Jan 072016
 
 January 7, 2016  Posted by at 2:05 pm Finance Tagged with: , , , , , , , ,
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Berenice Abbott William Goldberg, 771 Broadway, Manhattan 1937

If there’s one thing to take away from this year’s developments in markets and economies so far, it’s that they are all linked, they’re all part of the same thing. If you can’t see that, you’re not going to understand what’s happening.

Looking at falling oil prices as a separate thread is not much use, and neither is doing the same with Chinese stocks, or the yuan, or the millions of Americans who are one paycheck away from poverty, for that matter. It’s all one story.

And the take-away from that, in turn, is that focusing too much on ‘narrow’ conditions in your particular part of the globe has only limited value. We’re very much all in this together. In the UK today, it matters very little what George Osborne says or does, or Mark Carney, because they don’t shape the future of the economy.

The same goes for all finance ministers and central bank governors across the planet, Yellen, Draghi, Koruda, the lot: the influence they exert on their own economies, which was always limited from the start, is running into the boundaries imposed by global developments.

Even if central bankers could ever have ‘lifted’ anything at all (a big question mark), their power to do so is rapidly diminishing. The constraints global developments place on their powers will now be exposed -even more. And of course they’ll try to deny and ignore that, as naked emperors are wont to do.

And with the exposure of the limits to their abilities to make markets and economies do what they want, come the limitations of the mainstream financial press to make their long-promoted recovery narratives appear valid. Before we know it, we might have functioning markets back.

Oil -both Brent and WTI- have breached the $32 handle, and are very openly flirting with the $20s. China’s stock market trading was halted for a second time this year, just 14 minutes after the opening. This came about after the PBoC announced another ‘official’ devaluation of the yuan by 0.5% (stealth devaluation has been a daily occurrence for a while).

$2.5 trillion was lost in global equities in three days this year even before the Thursday China trading stop and ongoing oil price decline. Must be easily over $3 trillion by now. And counting: European markets look awful, and so do futures.

For the first time in years, markets begin to seem to reflect actual economic activity. That is to say, industrial production, factory orders, exports, imports and services sectors are falling both in China and the US. Many of these have been falling for a prolonged period of time.

In fact, Reuters quotes a Sydney trader as saying: The Chinese economy actually contracted in December. Given what I’ve written in the past year and change about China, that can hardly be a surprise anymore.

What we are looking at is debt deflation, in which virtual ‘wealth’ is being wiped out at a fast pace, and it’s taken some real wealth with it for good measure. It’s not going to be one straight line down, for instance because there are a lot of parties out there who need to cover bets they carry from last year, but it’s getting very hard to see what can stop the plunge this time. Volatility will be a popular term again.

The Fed could lose its last remaining shred of credibility through QE4,5,6 and a 180º turn on the rate hike, but it would lose that last shred for sure. Draghi’s ECB could start buying ever more paper, but they would have a hard time finding sufficient amounts of anything to buy that’s worth anywhere near the written value.

The PBoC can’t really do QE after the $25 trillion post-2008 credit pump, and the yuan devaluation today achieved the opposite of what it was intended for. The BoJ is being severely hampered by the rising yen. We’ll see crazy stuff from the global Oracles, for sure, but in reality they never had anything but expensive band-aids to offer, and they have nothing better now.

Ultimately, if China is a Ponzi (and $25 trillion in credit spent on overcapacity strongly suggests so), then the entire world economy is one. I would very much argue so, and have for years. And we all know what inevitably happens with Ponzi’s.

Economists like to think in cycles, in which things will simply bounce back at some point, but a lot of this stuff will not come back, not for a very long time. I’ve said it before: Kondratieff is also a cycle.

We’re watching the initial stages (though a lot has already vanished behind all sorts of curtains) of a massive ‘wealth’ destruction, a very loud POOF!, ‘wealth’ which can so easily be destroyed because most of it was never real, just inflated soap. It’s time to move to cash if you haven’t already, and if you have enough, perhaps a bit of gold, silver or bitcoin, but do remember those are not risk-free.

It’s tempting to see this as a China problem, but first of all there is no China problem that will not of necessity also gravely affect the west , and second of all when you read, just to name an example, that America’s new jobs pay 23% less than the jobs they replaced, it’s just plain silly to believe that the economy is doing well, let alone recovering.

Which is why a majority of Americans are living paycheck to paycheck, and don’t have enough savings even for a $500 car repair bill. All Ponzi’s burst, they can’t be tapered, and this one we have now is going down in epic fashion because there are no major economies left that are not overburdened by debt.

It’s also tempting, certainly for economists, to see money that’s lost in one ‘investment’ to automatically shift to another, but that’s not what’s happening. Much of it simply evaporates. That’s why investment funds where already in a huge high-yield bind last year, and why you should really worry about your pension fund.

Do prepare for rising taxes and services cuts: governments suffer along with everyone, and because they’re slow and lagging, probably even more so. And governments think they deserve to have their hands in your pockets. Prepare for mass lay-offs too. The consumption model is being broken and dismantled as we speak.

Home Forums China, Oil and Markets: It’s All One Story

This topic contains 5 replies, has 5 voices, and was last updated by  Professorlocknload 5 months, 3 weeks ago.

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January 7, 2016 at 2:05 pm #26035

Raúl Ilargi Meijer

Berenice Abbott William Goldberg, 771 Broadway, Manhattan 1937 If there’s one thing to take away from this year’s developments in markets and economie
[See the full post at: China, Oil and Markets: It’s All One Story]

January 7, 2016 at 4:28 pm #26036

Dr. Diablo

With 175 Million Americans with either no income or making under $35,000/yr it’s easy to believe that most Americans couldn’t cover a $500 repair bill. In fact, I’m shocked that 30% of those making under 30k could—it’s hard to imagine how with steak at $10/lb. I disagree with the commenter, referring to FoxNews link I think, who said that isn’t true. I live here and it looks pretty spot-on to me. Note this average is including the 10 richest Zip codes in DC plus all the coastal boomtowns like S.F. so imagine what flyoverland averages. The U.S., like Germany, is considered a “good”, “recovering” country. With 30% unemployment. Ahem.

2nd, you have to note that the > $3 Trillion loss (equities alone) is the loss of collateral value in a world struggling to find collateral to sustain the debt. We could argue about collateral/debt ratios v GDP or whatever, but let’s just look at the 30:1 leverage of the major banks–the kind of institutions that would be involved in using stocks as collateral. So that’s $90 Trillion of good collateral lost in 3 days. $90 Trillion is 6 years U.S. GDP. That leverage is the real hit to the system and is your Deflation.

January 8, 2016 at 1:29 am #26039

wakeupthyme

It’s time to move to cash if you haven’t already, and if you have enough, perhaps a bit of gold, silver or bitcoin, but do remember those are not risk-free.

Raul- Nicole always said cash and cash equivalents (such as short term T-bills). Is this still safe to hold in that form?

January 8, 2016 at 3:44 am #26040

Golden Oxen

It’s time to move to cash if you haven’t already, and if you have enough, perhaps a bit of gold, silver or bitcoin, but do remember those are not risk-free.

Ilargi, Cannot tell you how glad I am that a writer of your influence and sophistication has finally accepted a bit of gold as an acceptable adjunct to cash in the troubling circumstances we find ourselves in. Regards, GO

January 9, 2016 at 3:50 pm #26078

Raúl Ilargi Meijer

Nothing finally about it, GO, that’s what we have always said.

And wakeup, yeah, short term bonds count as cash (closest thing to it).

January 11, 2016 at 4:31 pm #26100

Professorlocknload

Silly wabbet,,,gumnuts don’t need to raise taxes to support debt spending. That’s old school stuff. Now all they need do is create more money.

And cash, in dollar form, is debt. The dollar is a debt instrument. A sort of bond. As in IOU. A certificate of confiscation. It WILL be devalued. No other choice. It’s just what Central Planners do.

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