Gross Domestic Product
While everyone was focusing on the threat of tumbling debt dominoes in China's shadow banking sector, a new threat has re-emerged: regular, plain vanilla corporate bankruptcies, in the country with the $12 trillion corporate bond market (these are official numbers - the unofficial, and accurate, one is certainly far higher). And while anywhere else in the world this would be a non-event, in China, where corporate - as well as shadow banking - bankruptcies are taboo, a default would immediately reprice the entire bond market lower and have adverse follow through consequences to all other financial products. This explains is why in the past two months, China was forced to bail out not one but two Trusts with exposure to the coal industry as we reported previously in great detail. However, the Chinese Default Protection Team will have its hands full as soon as Friday, March 7, which is when the interest on a bond issued by Shanghai Chaori Solar Energy Science & Technology a Chinese maker of solar cells, falls due. That payment, as of this moment, will not be made, following an announcement made late on Tuesday that it will not be able to repay the CNY89.8 million interest on a CNY1 billion bond issued on March 7th 2012.
While Emerging Market debt has recovered somewhat from the January turmoil, EM FX remains under significant pressure, and as Michael Pettis notes in a recent note, any rebound will face the same ugly arithmetic. Ordinary households in too many countries have seen their share of total GDP plunge. Until it rebounds, the global imbalances will only remain in place, and without a global New Deal, the only alternative to weak demand will be soaring debt. Add to this continued political uncertainty, not just in the developing world but also in peripheral Europe, and it is clear that we should expect developing country woes only to get worse over the next two to three years.
Mainstream media discussion of the macro economic picture goes something like this: “When there is a recession, the Fed should stimulate. We know from history the recovery comes about 12-18 months after stimulus. We stimulated, we printed a lot of money, we waited 18 months. So the economy ipso facto has recovered. Or it’s just about to recover, any time now.” But to quote the comedian Richard Pryor, “Who ya gonna believe? Me or your lying eyes?” However, as Hayek said, the more the state centrally plans, the more difficult it becomes for the individual to plan. Economic growth is not something that just happens. It requires saving. It requires investment and capital accumulation. And it requires the real market process. It is not a delicate flower but it requires some degree of legal stability and property rights. And when you get in the way of these things, the capital accumulation stops and the economy stagnates.
As the markets push once again into record territory the question of valuations becomes ever more important. While valuations are a poor timing tool in the short term for investors, in the long run valuation levels have everything to do with future returns. The current levels of profits, as a share of GDP, are at record levels. This is interesting because corporate profits should be a reflection of the underlying economic strength. However, in recent years, due to financial engineering, wage and employment suppression and increase in productivity, corporate profits have become extremely deviated. This deviation begs the question of sustainability. As we know from repeatedly from history, extrapolated projections rarely happen. Could this time be different? Sure. However, believing that historical tendencies have evolved into a new paradigm will likely have the same results as playing leapfrog with a Unicorn. There is mounting evidence, from valuations being paid in M&A deals, junk bond yields, margin debt and price extensions from long term means, "irrational exuberance" is once again returning to the financial markets.
Having destroyed any credibility that this budget could possibly have yesterday, President Obama has outdone himself with the predictions in this $3.9 trillion budget...
- *OBAMA BUDGET PREDICTS FASTEST GDP GROWTH THIS YEAR SINCE 2005 (US GDP estimates collapsing)
- *OBAMA BUDGET SAYS ECONOMY MOVING FORWARD, HOUSING `COMING BACK' (home sales plunge at fastest pace since 2011)
- *OBAMA BUDGET CITES 'ENCOURAGING SIGNS' ACROSS INDUSTRIES (US Macro worst start to year since 2008)
But apart from that, yeah, "nailed it"
What? Us worry? Thanks to the magic of the 102.00 USDJPY tractor beam, the S&P 500 has decided that Ukraine is fixed, the worst macro data in 6 years, and a rapidly tumbling expectation of US GDP is just enough "news" to warrant BTFATH. Thanks to an epic squeeze of the shorts, once again, stocks are at all-time highs... rinse, repeat...
- No need to use military force in Ukraine for now: Putin (Reuters)
- Russia Orders Drill Troops Back to Bases (WSJ)
- Ukraine premier agrees to reforms for aid package (FT)
- Japan Base Wages Rise for First Time in Nearly Two Years (WSJ)
- Only the algos are trading: Citigroup Joins JPMorgan in Seeing Trading-Revenue Drop (BBG)
- Vietnam sends blogger to prison for critical posts (AP)
- At White House, Israel's Netanyahu pushes back against Obama diplomacy (Reuters)
- Obama to offer new tax breaks for workers in election year budget pitch (Reuters)
- China Banks Show Too-Connected-to-Fail Link to Shadow Loans (BBG)
- Ex-BOK Deputy Lee Named to Head South Korea Central Bank (BBG)
- No mortgage origination problem in the UK: Mortgage approvals climb to six year high (Telegraph)
The sovereign debt of the developed world has risen from approximately 80% of GDP to 110%, an additional $12 trillion of debt, while interest rates have fallen to nothing. A ‘normal’ short term interest rate is one that is in line with inflation, which has been an average of 2% for the period 2007-2013. Therefore we can roughly calculate that ‘citizen-savers’ of the world have lost $1.75 trillion in unreceived interest. This is nothing short of being an undeclared tax levied by the State. As the quantum of debt has increased, a rise in interest rates would bring hefty costs to the State; currently, interest outlay in the USA alone, at 2.5%, is $400 billion per annum. Any sustained interest rate rise with the continued level of deficit is not manageable without growth being greater than the yields paid. Simply put, interest rates cannot rise without high growth, therefore a ‘lost interest generation’ is unfolding.
Our public finances are a mess, notwithstanding the misinformation you’ll hear tomorrow. When President Obama rolls out his proposed budget, you’ll hear boasts about improvements in the deficit since the depths of the Great Recession. You’ll also hear claims that those improvements are easily sustained; that a much talked about “grand bargain” on long-term debt reduction can wait. But once you see through the phony numbers in government projections, it’s clear that we’re on a path from a stupidly high debt burden to a much higher burden. Washington would need to find some leadership and foresight to change that path, and there’s no sign of that happening anytime soon.
"January nominal personal spending rose 0.4% (vs. consensus +0.1%). Both durable (-0.4%) and nondurable (-0.7%) goods spending fell on the month. Services spending rose a sharp 0.9%, the strongest gain since the bounce-back from the September 11 attacks in October 2001. Out-sized gains occurred in two categories of services spending: household utilities (+9.7%), boosted by colder weather, and health care (+1.6%) in light of enrollments in the Affordable Care Act exchanges."
Moments ago the BEA disclosed the January personal income and spending data, which surprised to the upside on both sides: Personal Income rose 0.3% in January, on expectations of a 0.2% increase, while spending roared up by 0.4% well above the 0.1% expected. Great news right? Well, not exactly. What happened in January to account for this spending spree? The chart below of spending on Services should explain it.
We were perhaps even more amused than our readers by our Friday headline "Stocks Close At New Record High On Russian Invasion, GDP Decline And Pending Home Sales Miss." It appears that today the market forgot to take its lithium, and is finally focusing on the Ukraine part of the headline, at least until 3:30 pm again when everything should once again be back to market ramp normal. As expected, the PMI data from China and Europe in February, was promptly ignored and it was all about Ukraine again, where Russia sternly refuses to yield to Western demands, forcing the shocked market to retreat lower, and sending Russian stocks lower by over 11%. This is happening even as Ukraine is sending Russian gas to European consumers as normal, gas transport monopoly Ukrtransgas said on Monday. "Ukrtransgas is carrying out all its obligations, fulfilling all agreements with Gazprom. The transit (via Ukraine to Europe) totalled 200 million cubic meters as of March 1," Ukrtransgas spokesman Maksim Belyavsky said. In other words, it can easily get worse should Russia indeed use its trump card.
Chinese Manufacturing PMI Slumps To 8-Month Low, Services PMI To 3-Month High; Goldman Admits Growth DeceleratingSubmitted by Tyler Durden on 03/02/2014 21:09 -0400
UPDATE:*CHINA HSBC MANUFACTURING PMI AT 48.5 FOR FEB. (as expected and marginally above the Flash print)
Chinese manufacturing PMI fell to an 8-month low holding barely above the crucial 50 level yesterday forcing Goldman to admit that "this signals further deceleration" in Chinese growth. All sub-indices showed signs of cyclical slowdown from January to February with perhaps the two most-critical ones - production and new orders - showing considerably larger falls than the headline index itself as we await this evening's HSBC print to confirm an average 'contraction'. China's Services PMI just printed at 55, up from 53.4, to a 3-month high led by a surge in the "expectations" sub-index.
Yuan volatility is part of a major rebalancing of global trade. The next phase of EM turmoil will involve banking crises in several countries including China.
Dispassionate look at next week's calendar.