Nominal GDP

"I have learnt from history that it is very hard working out what the trigger is. In 2008, it was the collapse of Lehman Brothers that triggered a credit crunch. Now it could be a major event in Turkey or a default of the Brazilian oil company Petrobras or some event in Malaysia. But if I have to pick one I would say it is Turkey introducing capital controls. Such controls will mean that Turkey will not pay back principals amounting to 400 Bio. $ and the interests on it." - Russell Napier

With everyone now focused on what China's daily Yuan fixing will be ever night, there was some confusion why last night the PBOC decided to devalue the CNY by another 1.1% to 6.4010, despite its promise that the devaluation would be a "one-off" event, taking the 3 day devaluation to just about 4.5%. However, subsequently in a press conference, central bank vice-governor Yi Gang said that the PBoC will continue to step in when the market is ‘distorted’, that there is no economic basis for the Yuan to fall continuously and that it will look to keep the exchange rate ‘basically stable’. The Vice-Governor also said that the PBoC will closely monitor cross-border capital flows and that reports suggesting the Central Banks wants to see the currency depreciate 10% are ‘groundless’. Which is ironic considering after just 3 days, the PBOC is already half the way there!

Strangely enough, every easily foreseeable financial crisis is presented in the mainstream media as one that "nobody saw coming." No doubt the crisis visible in these three charts will also fall into the "nobody saw it coming" category.

It looks like it is time for Warren to get on the Obamaphone and make it clear this is unacceptable... Berkshire Hathaway announced a $2,367 (Adjusted) EPS, missing estimates of $3,038 by 22.09% - the biggest disappointment since Nov 2008...

Here comes today's main event, the July non-farm payrolls - once again the "most important ever" as the number will cement whether the Fed hikes this year or punts once again to the next year, and which consensus expects to print +225K although the whisper range is very wide: based on this week's ADP report, NFP may easily slide under 200K, while if using the non-mfg PMI as an indicator, a 300K+ print is in the cards. At the end of the day, it will be all in the hands of the BLS' Arima X 12 seasonal adjusters, and whatever goalseeked print the labor department has been strongly urged is the right one.

The IMF failures in Greece bring back vivid memories of the Asian Financial Crisis of 1997-98... As the Indonesian episode should teach us, the IMF’s management can be very political and often neither trustworthy nor competent. Greece offers yet another chapter.

The so-called “trustees” of the social security system issued their annual report last week and the stenographers of the financial press dutifully reported that the day of reckoning when the trust funds run dry has been put off another year - until 2034. So take a breath and kick the can. That’s five Presidential elections away!

...Except that is not what the report really says.

"How would US Treasury bulls in the private sector react if they knew in advance that the second largest owner of Treasuries, the PBOC, was a forced seller of Treasuries. Such compelled selling would be obvious before US markets opened each morning as downward pressure on the RMB exchange rate in Asia forced the PBOC to liquidate foreign currency assets to defend the fixed exchange rate. Would even Treasury bulls stand in the way of such a large and predictable liquidation? If they didn’t then the second phase of The Great Reset would come to pass and the decline of EM external deficits would force tighter monetary policy in both EM and DM."

Last week, we asked "Is Australia the next Greece?" It appears, judging bu the collapse in the Aussie Dollar, that some - if not all - are starting to believe it's possible after last night's 15-month low in China Manufacturing PMI. As UBS previously noted, China's real GDP growth cycles have become an increasingly important driver of Australia's nominal GDP growth this last decade. With iron ore and coal prices plumbing new record lows, a Chinese (real) economy firing on perhaps 1 cyclinder, and equity investors reeling from China's collapse; perhaps the situation facing Australia is more like Greece than many want to admit.

In almost all cases, including the most recent rise, the intermittent change in psychology that drove interest rates higher in the short run, occurred despite weakening inflation. There was, however, always a strong sentiment that the rise marked the end of the bull market, and a major trend reversal was taking place. This is also the case today. Presently, four misperceptions have pushed Treasury bond yields to levels that represent significant value for long-term investors. While Treasury bond yields have repeatedly shown the ability to rise in response to a multitude of short-run concerns that fade in and out of the bond market on a regular basis, the secular low in Treasury bond yields is not likely to occur until inflation troughs and real yields are well below long-run mean values.

Something is very rotten in the state of China, and its crashing, manipulated stock market is merely the tip of the iceberg.

"The size of the required ‘upfront’ (i.e. to be introduced in 2016) principal haircut to be €110bn (60% of annual Greek nominal GDP in 2014). Note that we do not see much difference in an alternative scenario based on a ‘tranched’ principal haircut framework (of around €15bn per year), also starting in 2016. However, a ‘backloaded’ (i.e. to be introduced in 2022) approach relying on a single haircut would be more expensive, amounting to €130bn (72% of annual Greek nominal GDP in 2014)."

Australian consumers are more worried about the medium term outlook than at the peak of the financial crisis, and rightfully so. As The Telegraph reports, by the end of the first quarter this year, Australia’s net foreign debt had climbed to a record $955bn, equal to an already unsustainable 60pc of gross domestic product, and is set to rise as RBA's bet that depreciation in the value of the country’s currency would help to offset the decline in its overbearing mining industry hasn’t happened to the extent they would have wished. Furthermore, as UBS explains, China's real GDP growth cycles have become an increasingly important driver of Australia's nominal GDP growth this last decade. With iron ore and coal prices plumbing new record lows, a Chinese (real) economy firing on perhaps 1 cyclinder, and equity investors reeling from China's collapse; perhaps the situation facing Australia is more like Greece than many want to admit, as Gina Rinehart, Australia’s richest woman and matriarch of Perth’s Hancock mining dynasty stunned her workers this week: accept a 10% pay cut or face redundancies.

Everyone seems to be focusing on Greece these days – a country so indebted that it needs even more loans to repay just a fraction of its gigantic credits. Clearly this is unsustainable and something has to give. Even the IMF agrees. But what about the other Southern European countries? Actually, Portugal’s financial situation is looking particularly shaky, and any hiccups could have serious cross-border repercussions from Madrid all the way to Berlin.