After a period where the fraught markets rather commanded attention Prometheus has had time to reflect upon events and hopes to provide some useful thoughts as we approach the first budget of the new government with a mix of curiosity and concern.

Monday’s report from the new independent Office of Budget Responsibility (OBR) brought some relief because while it indicated that the deficit was going to remain elevated for some time, the figures were a little less scary than we had seen before. Furthermore this was in conjunction with future growth estimates that are somewhat more realistic than those of the previous administration, although to be fair they are still at the optimistic range of projections.

If these figures are correct, however, it means that we may bring things under control a little earlier than predicted, and hopefully with a little less pain, particularly if the private sector can pick up the growth baton as the public sector suffers under the weight of the inevitable cutbacks.

This is not to say we will avoid pain. That unfortunately is inevitable after the years of excess; however at least, all other things being equal, we have a reasonable chance now of avoiding a double-dip or worse. However we are in a truly global economy and in our weakened state we remain extremely vulnerable to external risks, and unfortunately all other things are unlikely to remain equal.

We have covered many times before the problems confronting the Eurozone: that the politicians are burying their heads in the sand and that the maths no longer works. The very fact that we are told by Euro’ heads that the breakup of the Eurozone is inconceivable says it all. They are inevitably, totally, irretrievably wrong. It is perfectly conceivable. I’m doing it right now.

China meanwhile is facing testing times, with growing discontent forcing big wage increases across the country. This will add to the building inflationary pressures that have caused the government to withdraw much of the recent stimulus. This may seem inconsequential when underlying growth rates remain well above anything we can hope to see but with so much development based upon cheap funny money a property and general asset collapse remains a real risk. While this would not de-rail the long term story there may be consequences elsewhere, particularly among mining stocks.

Whatever happens to China it is important to remember that while it is growing rapidly it is still much smaller than the Eurozone or US economies. With Europe stuck in the slow lane the progress of the US becomes all the more important to the extent that we have discovered that a leading Asian fund manager currently spends much of his time analysing fundamental US data, such is its import to global growth. Again, however, the picture remains unclear.

On the positive side there seems to be evidence of a steady, self fulfilling recovery in activity, building confidence which in turn encourages more activity. It is to be hoped this continues and on balance this may well be the case; however there are a number of issues that still trouble. Firstly the trend in increasing employment appears to have stalled, with the May non-farm payroll figures very weak after the subtraction of new part-time census jobs. Likewise consumer spending has hiccupped and there are increasing fears that markets will eventually revisit the US budget deficit, which is comparable to our own. Perhaps the most worrying indicator however is the following chart on the money supply in the US (using the broad figure of MZM, which is similar to the M3 measure we would use in the UK), which despite the unprecedented stimulus thrown at the economy, is deeper into negative territory than at any time over the past ten years.

 (Unfortunately due to a technical problem the chart is not currently displaying, but trust us, it looks bad)

In an economy trying to reflate into a recovery this is a worrying indicator that is garnering little attention. With so much riding on the US recovery perhaps Prometheus will shift focus a little bit as we watch events unfold, although Eurozone politicians will undoubtedly soon make fresh contributions for our amusement and horror.

A reminder not to pay too much attention to the opinions of those in authority:

During the Battle of Spotsylvania in the American Civil War Union commander General Sedgewick looked over the parapet at distant Confederate snipers and said “They couldn’t hit an elephant at this dist...”