Archive - Mar 6, 2014

UPDATE: It's happened - China has suffered its first domestic corporate bond default as Chaori fails to meet interest payments on schedule and rather more surprisingly failed to receive a last-minute mysterious or otherwise bailout...

*CITIC BANK WON'T HELP CHAORI MAKE INTEREST PAYMENT: 21ST HERALD

Ever since the specter of the first real domestic default on a Chinese corporate bond hovered over the markets, the Chinese credit markets have been leaking lower. The last 3 days have seen the biggest drop in Chinese credit markets in almost 4 months. That situation, wistfully occurring half way around the world while US equity markets press on to ever more exuberant (and ignorant) heights, meant at least 3 other Chinese firms pulled their bond issues today and, as Reuters reports, has "triggered widespread upheaval in the bond market." Banks are awash with liquidity (as indicated by low repo/SHIBOR rates) but clearly unwilling to lend and external investors are now running scared.

The biggest Asia-Pacific defense story this week is China’s decision to increase its defense budget by 12.2 percent to about $132 billion for the next fiscal year. Notice that the figure is noticeably uncorrelated with China’s 7.7 percent actual growth rate (with a 7.5 percent target rate). The numbers are expected, of course, and send a clear signal across the region that China is taking its investments in military hardware seriously. Contrast the Chinese trend with the United States’ belt-tightening on defense spending. The United States and China are, of course, nowhere near to a convergence in defense spending.

Today we’re going to look at the most important part of the economy – the US labor markets.

Core inflation, which excludes the effect of food and energy prices and is how every self-respecting economist measures price increases, is up 8.75% over the past five years. However, as ConvergEx's Nick Colas notes, this is a poor indicator for the true cost of living for many Americans. Having scrubbed the data, Colas has found the top 10 items that appreciated the most from 2008 to 2013 and the 10 items that became substantially less expensive, according to the government's Consumer Price Index (CPI). The data is deceiving though, as the CPI's "hedonic quality adjustment" distorts the amount of money people actually spend. Even more importantly, Colas warns, things that have a relatively low weighting in the CPI and that people use selectively – such as healthcare and education – don't have a big impact on the core number, but represent considerable expenses for many Americans. Thus we must use caution when using one figure to make policy decisions for an entire nation, and consider what happens to inflationary expectations if and when the still-sluggish economic recovery finally finds second gear.

Obama did it by offering hope, change, and free stuff for all... Abe did it by printing inordinate amounts of money, pumping stocks up, and speaking in increasngly militarist tones... and now Vladimir Putin has managed to get his approval rating to near-record highs - by invading Ukraine?

Say you come into Venezuela with just $1 and an eye for business. Just how much money can you turn that bill into using tried-and-true, being-used-right-now scams? With a bit of gumption the answer to that is…$175K or so. Really. Here’s how.

A week after Obama held his first crisis photo op holding a phone while supposedly talking to Putin, he has followed up with another, hour-long conversation. Below is the official White House statement on what was said.

The first is the Chinese word for filthy, stinking rich, the uncouth bling-blingy rich of the People’s Republic. The second is the name given to middle-aged women dripping in gold. I imagine that two middle-aged women with the yellow bars would lead to a much deserved ‘dispute’ (yes repeating the ideogram for ‘woman’ actually means there’s ‘trouble’, telling you a whole lot about what the Chinese actually think about women insociety).

While Canada may have bitten the hand that feeds it real-estate bubble, one of London's biggest real-estate investors says that even if sanctions were imposed against the Russian oligarchs, London property prices will continue to soar. The average London "flat" could fetch GBP36 million by the middle of the century, and is therefore a bargain now, Hugh Best advises clients. His reasoning is impecable, "the average price in prime central London is now £1.5m, and has been growing at 9% a year, which we think is firmly sustainable. They have been growing at that level for 40 years and we see no reason for that to change." With two-thirds of new homes in London sold to investors, they are all driving up prices and "the Russians are only a part of it... and the Ukrainians might come with their money."

Since 1999, the annual real economic growth rate has run at 1.94%, which is the lowest growth rate in history including the "Great Depression." While the Fed's ongoing interventions since 2009 have provided support to the current economic cycle, they have not "repealed" the business cycle completely.  The Fed's actions work to pull forward future consumption to support the current economy.  This has boosted corporate profitability at a time when the effectiveness of corporate profitability tools were most effective.  However, such actions leave a void in the future that must be filled by organic economic growth. The problem comes when such growth does not appear.  With the economy continuing to "struggle" at an anaemic pace, the effects of cost cutting are becoming less effective. This is not a "bearish" prediction of an impending economic crash, but rather just a realization that all economic, and earnings, forecasts, are subject to the overall business cycle.

Off the top, Universa's Mark Spitznagel explains that "high-frequency traders are making markets more jumpy" and the idea of HFT as a liquidity provider is a fallacy since as he notes "that liquidity won't be there when they most need it," especially when there is one-way order flow such as in the flash crash. Spitznagel then crushes the 'cash on the sidelines' meme but explaining that while corporate cash balances have soared, net debt has actually gone up beyond the highs of 2008. As we have previously discussed, "the idea that corporate balance sheets are so strong right now is entirely wrong," as investors are conveniently focusing in one piece of the balance sheet (assets not liabilities). Maria B just can't fathom it but Spitznagel's words are clear - scale the cash on the balance sheet against debt and we are as bad as we were in 2008.

"Will there be war in Ukraine? I am afraid so. After all, the extremists who seized power in Kiev want to see a bloodbath. Only fear for their own lives might stop them from inciting such a conflict... Russia will not annex Crimea. It has enough territory already.

At the same time, however, it will also not stand by passively while Russophobic and neo-Nazi gangs hold the people of Crimea, Kharkiv and Donetsk at their mercy."

Is the U.S. economy steamrolling toward another recession?  Will 2014 turn out to be a major "turning point" when we look back on it?  Before we get to the evidence, it is important to note that there are many economists that believe that the United States never actually got out of the last recession.  In fact, that would fit with the daily reality of tens of millions of Americans that are deeply suffering in this harsh economic environment.  But no matter whether we are in a "recession" at the moment or not, there are an increasing number of indications that we are rapidly plunging into another major economic slowdown.  The following are the top 12 signs that the U.S. economy is heading toward another recession...

Dow Transports surge almost 1% as Nasdaq and many of the momo names started to weaken. The S&P closed at new highs once again despite weakness in HY credit market and a rising VIX on the day. Started by Draghi, EUR strength implied USD weakness and the greenback gave back the week's gains and then some (as AUD is up 1.8% on the week). USDJPY topped 103 - supporting the S&P. Treasury yields continue to push higher (with 30Y +10bps on the week). Gold and silver recovered their Putin losses as the formers ends above $1350. Oil prices tanked all day (testing $100) but reversed hard on chatter of escalation in Ukraine. It seems more than a few traders were hedging into tomorrow's payrolls number with VIX rising and stocks tumbling into the last few minutes (not helped by chatter of a Russian invasion overnight).