China is similar to Japan in the 1980s in terms of financial imbalances and challenges for the real economy, but, as JPMorgan notes, China differs in terms of its stage of economic development. Turning possibility into reality is not an easy task, especially as China’s structural slowdown is accompanied by mounting financial imbalances. In the near term, overcapacity and decline in the rate of return on investment are the major challenges to be addressed by policymakers, and rising debt in the corporate sector and local governments needs to be contained and gradually reduced. In our view, this would require reform not only on the economic front (e.g., fiscal reform, land reform, financial reform, and SOE reform), but also social reform (e.g., hukou reform) and governmental reform (e.g., changing the role of the government and de-monopolizing). The list of tasks is daunting, but policy inaction could be even more dangerous - a delay in economic restructuring in China could lead to a repeat of Japan’s experience.
Ben Bernanke blames fiscal policies out of Washington. However, it is starting to look more and more like Fed policy is equally to blame for the lackluster U.S. GDP growth.
The Consumer Metrics Institute is generally a pretty subdued bunch, as befits their job interpreting economic statistics for money managers and other economists. But lately they’ve been increasingly vocal about the farce we are witnessing: "From time to time we may quarrel with the quality of the BEA’s deflaters. And frankly we may even find that at face value the lackluster numbers amount to nothing more than a sham “recovery.” But the most shocking part of this report is glaringly obvious from the real per capita disposable income numbers: all of the unprecedented fiscal and monetary stimulus has left American households materially worse off than they were two years ago."
There was little of note in today's May Personal Income and Spending report (aside from the now-traditional backward looking revision of Q1 data): personal spending was expected to come increase 0.3% in May, and so it did, up from a revised 0.3% drop in April. Income, however, spurted by 0.5% in the month, more than double the expected 0.2%, up from an adjusted 0.1% increase in April. The income rise was as a result of a $24 billion increase in wages, and a $31 billion rise in income on assets (interest and dividend income). Finally $19.4 billion in personal current transfer receipts (government generosity) completed the picture of why Americans' incomes rose in May. However, despite this beat in income, spending was in line with expectations, and following the revisions of January-April data, the May 3.2% savings rate was the highest reported so far in 2013. For the Keynesians out there, this is hardly the strong indicator of consumer spending they have been looking for.
In the final section of this five-part series (Part 1, Part 2, Part 3, and Part 4) on the dismal reality behind the non-recovery, David Stockman explains what lies ahead. He details in his new book 'The Great Deformation', that the mainstream notion that there is a choice between fiscal austerity and fiscal stimulus is wishful thinking. It does not recognize that owing to the triumph of crony capitalism and printing-press money America has become a failed state fiscally. What lies ahead is a continuous, mad-cap cycling back and forth - virtually on an odd-even day basis - between deficit cutting and fiscal stimulus to the GDP. As Stockman notes, the proximate cause of this recession waiting to happen is the federal government’s unfolding encounter with Peak Debt. The latter is not a magical statistical point such as a federal debt ratio of 100 percent of GDP, but a condition of permanent crisis - "no viable economy can survive on chronic fiscal deficits nor can it fail to save at a sufficient rate to fund a healthy level of investment in productive capital assets. The blithe assumption to the contrary which animates current policy rests on self-serving clichés such as “deficits don’t matter” and the Chinese savings glut." So the American economy faces a long twilight of no growth, rising taxes, and brutally intensifying fiscal conflict. These are the wages of five decades of Keynesian sin - the price of abandoning financial discipline.
By my count we are now in our fourth “Recovery Summer.” The recession was officially (and mistakenly) declared over in June 09. Yet, no data series in economics not influenced drastically by liquidity and a zero interest rate policy (e.g., stock prices and home prices) supports the claim. Recovery advocates point to the stock market as a barometer of how well the economy is doing. A key takeaway is that the stock market misled people during the 1930s and may be doing the same thing today. Those who want to argue against this position will declare the 1930s an unfair comparison because it was a Great Depression. Just what makes them think what we are in today is not the same thing, although not yet as far advanced. Given the trillions of dollars wasted to hide the true condition of the economy, that is not an unreasonable possibility. This liquidity hides the true nature of the economy (also falsely drives up financial asset prices) and creates even bigger distortions in the real economy.
As we are in the final stage of the global bubble, we realize that we often fail to ask the most obvious questions. In this case, as every central banker tells us that his policies are directed to obtain growth, the obvious question is... how do we define economic growth? What is economic growth? Yes, yes, we know that what they do is simply monetize deficits and enable the transfer of wealth between sectors and generations, but there is also an intellectual battlefield, which we should be aware of. What is the view of the central banking cartel on how to grow output? Surprisingly, not via an increase in the marginal productivity of capital, but via the so called wealth effect: As interest rates fall, asset prices increase (it doesn’t matter which assets see their prices rise) and the assets can be used as collateral to leverage a higher than previously possible consumption level. This consumption level will drive output growth, and this increase in output –they believe- will bring about full employment. The wealth effect is mistakenly attributed to Keynes, who actually argued against it. Thus, the central banking cartel has its own interpretation of economic growth and it does not fit any of the 'reality' perspectives presented below.
The Great Economic Transformation! The Chinese are suckers for adjectives to describe and give power and eminence to their attributes, actions or constructions. The Long March. The Cultural Revolution. The Great Wall, the Yellow River. A good adjective always makes it sound as if it’s true. The Chinese have taken over as the superlative attributor to everything. The tallest (soon-to-be) building in China, the Shanghai Tower, is the living proof that China plans on making itself into a byword for superlatives it’s ‘–est’ everything these days.
In yet another confirmation that the US consumer continues to get slammed, and is respectively slamming the GDP by spending less, today's April personal spending and personal income both missed expectations, printing flat and declining -0.2% from the March numbers, much as expected following the Q1 spending spree, which means that economic growth in Q2 and onward as a function of consumer spending will only "taper" going forward especially with the delayed impacts of the payroll tax negative effect on spending finally starting to trickle down. What's worse, is that since incomes did not improve in April, the savings rate remained flat at a minuscule 2.5%, or just off the lowest its has been since the start of the Second Great Fed-propped Depression.
A. Gary Shilling's discussion of how to invest during a deleveraging cycle is a very necessary antidote to the ecstacy and euphoria that surrounds the nominal surges in risk-assets around the world sponsored by central banking largesse. Shilling ties six fundamental realities together: Private Sector Deleveraging And Government Policy Responses, Rising Protectionism, the Grand Disconnect Between Markets And Economy, a Zeal For Yield, the End Of Export Driven Economies, and why Equities Are Vulnerable. The risk on trade is alive and well - but will not last forever. We are still within a secular bear market that begin in 2000 with P/E ratios still contained within a declining trend. Despite media commentary to the contrary - this time is likely not different.
With last night's China PMI disappointing expectations and eking out a just-expansionary miasma of hope for the growth enthusiasts, the very real question of global growth sustainability (while not on US equity market participants' minds) is coming to the fore. As Michael Pettis notes, Martin Wolf's recent perspective that it may be useful to think about Japan as a model for understanding the adjustment process in China since the Japanese model shows how risky it is to shift to a slow-growth model. While expectations for a 'relatively moderate' slowdown are common (at rates considered rapid for most economies); Pettis asks rhetorically, if part of the explanation for China’s spectacular growth of the past three decades has to do with the positive feedback loops that are so typical of developing countries with fragile and unsophisticated financial systems, then a moderate slowdown in growth may be an impossible target to achieve. Once growth starts to slow, the self-reinforcing impact on urbanization, on credit growth, on financial distress, and on expectations may force growth rates to drop far more sharply than any 'plausible' analysis would suggest.
The latest personal income and expenditure report for March was of particularly interesting reading. However, as opposed to the mainstream headlines that immediately reported that despite higher payroll taxes consumers were still spending, and therefore a sign of a strong economy, it was where they were spending that was most telling. In reality, The personal income and spending report does little to brighten the economic picture. The reality is that we now live in a world where "freely traded markets" are an anachronism and fundamental rules simply no longer apply. However, the problem is that such actions continually lead to asset bubbles, and eventual busts, that not only impact economic stability but destroy the financial stability of families. The consumer is clearly delivering a message about the state of the real economy. Eventually, the disconnect between the economy and the markets will merge. Unfortunately, there is no historical evidence of such reversions being a positive event.
In the past months and right after implementing Quantitative Easing Unlimited Edition, the Fed began surfacing the idea that an exit strategy is at the door. With the latest releases of weak activity data worldwide, the idea was put back in the closet. However, a few analysts have already discussed the implications of the smoothest of all exit strategies: An exit without asset sales; a buy & hold exit. We have no doubt that as soon as allowed, the idea will resurface again. Underlying all official discussions is the notion that an exit strategy is a “stock”, rather than a flow problem, that the Fed can make decisions independently of the fiscal situation of the US and that international coordination can be ignored. This is logically inconsistent as we address below...
Despite expectations that following several months of subpar income growth offset by rampaging spending and thus a plunging savings rate, March incomes would rise by 0.4%, while spending would be flat, this did not happen, and instead both spending and incomes rose by the same amount, or 0.2% in the past month. Worse, when adjusting for inflation, real disposable income rose just 1.1% compared to last March, and just barely above the 0% breakeven. On the other side, real spending was up 2.2% Y/Y just barely above the 2% recessionary threshold. And even that number is misleading as spending on Total Goods (including durable, already known as being quite abysmal, and non-durable), dropped by $32.8 billion in nominal dollars. What was the offset? Why a massive surge in consumption expenditures on services, which rose by $53.8 billion, which absent the spending aberation for September 11, 2001, which was reversed in the following month, was the biggest monthly increase on record! What drove this record services spending spree is anyone's guess.