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...
With both channel stuffing and subprime out of the window if only for the time being, GM, whose China sales are falling off a cliff, had to come up with some urgent source of end demand. And thanks to recently disclosed data, we now know that "once a Government Motors, always a Government Motors", because just the first quarter of 2015, the average annual increase in sales to Uncle Sam, aka the Government was a whopping 24%, just about 100% higher than GM's headline rate of sales increase!
A look ahead at the major drivers in the days ahead.
Currently, a new form of danger arises. The Keynesian pettifoggers at the Fed have painted themselves into an epochal corner. After 78 months of ZIRP they have no idea about how and why they got here; and now, mired deep in the lunacy of free money, they are clueless about where they are going next. There is not a chance the US economy has decoupled from the rest of the world. The great credit-driven boom was universal and fueled by out of control central banks. Now comes the bust phase, and these same money printing central bankers have no clue what to do about it.
There is no mystery anywhere to be found in the fact that US retail sales don’t follow the jobs trend. Not if you look at what kind of jobs they are, let alone at all the other made up and manipulated numbers that are being thrown around about the US economy. The only mystery is why everyone persists in talking about a recovery. That recovery will never come, simply because all 90% of Americans do is pay for the other 10% to get richer. There are many other factors, but that all by itself makes a recovery a mathematical mirage.
Accused of illegally repossessing cars from active-duty service members, Santander Consumer has agreed to pay $9.35 million to the Justice Department in the largest auto reposession-related settlement in history. A look at the company's subprime auto securitizations speaks volumes not only about the lender, but about the furture course of subprime ABS issuance in the US.