the financial markets over the last few weeks that looks very similar to the late 1980s. There is, however, an important difference. Policy makers still had fiscal room to respond to the crash of Black Monday. After two decades of easy money, and constant buffering of the markets with quantitative easing to prevent a crash, that no longer exists.

It remains to be seen whether we witness a rerun of 1987. One point is certain, however: if we do, this time around it will be far worse.

Bond market blitz

Investors are beginning to fret about a repeat of Black Monday primarily because of a sell-off in the bond market, where companies and governments issue debt and promise a guaranteed rate of return. Usually a sleepy corner of financial markets, the bond market has been gripped by a wave of selling in recent weeks.

If you want a vivid illustration of the rout in the bond markets, the place to look is Vienna. At the height of the bull market in government debt, Austria very smartly launched a 100-year bond, and then reissued it in 2020. With a coupon of just 0.85pc, investors would have to wait a whole century to get their money back, and for all that risk and patience they would get less than a 1pc return.

Amazingly, in retrospect, the issue was 16 times oversubscribed as investors scrambled to give away their money for practically nothing until long after they were dead. And today? The bond has, perhaps not very surprisingly, crashed in value. If you sell it, you will get back only 33 euros for every 100 you invested.

Why anyone wanted to lend the Austrian government money for 100 years is perhaps a question that only psychologists can answer. What is certain is that the bond market has fallen in value on a spectacular scale over the last few months. The Austrian 100-year bond is an extreme example, but the value of most of the major bonds have fallen by between 40pc and 50pc over the last year, with the losses accelerating over the last month.

The crisis is most often measured in yields – the rate of return offered by a bond, which moves inversely to price.

Yields have spiked to levels that even seasoned market professionals can barely remember. The yield on a 10-year US Treasury Bill, the key instrument that determines prices across the world, was closed to 4.9pc on Friday, a level not seen since 2007. In Britain, the government is now paying above 4.5pc on a 10-year gilt, significantly more than when Liz Truss supposedly “crashed” the economy a year ago.

The Italian government is paying close to 5pc, the highest level since 2011 when the eurozone came close to falling apart. Germany, which has had negative yields for most of the last decade, meaning investors were effectively charged a fee for lending money to the government, is now paying close to 3pc. In every major market, the cost of money is rising rapidly.

The bond market does not get the same kind of attention as equities or property. Most of us are not aware of owning any bonds, in the same way as we might own our home, or a portfolio of shares. But bonds are the crucial underpinning of the financial system, and your pension fund will certainly own lots of them, as will your bank, while your employer and of course the government will depend on the debt market for its financing.

In total, the global bond market is worth $133 trillion (£109 trillion), or rather it was when it was last properly measured in 2022. When it crashes, it has far more impact on the everyday economy than any other part of the financial system.

High interest rates are not ‘transitory’

There is no great mystery about why prices are crashing and, as a result, yields are going up. Investors are beginning to believe interest rates will remain high for longer than previously thought. As a result, they are demanding a higher rate of return on their investments. 100-year Austrian bonds that pay out 0.85pc no longer cut it.

The latest surge in government borrowing costs began with messaging from the US Federal Reserve in early September that interest rates will need to stay higher for longer.

Continued strong jobs figures in the world’s biggest economy have also stoked concerns – a tight labour market drives inflation. Bond yields lurched higher on Friday after figures showed the US economy added nearly twice as many jobs as expected in August.

Investors and economists are also concerned about high levels of government borrowing. Both Italy and France have raised their deficit forecasts over the last month, and show little willingness to bring borrowing back under control, while President Biden’s wild spending carries on regardless of the impact it might have on the economy.

In the background, the huge spike in inflation in the wake of the Covid pandemic and the war in Ukraine has proved stubbornly resistant to higher interest rates. The central bankers who only a few months ago complacently assured us that the rise in prices was merely “transitory” have started to concede that inflation has become embedded in the same way it did in the 1970s, and that rates will have to “stay higher for longer” to control that again.

We won’t be seeing rates of less than 1pc again for a long time. The result? Bonds have been massively repriced, even five or ten years out, for a world in which money is far more expensive than it has been for a generation.

Stock markets remain wildly over-stretched

So far, we have not yet seen the sell-off in the bond market feed through to equities, even though higher borrowing costs will mean lower growth potential for companies. But it may well be only a matter of time.

In a note sent to clients late last week, Barclays argued that the only way the rout in the debt market could finally stabilise would be if equities effectively crashed as well, amid a general re-pricing of financial assets.

“We believe that the eventual path to bonds’ stabilising lies through a further re-pricing of lower risk assets,” the bank’s analysts argued. “We believe stocks have substantial room to re-price lower before bonds stabilise.”

More pertinently, as the chart shows, the rise in bond yields looks very similar to the surge in borrowing costs that led up to the Black Monday crash of 1987. In the year before the crash, US bond yields had been steadily rising, following almost exactly the same trajectory as they have done over the last six months. That only ended with the massive sell-off that came in October.

In 1987, equities were not even significantly over-priced compared to their long-term averages; most share prices reflected a realistic assumption of profits, growth and value.

Now most indices, with the exception of a few dogs such as Britain’s FTSE-100, stock markets are already wildly over-stretched by any historical comparisons – meaning they have much further to fall if a crash does materialise.

There are of course plenty of signs of stress in the financial markets. The first tremors were felt here in the UK in the wake of the mini-Budget last September. The markets were unnerved by the scale of the borrowing planned by the Government. Sterling crashed and borrowing costs spiked.

The surge in bond yields triggered the LDI crisis, with pension funds over-committed to instruments that assumed bond markets would not move for years. A fire sale began and the Bank of England was in short order forced to step in and stop things spiralling out of control.

It was a vivid illustration of how issues in the bond market can spill over but perhaps will prove to be a relatively minor one in future.

There are plenty of warning signals elsewhere as well. In the US, there was a small-scale panic in the spring prompted by the collapse of Silicon Valley Bank, caused at root by its over-exposure to a falling bond market. Only intervention from the Federal Reserve, in much the same way as the Bank of England had to step in over the LDI debacle, prevented that from spreading to other banks in the US, and several other regional financial institutions were hustled into mergers.

Amid nervousness about the losses Silicon Valley Bank had suffered on its bond holdings, customers rushed to get their money out CREDIT: Anadolu Agency

In Germany, there is a growing property crisis, with values falling by almost 20pc so far this year and developers starting to go bust. In China, the country’s debt-fuelled property bubble is rapidly running out of air.

If there is a crash, it will be easy for anyone to look back at all those events and conclude that the warning signs were all in plain view.

Growing global debt mountain

If the financial contagion does spread, the main casualties are not hard to work out. In the UK, we have already witnessed a steep rise in mortgage rates and some modest falls in house prices, but if there is a full blown crash it will get much worse.

It is just as bad elsewhere. In the US, the average mortgage rate has hit 7.5pc, the highest level since the millennium. House prices are falling at an annual rate of 7pc in Germany, the steepest decline in 23 years.

A market crash will be felt by companies that borrowed cheaply, and complacently assumed that rates would never rise again, especially in the private equity industry. The sector bought up huge swathes of the economy with cheap money and will have to start selling at huge losses once all that debt has to be refinanced at far higher rates.

The consultancy firm Alvarez & Marsal estimated in a report last week that $500 billion of corporate debt will have to be refinanced next year; all of those companies will find they have to pay far higher rates, putting pressure on their businesses.

But it will be felt most painfully by governments, for the simple reason that they have borrowed so much over the last decade.

In the UK, the cost of servicing our huge debt mountain has risen to £100 billion a year, double the amount only a year ago, and almost 11pc of total government spending. In France, debt costs are now the biggest single budget item, forcing the free-spending Macron government to make savings elsewhere. Interest on Italy’s debts already consumes 4pc of GDP every year and that is only going to rise as it borrows more and more simply to stay where it is.

In the US, interest payments on the national debt are forecast to rise from $475 billion last year to $1.2 trillion by the end of the decade: all President Biden’s investment in “green technologies” will have to generate huge returns to make all that borrowing look worthwhile.

In reality, all the major governments across the developed world will have to start cutting their spending, and reducing their borrowing, simply to bring their cost under control. Add it all up, and it is going to be very tough to adjust to higher rates.

What would happen if there was a financial crash as spectacular as the Black Monday collapse in 1987?

“Back then, we didn’t have a big recession in the UK, for example, until the early 1990s,” says Neil Shearing, group chief economist at Capital Economics. “This time, the UK economy is adjusting to a sustained period of rate rises which means the economy is already struggling. There will be no buffer for a shock.”

Western economies lose their lustre

There are some big differences between 1987 and 2023. The overall debt levels were far lower back then, and government debts far less burdensome. In the US, the debt to GDP ratio was just 48pc then, compared to 120pc now, and the UK was also comfortably below 50pc, compared with 100pc now. Interest rates were significantly higher and households and companies were holding significantly less debt, which gave them a lot more flexibility to cope with the crash.

Perhaps more significantly, governments had already started the hard work of making their economies more competitive. The 1987 crash came in the middle of the Reagan-Thatcher project of rebooting the Western economies, curbing the overwhelming power of the trade unions, privatising inefficient state owned monopolies, and handing power back to companies and entrepreneurs.

All of that was just starting to pay dividends, unleashing a wave of innovation and growth that enabled economies to grow even through periods of financial turbulence. That is not to say it didn’t matter. The loosening of financial policy in the wake of the Black Monday crash led to a round of inflation that arguably led to the fall of the Thatcher administration in 1990, and the defeat of Reagan’s successor Geoge HW Bush in 1992. But it also came at a time when the major developed economies were getting stronger.

That is certainly not true today. In reality, all the Western economies have been steadily enfeebled over the last fifteen years. State spending has grown exponentially, much of it paid for by printed money. Regulation has been endlessly increased. Governments have been captured by lobby groups, and corporations have fallen under the sway of ideologically driven managers committed to social values instead of innovation and growth.

The corporate raiders who disciplined bloated management hierarchies in the 1980s are a distant memory. The crash of the 1980s proved in retrospect to be little more than a punctuation mark instead of the closing of one chapter and the opening of another.

That won’t be true of the crash of 2023, if it happens. It may well mark the point at which two decades of relentless government expansion, increased welfare entitlements, and soaring debt levels, all of it financed by cheap money, starts to unravel. Governments, corporations and households will all have to start living within their means again, and growth will only be possible through greater innovation and productivity instead of through printed cash.

When we look back from the 2030s or 2040s, that may well be seen as a good thing. A collapse will force us to focus on restoring real growth. But there will be a lot of pain getting to that point. We have already seen that in the bond markets over the last few weeks – and very soon we may see it everywhere else as well.  

Key points about monetary policy

• Governments have relied on monetary policy starting in 1987, with Alan Greenspan as Chairman of the Board of Governors at the Federal Reserve. It became the instrument of choice for all kinds of crises.
• But monetary policy has become increasingly ineffective in promoting real economic growth. Every crisis was met with monetary easing that caused debt and other imbalances to accumulate over time, and that caused the next crisis to be bigger than the previous one. The next crisis then needed more of a punch from central banks. However, since interest rates were never raised as much in upturns as they were lowered in downturns, the capacity to deliver that punch was decreasing.
• It’s true, the Fed had no choice but to step in to prevent a financial meltdown (in March 2020). But this meltdown only happened because of the monetary policy instituted over previous years.
• You see, by keeping interest rates too low as a means of stimulating economic growth, central banks are inducing corporations and households to take on more debt. 
• To a large extent, this debt is not used for productive investments, but for consumption or, especially in the U.S., for the buyback of shares. 
• This creates a debt trap, as well as increasing instabilities in the financial system. These instabilities broke out in March, and the Fed responded adeptly to stop the panic. But the point is: Central banks create the instabilities, then they have to save the system during the crisis, and by doing so they create even more instabilities. They keep shooting themselves in the foot.
• Governments should use the current environment to borrow long and lock in cheap money while they can.
• This is not the time for austerity due to the pandemic crisis, but governments should set clear guidelines about how they intend to get debt levels down in the future. They should reevaluate budgets and use of funds, e.g., cut subsidies that often go to special interest groups that don’t deserve them.

Asked if central banks have reached the end of the road, Bill replied:

• Just read what Bill Dudley, the former president of the New York Fed, wrote in Bloomberg a couple of weeks ago. He warns that central banks have run out of firepower, and that the side effects are getting worse. I agree with every word. That is the most dangerous effect of the past 30 years of monetary policy: Debt levels have constantly been building up, and so have the instabilities in the financial system.
• This is exactly my definition of the debt trap: Central banks know they can’t leave interest rates as low as they are, because they are inducing still more bad debt and bad behavior. But they can’t raise rates, because then they would trigger the very crisis they are trying to avoid. There is no way out but to keep doing what you are doing, but by doing that, you are making it worse.
• In 2008, the ratio of global household, corporate and government debt-to-GDP was 280%. Early 2020, this ratio had grown to 330%. And it’s not just the quantity of that debt, it’s the quality.
• Most of the new corporate debt is BBB-rated, covenant-light, low-quality stuff. The reason for that is the ultra-easy monetary policy we have seen post-2008.
• Governments made the mistake of embracing fiscal austerity too early. By doing that, they made it the job of the central banks to frantically try to create economic growth. This is a mistake we must avoid after this crisis. Fiscal policy will have to play a much larger part going forward.
• There is no return back to any form of normalcy without dealing with the debt overhang. This is the elephant in the room. If we agree that the policy of the past 30 years has created an ever-growing mountain of debt and ever-rising instabilities in the system, then we need to deal with that

The full post containing more gems is here:

https://www.cmgwealth.com/ri/on-my-radar-what-do-we-do-now/

Anything complex you want me to explain in order to understand come and see me.

Normalising monetary policy Oct 2017

This article looks at the potentially monumental shift from highly loose monetary policy to a more 'normal' stance. It has some critical information for any essay on policy to manage the economy in its current state:

It puts unconventional monetary policy in perspective, and looks briefly at the current stance towards removing some of the easing. It contains important A-A* material.

The Courage to normalise Monetary Policy September 26 2017 Stephen S Roach

A decade after the onset of the global financial crisis, it seems more than appropriate for central bankers to move the levers of policy off their emergency settings. A world in recovery – no matter how anemic it may be – does not require a crisis-like approach to monetary policy.

NEW HAVEN – Three cheers for central banks! That may sound strange coming from someone who has long been critical of the world’s monetary authorities. But I applaud the US Federal Reserve’s long-overdue commitment to the normalization of its policy rate and balance sheet. I say the same for the Bank of England, and for the European Central Bank’s grudging nod in the same direction. The risk, however, is that these moves may be too little too late.

Central banks’ unconventional monetary policies – namely, zero interest rates and massive asset purchases – were put in place in the depths of the 2008-2009 financial crisis. It was an emergency operation, to say the least. With their traditional policy tools all but exhausted, the authorities had to be exceptionally creative in confronting the collapse in financial markets and a looming implosion of the real economy. Central banks, it seemed, had no choice but to opt for the massive liquidity injections known as “quantitative easing.”

This strategy did arrest the free-fall in markets. But it did little to spur meaningful economic recovery. The G7 economies (the United States, Japan, Canada, Germany, the United Kingdom, France, and Italy) have collectively grown at just a 1.8% average annual rate over the 2010-2017 post-crisis period. That is far short of the 3.2% average rebound recorded over comparable eight-year intervals during the two recoveries of the 1980s and the 1990s.

Unfortunately, central bankers misread the efficacy of their post-2008 policy actions. They acted as if the strategy that helped end the crisis could achieve the same traction in fostering a cyclical rebound in the real economy. In fact, they doubled down on the cocktail of zero policy rates and balance-sheet expansion.

And what a bet it was. According to the Bank for International Settlements, central banks’ combined asset holdings in the major advanced economies (the US, the eurozone, and Japan) expanded by $8.3 trillion over the past nine years, from $4.6 trillion in 2008 to $12.9 trillion in early 2017.

Yet this massive balance-sheet expansion has had little to show for it. Over the same nine-year period, nominal GDP in these economies increased by just $2.1 trillion. That implies a $6.2 trillion injection of excess liquidity – the difference between the growth in central bank assets and nominal GDP – that was not absorbed by the real economy and has, instead been sloshing around in global financial markets, distorting asset prices across the risk spectrum.

Monetary authorities have only grudgingly accepted this. Today’s generation of central bankers is almost religious in its commitment to inflation targeting – even in today’s inflationless world. While the pendulum has swung from squeezing out excess inflation to avoiding deflation, price stability remains the sine qua non in central banking circles.Normalization is all about a long-overdue unwinding of those distortions. Fully ten years after the onset of the Great Financial Crisis, it seems more than appropriate to move the levers of monetary policy off their emergency settings. A world in recovery – no matter how anemic that recovery may be – does not require a crisis-like approach to monetary policy.

Inflation fixations are not easy to break. I can personally attest to that. As a staff economist at the Fed in the 1970s, I witnessed first-hand the birth of the Great Inflation – and the role played by inept central banking in creating it. For years, if not decades, after that experience, I was convinced that renewed inflation was just around the corner.

Today’s generation of central bankers has dug in its heels at the opposite end of the inflation spectrum. Wedded to a “Phillips curve” mentality conditioned by the presumed tradeoff between economic slack and inflation, central bankers remain steadfast in their view that an accommodative policy bias is appropriate as long as inflation falls short of their targets.

This is today’s biggest risk. Normalization should not be viewed as an inflation-dependent operation. Below-target inflation is not an excuse for a long and drawn-out normalization. In order to rebuild the policy arsenal for the inevitable next crisis or recession, a prompt and methodical restoration of monetary policy to pre-crisis settings is far preferable.

A failure to do this was, in fact, precisely the problem during the last pre-crisis period, in the early 2000s. The Fed committed the most egregious error of all. In the aftermath of the bursting of the dotcom bubble in early 2000, and with fears of a Japan scenario weighing heavily on the policy debate, it opted for an incremental normalization strategy – raising its policy rate 17 times in small moves of 25 basis points over a 24-month period from mid-2004 to mid-2006. Yet it was precisely during that period when increasingly frothy financial markets were sowing the seeds of the disaster that was shortly to follow.

In the current period, the Fed has outlined a strategy that does not achieve balance-sheet normalization until 2022-2023 at the earliest – 2.5-3 times as long as the ill-designed campaign of the mid-2000s. In today’s frothy markets, that’s asking for trouble. In the interest of financial stability, there is a compelling argument for much speedier normalization – completing the task in as little as half the time the Fed is currently suggesting.

Independent central banks were not designed to win popularity contests. Paul Volcker knew that when he led the charge against raging inflation in the early 1980s. But the approach taken by his successors, Alan Greenspan and Ben Bernanke, was very different – allowing financial markets and an increasingly asset-dependent economy to take charge of the Fed. For Janet Yellen – or her successor – it will take courage to forge a different path. With more than $6 trillion of excess liquidity still sloshing around in global financial markets, that courage cannot be found soon enough.

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management. He is the author of Unbalanced: The Codependency of America and China.

Spoiling Mr Bool's breakfast:

and possibly being a tad too pessimistic, but the reasons in here are solid - lift yourselves above the pack by having this as evaluation material:

The eurozone is already heading back into recession – and that could be catastrophic

• MATTHEW LYNN 

8 APRIL 2018 • 8:00AM

Retail sales are falling sharply. Industrial production is slumping. Construction is sluggish and the government is weak and clueless with little idea of how to respond to falling demand. No, don’t worry, you haven’t accidentally stumbled across a hardcore remoaner rant about a declining, irrelevant Britain. That is actually a description of what is meant to be the eurozone’s strongest economy – Germany. 

Very few people seem to have noticed it yet but there are worrying signs the exporting powerhouse at the centre of the eurozone is slowing down sharply. True, it might only be a blip. Then again, that is how most recessions start. If that is what is happening, and the evidence is mounting all the time, then it will be catastrophic for the whole single currency area. No progress has been made on reform, policy responses are limited and electorates are exhausted by austerity. One more downturn might be the last. 

Most mainstream economists have bought into the story that the eurozone is booming this year. Led by a powerful Germany, with France reviving under president Macron, and with a central bank that is still pumping the economy with printed money and near-zero interest rates, production has been rising and joblessness finally falling. Heck, even Italy and Greece have been growing again. Investors have been pouring cash into the continent, and the currency has been soaring, as anyone planning a holiday in France or Spain will quickly discover. 

But hold on. There are some suspicious numbers emerging that don’t quite fit that narrative. Start with Germany. This week we learnt retail sales dropped by 0.7pc in February. They have fallen in six of the last eight months and all of the last three. On Friday, industrial production figures showed output down by 1.6pc, the largest monthly fall in three years. Factory orders came in way below expectations this week, with a mere 0.3pc rebound after the 3.5pc drop in January, and construction spending is also down. In fact, the only part of the German economy still expanding is its export industry, but even that is under threat. 

At the same time, Angela Merkel’s patched-together Grand Coalition seems unlikely to respond with any form of stimulus, while Germany will be the biggest loser from Donald Trump’s trade wars. 

True, employment growth is still OK (although rather like this country, nearly all the new jobs go to lowly paid immigrants). But that is not a leading indicator like retail sales and factory output. “We are not calling for a recession in Germany … yet”, argued High Frequency Economics in a note this week. “We are suggesting that the peak of economic growth for this cycle has been realised.” Once you are passed a peak, of course, then the only way is down. 

Across the eurozone as a whole, the outlook is not looking much better. Retail sales for the whole region rose a mere 0.1pc in February compared to the 0.5pc forecast. France is especially weak, with retail stagnant, and a nasty 1.9pc fall in household real income for January and for the year as a whole. A long summer of strikes is not going to help that economy, especially as its huge tourist industry needs the trains and planes running again to prosper.  

Over in Italy, there is at least some growth, which is a miracle given its experience of the single currency, but the jobs numbers came in below expectations this month. None of those figures fit the picture of an economy that is booming. In fact they look increasingly like one that is heading into a German-led downturn. 

In truth, the growth of the last two years has been mostly an illusion. The European Central Bank has chucked 2.2 trillion of freshly printed euros at the economy and slashed interest rates as close to zero as it can possibly get. It would be extraordinary if that amount of cash didn’t stimulate some kind of revival. But the key question was always this: would quantitative easing kick-start a genuine recovery, as it has in the United States, or to a more limited extent in the UK? Or would it, as it has in Japan for 20 years, merely generate a feeble revival that almost immediately runs out of steam? 

Right now, it is starting to look as if we have the answer. The eurozone is another Japan. After all, without a strong Germany, the region can’t grow. It accounts for 23pc of the zone’s GDP and has created 38pc of the new jobs in Europe over the last five years. And Germany has stopped expanding. 

The last recession led to a dramatic crisis within the eurozone. Greece, Ireland and Portugal had to be bailed out, and Spain and Italy came within a whisker of the same fate. The next one will be far harder. 

There have been no meaningful reforms to make the single currency work better. Indeed, in the background, the imbalances have grown even worse, with Germany’s shocking trade surplus draining demand from the rest of the continent. The ECB is out of policy responses. The banking system looks in worse shape than ever (suspiciously, Deutsche Bank’s shares keep hitting fresh lows – almost as if something was up in its home market). In the peripheral countries, voters are exhausted by austerity and low growth. In the core, Angela Merkel now looks too weak to impose a solution should a fresh crisis erupt. 

In truth, a fresh recession may well be terminal. Of course, it may not happen. The latest data may just be a few rogue figures, followed by a swift recovery as most mainstream forecasters still predict. Even so, the warning signs are clear enough. The markets are ignoring them right now. But that doesn’t mean they aren’t real – and if they are the eurozone is heading for big trouble.