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China's Credit Bubbleicious Trade Balance Pain
Recent German economic data has been interpreted as indicative of a renaissance in the Eurozone's primary economy. Aside from the fact that Germany is ill prepared to handle its so-called "second credit crisis wave" (the ECB having much less free reign over printing wheelbarrows worth of Euros may have something to do with this), looking purely at GDP components one would note that a primary function of this anticipated growth comes primarily from a mathematical contribution resulting from an increase in net exports. From the Bundesbank's most recent monthly economic report:
According to provisional figures from the Federal Statistical Office, in May the foreign trade surplus was up by 30.2 billion on the month to 39.6 billion. After adjustment for seasonal and calendar effects, it rose from 39.0 billion to 310.3 billion. The value of exports rose slightly by 0.3%, while the value of imports declined by 2.1%. If April and May are taken together, seasonally adjusted nominal exports were 5.1% below the average for the first quarter of 2009. Of this, 0.6 percentage point can be attributed to export prices. Imports were down as much as 8.4%, with 1.7 percentage points due to market prices.
So basically, we are seeing voodoo mathematics which indicate sovereign economic improvement as a result of declining world trade. This is even more obvious by looking at a time series of US net exports, where a disproportionate collapse in imports has made it seems that the US GDP is also improving.
Yet while Germany (and thus the Eurozone) and the US are basking in the temporary glow of mathematical bliss, gulped up by eager momo quants who have the attention span of only the first 5 letters of any headline before lurching with millions of bids, this changes nothing on a global scale where all trade flows are net neutral, and the traditional net exporters are getting pummeled: we demonstrated the collapse in Japanese exports, historically one of the strongest positive trade balance countries. The simple math is that what is good for the US and the Eurozone is bad for Japan.
Yet the real wild card is China, where estimates for export decline approach the 20% mark, after a prior year increase of 20%. This is a huge hit to the Chinese economy and is the primary reason for the $1.1 trillion in increased lending, whose primary purpose is to spur replacement demand with traditional export partners reeling.
In essence what is going on, is that the brief pick up in German and US GDPs on the trade balance side, are being facilitated exclusively by the credit bubble in China. By dint of China being able to recognize GDP at production instead of expenditures (like normal Western countries), China is now trying to back fill into the trade void left from the collapse of Western economies by promoting the same kind of irresponsible lending (and borrowing) that lead the US economy to its current sorry state. This will eventually end very, very badly.
Two conclusions: i) the bubble is unsustainable and recent overtures by the Bank Of China indicate that they are aggressively attempting to rein it in; however as the amount of liquidity let loose primarily in the equity capital markets is staggering, on par with the balance sheet expansion by the Federal Reserve, this will prove to be a nearly impossible task; ii) as this replacement demand is shut off, the tremors in trade flows will exacerbate the temporary respite that the two main non-Chinese economies have been experiencing, and not only will the velocity of exports over imports decline, but the bigger question of how the collapse in Chinese capital markets (and the real estate bubble) is yet to be answered. All this, of course, also means that the temporary period of abnormal increase in the US equity markets will be aggressively tested as flush global liquidity will be promptly mopped up beginning over the next 2 months, with the expiration of QE and a major shift in Chinese lending policy.
As everyone knows, the S&P 500 is up 50% + not on any improvements in fundamentals, but merely as a function of excess liquidity driving markets higher, which in turn generated temporary increases in confidence, feeding a closed loop of confidence and market increases. Yet, the US consumer is down for the count, and while it is this primary factor for US growth the the Fed should be tending to, Mr. Bernanke is more concerned about keeping mortgage rates artificially low in order to perperuate the credit bubble as long as he can. As we have seen over the past year, credit bubbles do not go away by themselves, and inflated asset bubbles tend to pop. Regardless of how much cash one can throw at the problem, and how much pain the formerly proud US Dollar can take.
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requires looking at the bigger picture, seen through the prism of hope, dreams and more time n
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Excess liquidity is also driving commodity markets.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aPlyCp1ssc.s
Nickel, which surged 17 percent the past month, may advance further as “price momentum” and inflation expectations lure fund managers even as stockpiles of the metal approach a 14-year high, according to Commerzbank AG.
“I find the one-way, very dramatic price rise in all metals anomalous given the shaky fundamental basis and rising LME inventories,” Eugen Weinberg, a commodity analyst with Commerzbank in Frankfurt, said in an interview Aug 18. “The price momentum behind metals is so strong that the market is attracting external players.”
http://www.businessinsider.com/rio-tinto-speculators-are-a-major-force-i...
Metals and minerals producer Rio Tinto made it clear in their latest earnings result that speculators are a major force in the commodities markets right now. This is especially the case since demand from the US, Europe, and Japan currently remains weak, leaving China as one of the only real engines out there for demand. This means that much of the strength in 2009's commodity markets could be simply financial speculators, which aren't the best sources of market support.
Who knows how long it goes on or how high the markets go before these bubbles burst? Having seen how long the Nasdaq was wildly overpriced in the late 1990's into early 2000 and how many shorts got wiped out by being early, I wouldn't think of shorting this market.
Oil just hit a new high for the year as E-wavers take it in the Prechter hole, following Bob's call of oil to $10.
Sorry deflationists, but commodity demand isn't falling nearly as fast as demand for dollars.
We are now a year into the so-called 'deflationary death spiral' and TPTB have proven quite capable of levitating markets as long as they want. The USD is about where it was a year ago...wasn't it supposed to go to the moon? And wasn't gold supposed to crash with oil, and the Dow to 300?
Ain't gonna happen.
Evidence is mounting of world wide USD revulsion.
As much as I love to bet against the crowd...
I never want to fight the Fed.
Right now Ben and Timmy are hooked on QE as a narcotic.
President Harding showed us the correct solution: cut taxes and government spending drastically.
Exactly. Also keep in mind that this time the good faith of the government (aka Federal Reserve) is backing many of these players (implicitly/explicitly). This would be a strong indicator that the normal mechanisms for popping the asset bubbles will not be as strong. Meaning, the bubble most likely will go much higher this time...
In short... My guess is that in the Federal Reserve's panic he unleashed a wall of money that cannot easily be slowed down. Yesterday was a good example of this in that the news was very bad, but the market just sailed higher...
This is a fantastic article. Pretty funny too.
What I wonder is whether Bernanke will actually let QE expire or whether the tempation to keep the music playing will be too much to resist.
Yes I agree that it is funny in that the write'rs conclusions totally missed the point within China.
He is presupposing a lot. The Chinese powerhouse are well aware of the need to offset external demand through to internal demand. 1 billion people who have basically no social net and negative rates towards savings have to be accommodated, if you read mpettis it is going to be a tough struggle and they need to micro manage a lot of situations.
Whether they can or not it is an ingenius solution to overlook the obvious and that is they have the money, they have the need and they do not like egg on their face. None of them do.
Yes I agree that it is funny in that the write'rs conclusions totally missed the point within China.
He is presupposing a lot. The Chinese powerhouse are well aware of the need to offset external demand through to internal demand. 1 billion people who have basically no social net and negative rates towards savings have to be accommodated, if you read mpettis it is going to be a tough struggle and they need to micro manage a lot of situations.
Whether they can or not it is an ingenius solution to overlook the obvious and that is they have the money, they have the need and they do not like egg on their face. None of them do.
"Investors" would have made a killing this week with a "wards of the state" portfolio: AIG (nice pump by the new CEO yesterday), Fannie, Freddie and Citi are all up 20-40% in the last 5 days. You could even thrown in the old worthless stock of GM, which has actually traded up in the pink sheets despite warnings everywhere that the stock is worthless.
Some believe that old GM's tax loss carry-forward provides value to the corpus. It's over $50 per share. The worst of the secured claims have already been negotiated out of the balance sheet. Changes to the bankruptcy laws/income tax laws make it much, much more likely that a taxpayer like MSFT might merge with old GM and play the tax loss card.
Some believe that old GM's tax loss carry-forward provides value to the corpus. It's over $50 per share. The worst of the secured claims have already been negotiated out of the balance sheet. Changes to the bankruptcy laws/income tax laws make it much, much more likely that a taxpayer like MSFT might merge with old GM and play the tax loss card.
Some believe that old GM's tax loss carry-forward provides value to the corpus. It's over $50 per share.
Some are misinformed. See page 15 at the link below. "The use of the loss corporation's NOLs will be completely denied if the loss corporation does not continue its old business for a period of two years following the ownership change."
In GM's case, the old stock does not come with the old business which makes their NOLs worthless. Seriously, do you think the gov't is going to suck up the losses of GM and then let a Microsoft buy it to evade paying taxes? I doubt that one would fly on a penny stock message board.
http://www.davismalm.com/UploadedDocuments/Articles/GriffinLevTaxAspects...
While I wouldn't touch it with a barge pole...
Maybe the play is with Toyota?
Toyota lost in the neighborhood of $5 billion for the fiscal year ended 3/31/09. Current market capitalization is around $135 billion. They have global production capacity of about 9.5 million annual units versus current demand of about 6.5 million. Not only are unit sales down, but there has been an unfavorable mix shift.
It could be argued that Toyota has an overcapitalized balance sheet, but even considering that I'd think buying the stock at current prices is a bet that Toyota will be back to making $10 billion in annual profit in the next 2-3 years. That seems extremely unlikely to me.
The Wards of the State portfolio is kicking butt again today:
Fannie + 11.8%
Freddie + 10.0%
AIG +3.4%
C +6.0%
This keeps looking more and more like the last bubble.
the thing I hate most is how giddy that c*nt Erin Burnett is.
I can't help but think there is massive speculation in every asset class in every market around the world. Never have I seen such wild and rampant speculation. I can only conclude that this will not end well. When has mass speculation ever ended well?
Pay the man Shirley.
off topic, but what does everyone here think of the CTA chartered technical analyst designation? worth doing? carry any weight on a resume?
thanks
off topic, but what does everyone think of the CTA - chartered technical analyst - designation? worth doing? carry any weight on a resume? thanks
off topic, but any thoughts on the value of CTA- chartered technical analyst - designation? does it carry any weight on a resume?
The ever increased expansion of the supply of Benbucks is not having the desired and expected result of folks rushing out to unleash their animal spirits on new big screen TV's, computers and garages of Wal-Mart what not and will not as it has in the past. These efforts to pump confidence is just a confidence game outside of the money centers. Sooner or later this reality will catch up with the policy makers and shapers then we will see some serious panic set in.
Get the popcorn ready because the shapers in China are in even deeper trouble than most of their counterparts. After all, the Chinese are indentured servants to the Benbucks system. Their new opium of easy money and increased living standards is all built on chasing the dragon.
I was watching Nassim Taleb (the black swan) on FORA.tv http://fora.tv/2008/02/04/Nassim_Nicholas_Taleb_A_Crazier_Future and towards the end he said something quite profound. He does not play the stock market, because he does not understand it. In case Nassim ever reads ZH, the sole purpose of the stock market is to separate people from their money.
http://www.zerohedge.com/article/nassim-taleb-crazier-future
The fact that commentators are looking at housing(!) and financials(!) for signs of recovery tells me we are still far, far way from a solid base on which to rebuild economically. The speculation has become delirious as all it takes is a "Hello" out of some public figure's mouth to drive a trash stock up 30% in minutes. Discussion focuses on how OTHER stock markets are performing as opposed to actual economies, and that's never good. "Oh yeah, there is a recovery because that other market rallied overnight on hopes of a recovery."
And the favourite, of course, is China.
Yeah, because the Shanghai market is the most transparent, reliable, accurate measure of the health of the broad Chinese polity. That thing could hit 10,000 and you'd still have tens of thousands of riots in the countryside.
And here I was thinking that casino capitalism would get reined in after the nice little crash it caused recently. Where I (and many others, I think) erred is in failing to realize that the collapse of the real economy would reset finance: in fact, the collapse of the real economy meant that the ONLY way to make money now is to speculate like never before. Thanks dear world leaders, you've really fixed this one.
I heard electronic money taste great with a little dressing.
oh snap
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
In 2008 The Fed chairman,departing from Greenspan phylosophy, was quoted by Bloomberg saying that he will fight bubles. He is on the verge of outmatching his predecessor.
The G20 and China more insistantly, were adamantly comdemning the shadow banking system.They have set up a largest shadow banking system.
The G20 was adamantly comdemning the so called hedge funds,they have become the largest hedge funds (see their liabilities to GDP and their contingent liabilities to GDP)
The G20 was outcryingly comdemning the derivatives they have not decreased.
iBanks were assumed to find a new shelter,as commercial banks and to comply with the adequacy ratios (20% capital funds to total assets)They are not in compliance.
G20 made broadcasted comments on finacial markets frauds, many banks balance sheets are raw fraud.
Difficult to conclude without being taxed of anarchist,but sincerly I thought I could trust these people.
This NEWS appeared on Bloomberg for few minutes and the was taken OFF!!
Jobless Rates Rise in 26 U.S. States; California’s Hits 11.9%
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By Timothy R. Homan and Alison Sider
Aug. 21 (Bloomberg) -- Unemployment rates rose in 26 U.S. states in July, a sign the labor market will take time to mend and budget crises in capitals across the nation may deepen.
California, Nevada, Rhode Island and Georgia all reached their highest level of joblessness since records began in 1976, with California’s rising to 11.9 percent from 11.6 percent the previous month, the Labor Department reported today in Washington. The number of states with at least 10 percent unemployment held at 16.
The figures are a blow to states already hammered by falling income and sales-tax receipts and underscore economists’ projections that the national unemployment rate will reach 10 percent by early next year. Companies will probably trim payrolls at a slower pace in coming months as factories and the housing market show signs of stabilization.
“The labor market remained very soft, albeit not nearly as weak as it was during the first half of the year,” Steven Wood, president of Insight Economics LLC in Danville, California, said before the report. “The labor market is still deteriorating but the pace of deterioration has become much less severe.”
To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net; Alison Sider in Washington at asider@bloomberg.net
Last Updated: August 21, 2009 10:29 EDT
It's back on.
Nassim has had a career in finance:
http://en.wikipedia.org/wiki/Nassim_Nicholas_Taleb#Finance_career
He also founded this investment fund which has since closed:
http://en.wikipedia.org/wiki/Empirica_LLC
I am amazed at your sloppiness in quoting figures. The trade surplus went up €0.2bn to €9.6bn (and not 30.2 to 39.6). After adjustment, it rose from €9.0bn to €10.3bn; and not from 39.0 to 310.3bn; which in any case makes no sense whatsoever.
If this is an indication of your usual Attention To Detail, we shall have to take your reports with a rather larger grain of salt from here on .(:)