How five investment themes will evolve in the week ahead.
Auto sales have recovered to the 16.5-17 million range, and many observers predict further gains in coming years (despite, as we previously noted, missing expectations for the last few months). But to Goldman Sachs, the current sales pace already looks high relative to the medium-term fundamentals; and their assessment of scrappage rates, population growth, licensed drivers, and vehicle ownership suggests that trend demand for autos - excluding cyclical fluctuations - is only 14-15 million units per year.
The good news is that there will be no 25-year recession. Nor will there be a depression that will last the rest of our lifetimes.
The bad news: It will be much worse than that.
Spin that Phil LeBeau...
Overnight we got the latest proof that there is nothing worse for an economy than to be run by a bunch of central planning academics who get "advice" from Paul Krugman. The reason: Japan's retail sales which crashed by 9.7% Y/Y, the biggest annual drop in history. To be sure, the biggest reason for the annual drop was the base effect with the surge in demand last March ahead of the April 2014 consumption tax hike, but the drop was bigger than what consensus had expected, as expectations were for a -7.3% drop. And confirming that things are getting worse on a sequential basis as well, was the 1.9% drop in sales in March compared to a 0.7% increase in February. In fact, as the chart belows show, on an indexed basis, the March retail sales print was one of the worst since last year's tax hike.
A look at the next week's events that could impact the global capital markets.
While the world gasped last night when China's production-based, and goalseeked GDP number came in at 7.0% - the lowest in 6 years the truly scary numbers were in the details, which revealed unprecedented deterioration. Details which suggest China is now growing at a 1.6% annual pace: the lowest in modern history.
There were the usual trite, forgettable highlights in the just released beige snow book, which as summarized by Bloomberg, had the following highlights:
FED: ECONOMY EXPANDED IN MOST REGIONS MID-FEB. TO END-MARCH; HIGHER RETAIL SALES REPORTED BY MAJORITY OF REGIONAL FED BANKS; BEIGE BOOK: LABOR MARKETS STABLE OR SHOWED MODEST IMPROVEMENT; REGIONAL FEDS NOTED MODEST UPWARD WAGE AND PRICE PRESSURE;
One can ignore all of the above, because the only word that matters in the latest beige book was one: "Weather"
A month ago we warned "Beijing, you have a big problem," and showed 10 charts to expose the reality hiding behind a stock market rally up over 100% in the last year. Tonight we get confirmation that all is not well - China GDP fell to 7.0% (its lowest in 6 years) with QoQ GDP missing expectations at +1.3% (vs 1.4%). Then retail sales rose 10.2% YoY - the slowest pace in 9 years (missing expectations of 10.9%). Fixed Asset Investment rose 13.5% - the lowest since Dec 2000 (missing expectations). And finally Industrial Production massively disappointed, rising only 5.6% YoY (weakest since Dec 2008). Finally, as a gentle reminder to the PBOC-front-runners, a month ago Beijing said there was no such thing as China QE (and no, the weather is not to blame.. but the smog?).
After 3 months of missed expectations and the first consecutive drop in retail sales since Lehman, retail sales rose 0.9% in March (missing expectations of +1.1%). While the 0.9% rise is the biggest since March last year, this is now the worst streak of missed expectations in retail sales since 2008/9. Ex-Autos, retail sales also mised expectations (rising just 0.4% vs 0.7% exp).
A look ahead into next week's macro forces.
Auto ABS has "dominated" new consumer issuance YTD and $7 billion in new subprime supply suggests buyers are generally oblivious to worsening credit profiles. Is this a good time to pledge a devaluing asset to buy an overvalued asset?
Even before the disappointing US jobs data, we anticipated a downside correction in the dollar after a sharp advance in Q1.
Current policy coming from the Fed seems to be geared to create a never-ending series of booms and busts, with the hope that the busts can be shortened with more debt and easy money. Yet one major driver behind the financial crisis in 2008 was too much debt - much of which led to taxpayer-funded bailouts. In spite of this, the best the Fed can come up with now is to lower interest rates to boost demand to induce households and governments to borrow even more. Interfering with interest rates, however, is by far the most damaging policy. The economy is not a car, and interest rates are not the gas pedal. Interest rates play a critical role in aligning output with society’s demand across time. Fiddling with them only creates an ever-growing misalignment between demand and supply across time requiring an ever larger and more painful adjustment.
When gaming the old score wasn't sufficient to expand the pool of elligible borrowers, creativity was necessary. The result: an entirely new score is born...