A funny thing happened during Michelle Obama's public relations tour of China (where taxpayers are privileged to pay $8,400 for each night of her lodgings): T-shirts, coin purses and posters that show President Barack Obama portrayed as Chairman Mao are normally available for sale at the Great Wall. But on Sunday, when First Lady Michelle Obama visited the Chinese tourist spot with her daughters, the so-called “Obamao” souvenirs were no where to be found. "We don’t have them anymore," said one peddler, a woman who declined to give her name. "But if you come back next time, you might find them. You could come tomorrow," the woman said.
Words matter, and the Fed’s words matter more than anyone’s. But this is the classic mistake that academic economists always make – the quasireligious belief in theory over practice, in the triumph of bloodless ideas over the market’s fang and claw. Woodford’s ideas are sweet music to the enormous egos of the academics who control the Fed: you can save the world just by stating your brilliant policy intentions. Your words will become self-fulfilling prophecies as the markets shape themselves in expectation of your mighty deeds. And so what do we get? Horror shows like Bernanke’s press conferences last summer or Yellen’s press conference last week. If the Fed was surprised by the rotten tomatoes thrown up on the stage last year, they ain’t seen nothing yet.
Curious what the real, and not pre-spun for public consumption, sentiment on the ground is in a China (where the housing bubble has already popped and the severe contraction in credit is forcing the ultra wealthy to luxury real estate in places like Hong Kong) from the perspective of the common man? The photo below, which shows hundreds of people rushing today to withdraw money from branches of two small Chinese banks after rumors spread about solvency at one of them, are sufficiently informative about just how jittery ordinary Chinese have become in recent days, and reflect the growing anxiety among investors as regulators signal greater tolerance for credit defaults.
- Putin Threatened With More Sanctions as Russia Out of G-8 (BBG)
- China Faces ‘Mini Crisis’ on Debt Defaults, Ex-PBOC Adviser Says (BBG)
- Don't laugh too hard: Obama to propose ending NSA bulk collection of phone records (Reuters)
- SEC Is Probing Dealings by Banks and Companies in Loan Securities (WSJ)
- Japan GPIF asset review not aimed at supporting domestic stocks (Reuters)
- Chinese families clash with police, slam Malaysia over lost plane (Reuters)
- Russian Capital Flight Surges in First Quarter, Fueled by Ukraine Crisis (WSJ)
- Democrats ditch Nate Silver after data whiz predicts dismal midterm outcome (DN)
- China’s Urbanization Loses Momentum as Growth Slows (BBG)
China, Japan and the US are the three largest economies in the world. Each country is currently in the midst of highly-significant policy maneuvers. The Fed is bringing QE to an end. China is dealing with the credit bubble issues outlined above. Japan is lifting its consumption tax from 5% to 8%. Japan’s hike in 1997 from 3% to 5% pushed the economy into a recession. In addition, Russian sanctions could magnify and potentially take a large bite out of global economic growth. Portfolios will need to adapt to this changing environment. Just about everyone is anticipating higher Treasury yields. Most PM’s are short duration. However, the term premium is falling quickly. The technical chart looks outstanding on the long end. Macro factors are also beginning to align. I believe the next 50bps in the 30year (yield) is shaping up to be a move toward lower (not higher) yields. Portfolios are ill-prepared.
Hell hath no fury like a woman scorned or, it seems, like a Chinese real estate speculator who is losing money. After four years of talking (and not doing much) about cooling the hot-money speculation that is the Chinese real-estate bubble (mirroring the US equity market bubble since stock-ownership is low in China), the WSJ reports that the people are restless as the PBOC actually takes actions - and prices are falling. With new project prices down over 20%, 'homeowners' exclaim "return our hard-earned money" and "this is very unfair" - who could have seen this coming... "We aren't speculators. We just want an explanation from the developer," said one 35-year-old home buyer, who said he had bought an apartment and gave his surname as Wu. "This is very unfair." Unfair indeed. How long before we hear they are "entitled" to a fair return on their housing (non) speculation investment? Alas for China's "non-speculators", as we reported last week in "The Music Just Ended: "Wealthy" Chinese Are Liquidating Offshore Luxury Homes In Scramble For Cash" the real anger is only just beginning.
- U.S. Small-Cap Rally Sends Valuation 26% Above 1990s (BBG)
- Russian troops seize Ukraine marine base in Crimea (Reuters)
- Apple in Talks With Comcast About Streaming-TV Service (WSJ)
- Top J.P. Morgan Executive in China to Leave Bank (WSJ)
- Treasury's Lew to undergo treatment for enlarged prostate (Reuters)
- Billionaire Sought by U.S. Holds Key to Putin Gas Cash (BBG)
- Israel closes embassies around the world as diplomats strike (Reuters)
- Herbalife to Nominate Three More Icahn Candidates to Board (BBG)
- Australian ship homes in on possible debris from Malaysia plane (Reuters)
- California DMV Investigating Potential Credit Card Breach (WSJ)
HSBC's Flash China Manufacturing PMI printed at 48.1 (against a hope-strewn 48.7 bounce expectation). This is the lowest in 8 months and among the lowest prints since Lehman. Even the usually silver-lining-seeing HSBC Chief economist had little positive to add, "weakness is broad-based with domestic demand softening further." Early strength in CNY, stocks, and copper is eroding fast.
Curious how China imported a record amount of physical gold in 2013 without in the process sending the price of gold to new record highs? Here is the answer...
Following China's unwillingness to vote against Russia at the UN and yesterday's news that China will sue Ukraine for $3bn loan repayment, it seems Russia is returning the favor. Speaking at the Chinese Economic Development Forum, ITAR-TASS reports, the Chief Economist of Russia's largest bank stated that "China's Yuan may become the third reserve currency in the in the future."
Apparently China did not get the memo that the Fed's apologists are furiously scrambling to packpedal on Yellen's "6 month" guidance in virtually all media outlets. The is the only way to explain why Vice Minister of Finance Zhu Guangyao said overnight that "the U.S. Federal Reserve will begin boosting interest rates within six months after exiting “unconventional” monetary policy, and that will have a “significant impact” on the U.S. and world economy, as Market News International reported earlier. Zhu told China Development Forum this weekend “we believe a the Fed meeting this October, the exit of their quantiative easing will complete." In other words while the spin for public and algo consumption is that the Fed will continue placating those long the stock market until everyone's price target on the S&P 500 is hit and everyone can comfortably sell into an ever-present bid, China is already looking for the exits. But while the end of QE appears a given, at least until the market realizes there is no handover to an economy that is a moribund as it has ever been in the past five years, and the Fed has no choice but to untaper and return with an "even more QE" vengeance (it certainly won't be the first time - just recall the "end" of QE1, QE2, Op Twist, etc), a bigger question surrounds whether China, already sliding in credit contraction and suffering a plunging stock market with its housing sector also on the edge of a bubble bust, is about to take over from the Fed and proceed with its own stimulus program. The answer is no.
A dispassionate look at the main considerations for investors in the week ahead.
Rumors of a new "preferred shares" program which could implicitly mean easier access to desperately needed liquidity for Chinese banks and real estate developers prompted what one analyst called "a short-covering-led recovery after shares had fallen a lot." The banks of the Shanghai Stock Exchanged rallied notably as chatter was they would be be first to be blessed with the ability to issue new stock and this boosting their capital. The 2.7% rally in the composite was the best day in 4 months (even as China CDS surged by their most in 9 months) but, as one trader noted, "we may see one or two more days of upside but China's fundamentals are still weak. We weren't falling for nothing."
- Australia says nothing spotted in search for plane (AP)
- Putin looks to Asia as West threatens to isolate Russia (Reuters)
- China Billionaire Builds Metals With Dreyfus, Glencore Hires (BBG)
- China Beige Book Says Economy Slowing (BBG)
- Caterpillar Said to Be Focus of Senate Overseas Tax Probe (BBG)
- US Cancels Summit With Divided Group of Gulf Nations (WSJ)
- Cyprus defense minister suffers aneurysm (AP)
- Abe to zero in on economy as tax hike looms (Nikkei)
- Europe strikes deal to complete banking union (Reuters)
Yellen’s press conference was panned by some as confusing and ambiguous. The press conference was not as “boring” as some have stated, because the FOMC (represented by Yellen) now appears to be struggling between theory and practice. This marks a significant shift from the majority of members who had almost entirely been relying on models (theory). The one thing that seemed perfectly clear is that the Fed plans to continue to unwind the QE program barring some type of disaster. After that, we will all have to reassess and see how things unfold...“Theory is when you understand everything, but nothing works. Practice is when everything works, but nobody understands why. When theory and practice are untied, nothing works and nobody understands why.”