Arthur Rothstein Worker at carbon black plant, Sunray, Texas 1942
The world economy today looks like an episode of MASH, but without the cued laugh track. The pain and injuries and festering wounds that are the flipside of issuing more debt in the face of too much debt are tangible on every screen. As if the viewing experience wasn’t painful enough with the plots about China and the emerging markets in general, an additional fear-ridden storyline was added yesterday, when US new factory order growth was reported down most in 33 years.
We’re going to need a generous laugh track when watching Washington, Wall Street and the financial media fall over each other in their attempts to spin that one into a feel good scene, but in the end it’s simply an astonishing piece of bad news for the faithful who’ve fallen for the growth epic. How we’ll be told to reconcile the recovery narrative with the worst manufacturing numbers since 1980, we can only wonder.
Not that it matters much, since the narrative is all really just entertainment. There comes a point when everyone starts to see what pushing on a string actually means. The Fed can make up stories about how its $4 trillion QE driven balance sheet succeeded in helping the real economy heal, and the whoring herd of journalists and analysts can tell those stories morning noon and night to put people to sleep with, and Bernanke can be praised till the cows come home and leave again, people down the line will find out what’s going on, even if only because it hits them square on the jaw.
The Nikkei lost 4.2% while you were sleeping. 4.2%! Imagine that for the Dow and S&P… And much worse is to come for Japan. That recent positive price inflation signal PM Abe likes to boast reflects nothing but those Japanese who needed a new fridge or car anyway, buying them now, before April 1, when the new sales tax rise that’s supposed to pay for the three arrows of Abenomics goes into effect. Ergo: after that date, the sales of fridges and automobiles will plummet off a cliff, and then, in essence, there’ll be nothing left to pay for Abenomics. Which is quite simply, no matter how you phrase it, a huge and desperate wager, an everything on red that moreover completely ignores that the house always wins. If you ask me, it might be time to get seriously afraid for what’ll happen in Tokyo after April Fools day. If only because it should be obvious how scared the Japanese people themselves are. After 2 decades of deflation.
In China, new export orders fell to 49.3, below the expansion line of 50. And talking head “experts” may come up with such gems as “We believe the negative impact of tighter liquidity conditions is showing on the real economy”, but that totally misses the point. If and when China receives fewer export orders from abroad, it’s because global demand for its trinkets and gadgets is falling, not because factories close in spite of an avalanche in orders. China equals exports, and less exports means less China, and that has very little if anything to do with Beijing credit policies.
Of course, for us here at The Automatic Earth, we have our own private laugh track these days, because we’ve been saying for years that what is happening now, would. You can have faith in people like Keynes and Krugman and Bob Shiller until you’re blue in the face, but you can’t revive an economy that’s dying from a debt overdose by injecting more debt. It doesn’t work. Ever. Not even if you find some miracle new source of energy, or, pete forbid, you go to war. That’s how much debt there remains hidden, lurking and festering inside the global financial system.
There’s only one way to keep this MASH episode from turning into the shower scene from Psycho: seize the banks, restructure their debts, default what must be defaulted upon, bankrupt what is broke(n), and start anew from there. Christine Lagarde instead laments that it’s nationalism that holds back a global recovery. If you ask me, she deserves to be in that shower with Anthony Perkins. And his mom.
Centralization and globalization eat people alive, and the crux in that is that people must safeguard control over their basic needs, their essentials, and not allow their children’s heating and food and drinking water to be controlled by faceless dudes in glass towers 10,000 miles away buying up any assets and politicians they can with cheap credit backed by the same people’s labor whose basic needs they seek to squeeze for profit. That’s a model that destroys entire societies, not for the glass tower dudes, but for everyone else.
The word “nationalism” may today evoke negative images of right wing squads and starving peasants, but much of that is just spin induced. There’s nothing wrong with protecting your society, your children and their basic necessities from a tidal wave of power and profit induced manipulation by those with access to the prospective profits of your very own future labor. And if someone wishes to label that “nationalism”, so be it. The way the show is run now, all the economic bloodletting stories you read today will be but a prelude to what is coming to where you live.
If protecting yourself from that is presented as something bad or evil, just let them talk. It is your basic human right to protect your children from harm inflicted on them now and in the future. But you’re going to have to fight for that right. That may sound dramatic, but think it through: what do you see happening going forward? Even if there were growth, and what are the odds for that, why, and how, would it ever reach you when the global financial system has their hands in your pockets? The financial system wants you to believe that you’re lost without it, that your wellbeing depends on it, but the opposite is true, it’s killing you.
Global finance needs profits and growth, or it’ll die, and there is no overall growth left, that chapter’s done and gone, so it can survive only by preying on you and sucking up your children’s life blood. And in light of that widescreen feature motion picture, today’s ugly economic numbers are just the beginning. The biggest losers in today’s bad numbers game are the major banks. But they don’t have to worry about the losses, because they’ve been declared too big to fail by their respective governments. In other words, their losses are covered, dollar for dollar, by you. At least if you would place your own bets, you might have a chance of winning. Letting glass tower bankers bet with your money means you can only lose. Tell ’em to go take a hike..
US stocks fell on Monday, with the S&P 500 hitting its lowest level in almost three months after data showed the factory sector in the world’s largest economy expanded in January at a far weaker pace than expected. US manufacturing grew at a slower pace in January as new order growth plunged by the most in 33 years, while spending on construction projects barely rose in December. Investor sentiment soured sharply after the factory data, driving the cost of protection against a drop on the S&P to its highest level in nearly four months. The CBOE volatility index jumped more than 10% to trade above 20 for the first time since early October.
“The data was very weak across the board. It’s hard to find any good news in there. It looks like a general slowdown, though you don’t know how much of this is weather related,” said Paul Zemsky, head of asset allocation at ING Investment Management in New York. “Combine that with the fact emerging market currencies continue to sell off, and things don’t look too good for the market now,” he said. “Somewhere between now and 1,700 (on the S&P) there’s a big buying opportunity, but people need to see some stability in emerging currencies.”
Factory orders in the US suffered their steepest fall for 33 years in January and also slowed further in China, raising fresh concerns about the strength of the world’s two biggest economies. The shock figures set off a renewed flight to safety in New York, where yields on US 10-year Treasuries fell to a three-month low of 2.60pc. The Dow Jones index tumbled 326 points, breaking through crucial technical support levels.
The Japanese yen rallied as funds unwound “carry trade” positions in Asia to reduce risk. Emerging market currencies slumped to a five-year low. America’s ISM index of supply managers dropped from 56.5 to 51.3 in January, the biggest one-month decline since the Lehman crisis.
There was a sharp slide in orders for machines and white goods in December even before the cold snap. Stephen Roach, from Yale University, said the robust growth in the US over recent months had been “bloated by an unsustainable surge of restocking”. The underlying rate of growth is closer to 1.6pc, if final sales to consumers and businesses are used as a guide.
Mr Roach said American households had not yet finished the epic purge needed to bring borrowing levels back to historic levels. The debt-to-income ratio has dropped from 135pc to 109pc since the sub-prime bubble burst in 2007 but still has another 35 percentage points to go, implying powerful headwinds for the US economy for years to come. “American consumers’ balance-sheet repair is, at best, only about half-finished,” he wrote on the Project Syndicate blog.
In China, the PMI gauge of manufacturing fell to its lowest level since May as the authorities continued to bear down on the country’s $24 trillion (£14.7 trillion) credit boom. New export orders fell to 49.3, below the expansion line of 50. “We believe the negative impact of tighter liquidity conditions is showing on the real economy,” said Zhiwei Zhang from Nomura.
Morgan Stanley has cut its growth forecast for China to 6.6pc for the first half of 2014, warning that the country may face a rough ride trying to deleverage the economy while at the same time raising interest rates. There are widespread concerns over an estimated $1.1 trillion foreign currency debt owed by Chinese banks and companies, mostly borrowed through Hong Kong and Macau.
The US Federal Reserve insists that America’s growth has reached “escape velocity” as the housing market recovers and the shale gas boom revives large sectors of industry. Yet the picture is murky. The labour participation rate is still at a 50-year low of 62.8pc, evidence of a jobless recovery.
All key measures of the US money supply have been slowing for months. The growth rate of broad M2 measure has halved to around 5pc from 10pc two years ago, signalling a lull ahead. Tim Congdon, from International Monetary Research, said the Fed’s bond purchases kept the money supply afloat last year as the economy wrestled with deleveraging, leaving it unclear what will happen as the Fed withdraws support.
Japan’s Nikkei 225 stock average dived more than 4% Tuesday as weakness in U.S. and Chinese manufacturing sent Asian markets sharply lower. The slide in Asian stocks followed losses Monday in Europe and on Wall Street after sentiment was hurt by the weak data from the world’s two biggest economies.
The Nikkei tumbled 4.2% to 14,008.47 and is down 14% over the past month. Toyota Motor Corp. sank 5.7% before reporting a fivefold surge in its quarterly profit and Sharp Corp. plunged 8.4%.
Investment sentiment was already fragile because of signs of stress in the financial markets of nations such as Turkey and Argentina. The Federal Reserve is incrementally withdrawing massive stimulus as the U.S. economy recovers from 2008 financial crisis, sending shockwaves through markets that were driven higher by the tide of cheap money created by the Fed’s policy.
This is going to be a bad story. Shinzo Abe will be forced to leave in shame, head down and all, and what will there be after that?
Kudos to the Bank of Japan. Its heroic campaign to water down the yen has borne fruit. The Japanese may not have noticed it because it is not indicated in bold red kanji on their bank and brokerage statements, and so they might not give their Bank of Japandemonium full credit for it, but about 20% of their magnificent wealth has gone up in smoke in 2013. And in 2014, more of it will go up in smoke – according to the plan of Abenomics.
What folks do notice is that goods and services keep getting more expensive. Inflation has become reality. The scourge that has so successfully hallowed out the American middle class has arrived in Japan. The consumer price index rose 1.6% in December from a year earlier. While prices of services edged up 0.6%, prices of goods jumped 2.6%.
It’s hitting households. In December, their average income was up 0.3% in nominal terms from a year earlier. But adjusted for inflation – this is where the full benefits of Abenomics kick in – average income dropped 1.7%. Real disposable income dropped 2.1%.
Abenomics is tightening their belts. But hey, they voted for this illustrious program. So they’re not revolting just yet. But they’re thinking twice before they extract with infinite care their pristine and beloved 10,000-yen notes from their wallets. And inflation-adjusted consumption expenditures – excluding housing, purchase of vehicles, money gifts, and remittances – dropped 2.3%.
But purchases of durable goods have been soaring. Everyone is front-loading big ticket items ahead of April 1, when the very broad-based consumption tax will be hiked from 5% to 8%. Pulling major expenditures forward a few months or even a year or so is the equivalent of obtaining a guaranteed 3% tax-free return on investment. That’s huge in a country where interest rates on CDs are so close to zero that you can’t tell the difference and where even crappy 10-year Japanese Government Bonds yield 0.62%. It’s a powerful motivation.
And it has turned into a frenzy. In December, households purchased 32.2% more in durable goods than the same month a year earlier, in November 25.2%, in October 40.4%. These front-loaded purchases have been goosing the economy in late 2013. But shortly before April 1, they will grind to a halt. The Japanese have been through this before.
New EU stress tests will be performed this year, but they’ll need to be revised once the impact of the $3 trillion invested in EM becomes clear. Brussels has painted itself into a corner where it can’t let Santander or HSBC go broke. Will Draghi buy up bank bonds? Will Berlin let him?
European banks have loaned in excess of $3 trillion to emerging markets, more than four times U.S. lenders and putting them at greater risk if financial market turmoil in countries such as Turkey, Brazil, India and South Africa intensifies. The risk is most acute for six European banks – BBVA, Erste Bank, HSBC, Santander, Standard Chartered, and UniCredit – according to analysts.
But the exposure could be a headache for the industry as a whole, just as it faces a rigorous health-check by the European Central Bank, aiming to expose weak points and restore investor confidence in the wake of the 2008 financial crisis. “We think EM (emerging markets) shocks are a real concern for 2014,” said Matt Spick, analyst at Deutsche Bank. “When currency (volatility) combines with revenue slowdowns and rising bad debts, we see compounding threats to the exposed banks.”
Christine Lagarde should be watching stupid is as stupid does. In a mirror.
Tensions in the global economy risk creating “more frequent and more damaging” crises unless countries put global interests above national gain, Christine Lagarde has warned. The managing director of the International Monetary Fund (IMF) said there was an increased risk of global discord as the balance of power shifted away from advanced economies towards emerging markets, which will account for two thirds of global output within the next decade, up from half today.
“This will be a more diverse world of increasing demands and more dispersed power, she told the annual Richard Dimbleby lecture in London. “In such a world, it could be much harder to get things done, to reach consensus of global importance.” Ms Lagarde said while closer financial integration had benefited the global economy, the 2008 financial crisis – triggered by the collapse of the US mortgage market – demonstrated countries could collapse like dominos if they did not work together.
She said the $1 trillion stimulus package agreed in 2009 by the G20 in London had saved the world from global meltdown. “When linkages are deep and dense, they become hard to disentangle,” she said. “The channels that bring convergence can also bring contagion.”
Latin America once again will be taken through the Shock Doctrine wringer. Automobiles, iPads, gasoline, new shoes, not going to happen for you, kid.
With today’s plunge, Latin American currencies have collapsed by over 5% in the last 2 weeks – the fastest drop in almost two years. Year-over-year this is a 15.75% drop, the largest such drop since Lehman. This drop breaks the 2009 lows and presses the currencies to their weakest since 2003… Bond markets are being crushed as short-dated Argentine BONARs have collapsed to 14 month lows.
Good graph depicting the already inflicted hurt in EM. We can guess what’s next.
The global market sell-off continues. And the emerging market continues to take the worst of it. For some context, Oppenheimer’s John Stoltzfus offers this chart of emerging market currency moves relative to the U.S. dollar from a year ago.
When it comes to currency, stability is key. But these horrific devaluations in such a short period of time is a nightmare for countries that have lots of overseas debts and imports to finance. Unfortunately, as the Federal Reserve makes steps to normalize monetary policy, currency experts only expect things to get worse for these markets as the U.S. dollar is forecasted to get stronger.
And yes, it’s also funny in a cruel way to see all the tools for recovery and growth, whatever their agenda, now pose as if they knew all along, and have total control. But that’s not the whole story:
If you’re Goldman Sachs, and you have $100 billion in highly leveraged credit invested in some EM economy, you don’t wait for things to happen, you act instead of react, you make things happen. You put your shorts into place and then you pick the perfect time to pull your $100 billion out. The emerging economy will plummet, as will its currency, and that dad in Buenos AIres may not be able to buy his daughter a pair of shoes anymore, but your company just made a killing, and you made yourself a year end bonus worth more than that entire family will ever make in their entire lives. It’s only fair, right? That’s the game.
Goldman’s Global Leading Indicator’s January reading and the latest revisions to previous months paint a significantly softer picture of global growth placing the global industrial cycle clearly in the ‘Slowdown’ phase. They add, rather ominously, While the initial shift into ‘Slowdown’ [..] had a fairly idiosyncratic flavor, the recent growth deceleration now looks more serious than in previous months.
The January Final GLI places the global industrial cycle clearly in the ‘Slowdown’ phase, with positive but decreasing Momentum. Previous GLI readings had already highlighted that global activity growth peaked in August and the latest revisions show the subsequent deterioration more visibly. Some idiosyncratic factors might have had a hand in amplifying the current softness, but still the recent growth deceleration now looks more serious than in previous months.
Up the escalator, down the elevator shaft …
The volatility in Local Markets which began in 2013 may just be beginning as much of the excess liquidity that went in search for yield may reverse course. During the next few months to few years, we would not be surprised to see even greater stress as the “Greenspan/Bernanke/Yellen put” begins to fade and volatility returns to markets.
LatAm is coming under pressure with Brazil, Mexico, Chile and Colombia all setting up for further losses. In CEEMEA, stress has been more selective with Turkey, South Africa, Russia and Hungary being the countries in focus for now.
While Asian Local Markets remain relatively calm compared to LatAm and CEEMEA, the ADXY Index is testing a major support level at 115. A monthly close below there would be concerning and suggest Asian currencies could come under significant pressure. [..]
So far, the exodus of money from Local Markets has been “tame” compared to previous EM crises and it has also been selective since countries with weaker economies and foreign reserves have been the ones taking the largest hits. However, our bias is that this is just the beginning. [..] … the bigger danger over the next few months/years is that the markets begin to ‘throw out the baby with the bathwater” and Local Market investors begin to exit through the same small door.
It’s getting increasingly hard not to just wish for the US to default. Just out of curiosity. And besides, it doesn’t have an actually functioning economy anymore anyway, it’s all debt and no sweat.
It’s almost hard to believe, but it’s happening again. US Treasury Secretary Jack Lew warns that the world’s largest economy may default by the end of the month if the debt limit is not raised. The $16.7tn debt ceiling will be reinstated on Friday after being suspended since October as part of a budget deal that re-opened the federal government after a shutdown.
Lew says that he will rely on accounting measures to pay the bills for a few weeks. This is a replay from last year. Recall then, as now, that there’s been (and still is) a lot of uncertainty as to when the US Treasury will exhaust those “extraordinary measures”.
The US government can’t borrow once it hits the debt ceiling but it receives around $7bn in revenues every day, which is how the government managed for a while. The Congressional Budget Office, considered to be bipartisan, estimated last November that the Treasury may not be able to fully pay its bills starting in March but may last longer depending on tax receipts.
The growth and recovery prophets at Goldman, Citi, CNBC, they’ve all done a 180 and they’re all in line now with what we’ve been saying all these years: “Oh no, it was all a fake … “.
For much of the last six months, the benchmark indices for the US and Japan traveled a together; the S&P 500 and the Nikkei 225 moved in the same direction about 65% of the time. Now, with recent declines in the Nikkei– down 9.6% since the start of 2014 – does that mean investors in the S&P 500 and US stocks in general should be worried? A look at the relationship between these two indices in the recent past may give some idea about just how significant, if at all, the Nikkei may be in determining the S&P 500’s next move.
Over much of the previous two decades, the S&P 500 and the Nikkei usually had a correlation coefficient of less than 0.56 (based on monthly return over five year periods), though the two indices had a generally positive relationship. Then the worldwide financial crisis happened.
From October 2008 until August 2011, the two indices had a correlation coefficient above 0.70, meaning the two had a very strong positive relationship. It has since dropped to 0.61 as of October 2012, in part because the huge effects of the crisis were no longer part of the equation (The Nikkei was down 42% while the S&P 500 lost 38% in 2008). Part of why the correlation is down is also because the S&P 500 was flat or up every year since 2009 while the Nikkei was down in 2010 and 2011.
Then, with large amounts of monetary stimulus (“quantitative easing”) in both the US and Japan, stocks in both countries saw phenomenal returns. The S&P 500 was up 29% in 2013 while the Nikkei had made investors over 56% that same year.
So, with the Nikkei down thus far in 2014 – in part due to tapering of the monetary stimulus in the US and worries over Chinese growth – is that a secret sign that US stocks are headed down, too?
Michael Snyder presents a long list of US cities where homes are on offer for a buck. They’re no longer exceptions.
Would you like to buy a house for one dollar? If someone came up to you on the street and asked you that question, you would probably respond by saying that it sounds too good to be true. But this is actually happening in economically-depressed cities all over America. Of course there are a number of reasons why you might want to think twice before buying any of these homes …
First, it is worth noting that many of the cities where these “free houses” are available were once some of the most prosperous cities in the entire country. In fact, the city of Detroit once had the highest per capita income in the entire nation. But as millions of good jobs have been shipped overseas, these once prosperous communities have degenerated into rotting, decaying hellholes. Now homes that once housed thriving middle class families cannot even be given away. This is happening all over America, and what we are witnessing right now is only just the beginning.
Old and wise energy professor Jean Laherrere shines his light on US shale. His conclusion is the same as ours last year, plus he puts a date on it: the only US shale plays that matter will peak later his year. Combine that with the fact that Shell, Chevron, Exxon and today BP have all come with awful numbers, and you know we’re in for a sh*t storm.
This article addresses just one of the many issues discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!