As Western economies start to regress in earnest following decades of failed and destructive monetary inflation and debt accumulation, yield-starved investors are allocating real capital to the one industrially untapped continent in the world: Africa. However, we’re not seeing industry moving to Africa to set up shop. Rather, politically-directed capital flowing into the African resources sector is fueling and financing the strongest consumer boom in the world. It’s a vendor financing model for Asia, and it portends a major boom and bust cycle for the African continental economy.
Let’s see. Consumers are carrying more debt than they did in 2007. Corporations are carrying more debt than they did in 2007. The Federal government is carrying 60% more debt than it did in 2007. Cities and States are carrying more debt than they did in 2007. Interest rates have jumped by 80% in the last three months. The economy is clearly in recession, as retailer after retailer reports horrific results. Stocks are as overvalued as they were in 1929, 2000, and 2007. China is experiencing a real estate collapse. Japan is experiencing a cultural/economic/societal collapse. The Middle East is awash in blood. The European Union is held together by lies, delusion and false promises. What could possibly go wrong?
The Russian Bear is stronger and more powerful than it has ever been before. Sadly, most Americans don't understand this. They still think of Russia as an "ex-superpower" that was rendered almost irrelevant when the Cold War ended. And yes, when the Cold War ended Russia was in rough shape. Today, Russia is an economic powerhouse that is blessed with an abundance of natural resources. Their debt to GDP ratio is extremely small, they actually run a trade surplus every year, and they have the second most powerful military on the entire planet. Anyone that underestimates Russia at this point is making a huge mistake. The Russian Bear is back, and today it is a more formidable adversary than it ever was at any point during the Cold War. Just check out the following statistics...
So much for hopes that US consumers were loosening the purse strings and starting to "charge it." Moments ago we got the latest, June, consumer credit which was expected to increase $15 billion following the May revised $17.6 billion. More importantly, there was an expectation that following the surge in May revolving credit which rose by $6.4 billion or the second most in the past three years (only matched by the comparable pre-summer surge in 2012). Sadly, neither expectation was met: total consumer credit rose by "only" $13.8 billion, but more importantly, the revolving component posted a $2.7 billion decline. This also matched last year's pattern when June saw a major reduction of $2.8 billion. In other words, the only credit creation in the month of June was, once again, entirely for student and car loans, which rose by a whopping $16.5 billion - the most since February and the second highest increase since July 2011. So much for US consumers seeking to relever for discretionary purchases.
For many years before 2007-9 a few analysts have warned that rising consumer credit in the US and peripheral Europe was unsustainable. They warned that rising debt to support misallocated investment in China was also unsustainable. They warned that soaring US mortgages backed by little more than the hope that land prices could only rise would lead to a real estate crisis. They warned that commodity-exporting countries that did not hedge their bets would find themselves in serious trouble when commodity prices collapsed. Of course you could not have had a bubble unless the majority of analysts disagreed with these warnings, and most analysts did indeed disagree. So what happened when the warnings turned out to be right? The former bulls immediately trotted out the stopped-clock analogy. The reason the worriers turned out to be right, they earnestly explained, is that they are perma-bears, and as everyone knows a stopped clock will always be right twice a day... As China’s growth continues to slow and as its debt problems become obvious to even the most bullish, the stopped clock analogy is working overtime.
While there was little macro news to report overnight, the most notable development was yet another USDJPY-driven crash in the Nikkei 225 which plunged by a whopping 576 points, or 4%, to 13825, while the Yen soared to under 96.80 in the longest series of gains since mid-June before recouping some of the losses on pre-US open program trading. The reason attributed for the move were reports that Japan would adhere to pledge to cut its deficit which is the last thing the market wanted to hear, as it realizes that boundless QE is only possible in a context of near-infinite deficit spending. The index, which has now become a volatility joke and woe to anyone whose "wealth effect" is linked to its stability, pushed not only China's Shanghai composite lower by 0.7% but led to losses across the board and as of this moment is seen dragging US equity futures lower for the third day in a row.
This insane world was created through decades of bad decisions, believing in false prophets, choosing current consumption over sustainable long-term savings based growth, electing corruptible men who promised voters entitlements that were mathematically impossible to deliver, the disintegration of a sense of civic and community obligation and a gradual degradation of the national intelligence and character. There is a common denominator in all the bubbles created over the last century – Wall Street bankers and their puppets at the Federal Reserve. Fractional reserve banking, control of a fiat currency by a privately owned central bank, and an economy dependent upon ever increasing levels of debt are nothing more than ingredients of a Ponzi scheme that will ultimately implode and destroy the worldwide financial system. Since 1913 we have been enduring the largest fraud and embezzlement scheme in world history, but the law of diminishing returns is revealing the plot and illuminating the culprits. Bernanke and his cronies have proven themselves to be highly educated one trick pony protectors of the status quo. Bernanke will eventually roll craps. When he does, the collapse will be epic and 2008 will seem like a walk in the park.
A discussion of this week's key events and data within the context of the investment climate characterized by shifting Fed tapering expectations, evidence still pointing to a soft landing of the Chinese economy, a cyclical recovery in Europe and renewed capital outflows from Japan, while foreign investors slow their purchases of Japanese equities.
Hopes that Kuroda would say something substantial, material and beneficial to the "three arrow" wealth effect (about Japan's sales tax) last night were promptly dashed when the BOJ head came, spoke, and went, with the USDJPY sliding to a new monthly low, which in turn saw the Nikkei tumble another nearly 500 points. China didn't help either, where the Shanghai Composite also closed below 2000 wiping out a few weeks of gains on artificial hopes that the PBOC would step in with a bailout package, as attention turned to the reported announcement that an update of local government debt could double the size of China's non-performing loans, and what's worse, that the PBOC was ok with that. Asian negativity was offset by the European open, where fundamentals are irrelevant (especially on the one year anniversary of Draghi FX Advisors LLC "whatever it takes to buy the EURUSD" speech) and renewed M&A sentiment buoyed algos to generate enough buying momentum to send more momentum algos buying and so on. As for the US, futures are indicating weakness for the third day in a row but hardly anyone is fooled following two consecutive days of green closes on melt ups "from the lows": expect another rerun of the now traditional Friday ramp, where a 150 DJIA loss was wiped out during the day for a pre-programmed just green closing print.
Some thoughts on why US auto sales are at their strongest pace since prior to the crisis, while EU auto sales are at 20 year lows.
"It is not true that those who worried about the rise of consumer credit in the US in the mid 2000s were “wrong” until the stopped clock eventually was right," this strikes me as an incredibly superficial analysis, explained only by the fact that many of us expect economic analysis merely to predict whether the stock market will rise or fall this week. Those who worried about rising consumer credit in the US were not wrong every single year until 2007-8, when they accidentally became right. They were right every single year, and were proven right in 2007. Those who have been arguing that China is experiencing an unsustainable increase in debt have not been wrong every quarter that China has not collapsed. They are almost certainly right and it is hard even for the most foolish of bulls any longer to deny it."
Sometimes it is what is not discussed among the mainstream media that is most critical to understanding the new normal...
Succinctly summarizing the positive and negative news, data, and market events of the week...
Much has ben written lately about the fact that the Federal Reserve is beginning to realize that they are caught in a "liquidity trap." However, what exactly is a "liquidity trap?" And perhaps more importantly how did we end up in it - and how do we get out?
As if predicting the jump in interest rates in June, consumers took advantage of cheap credit condition two months ago to load up on credit, pushing the May Consumer Credit higher by $19.6 billion, well above expectations of a $12.5 billion jump. This was the second highest sequential jump post the consumer credit data set revision, only second to the $19.9 billion from last May. And just like a year ago, revolving credit jumped by $6.6 billion following months of stagnating levels. It did the same in May 2012 when it rose by $6.8 billion when consumers also appeared to be prepaying summer purchases. The balance of credit expansion was once again driven by a surge in student and car loans, which amounted to $13 billion of the total May increase. Whether this credit growth continues into June is skeptical following the jump in interest, and especially following the doubling of the prevailing subsidized Stafford Loan rate which will likely cripple future student loan extraction.