Category Archives: Economy and Meltdown

Meanwhile, In The Land Of The Setting Sun… And Exports


Things are going from worst to worsterer in Japan. Somewhat ironically (given our recent post), this update to the state of play awaiting Mr. Abe is not good. With the Senkaku debacle flaring still in the background, we wonder just how much ‘face’ the Japanese are willing to lose as their exports fall 6.5% (for the fifth month in a row) dominated by an 11.6% drop ‘to’ China (which accounted for around 20% of Japanese exports until recently) making it extremely likely the nation is headed for yet another recession. The trade balance missed large to the downside yet again, extending a multi-year trend (and drastically reducing the ‘net’ exports capital buffer), and so (as USDJPY remains ‘strong’ despite REER being well below its 1995 peak) we are to believe yet another JPY1tn Koo-nesian fiscal stimulus will do the trick.

 

The trade balance is crushing the hopes and dreams of any recovery here…and removing that ‘net’ export capital buffer that helped for so long…

 

as exports plunge for the fifth month in a row (which seems like a never-ending story for the last few years)…

 

Crushed by the weight of China’s door slamming shut…

 

as USDJPY ‘strength’ doesn’t help vs JPY REER weakness (thank you Ben…)

 

 

Charts: Bloomberg and CLSA

Where the Puck is Going


Where the Puck is Going

I skate to where the puck is going to be, not where it has been.
Wayne Gretzky

Where the Puck Is Going: Market Shadows Newsletter (Nov. 18 12)

This week:

Death of an Indicator: Bad indicators, dead indicators. Remembering the yield curve.

Market Forces: Monetary and Fiscal Policy

Charting the Universe: Approaching a Low?

The seasonal setup from Thanksgiving has been “up” for the last nine years. I’m expecting a bounce here.

Molson Coors Can Score When the Puck Drops Again

Simply rebounding to [the highs of this year] would bring a total return of almost 20%. That looks quite appealing on a low risk stock, especially in a ZIRP [zero interest rate policy] world where 10-year treasuries now yield less than 1.6%.

Glimpse into Future: Soaking Up the Gravy

Stocks may not be expensive relative to the economic data, but they’re not cheap either. If they should run to reach the 2007 highs from here, a gain of around 10%, they would be approaching a historical extreme, but if industrial production continues to expand at the current pace or faster as QE3 cash filters through the economy, there would be room for stocks to reach new highs.

 

There’s no free lunch however. The cost of the money printing will show up in higher commodity prices which squeeze producers, middlemen, and retailers, and ultimately lead to disastrous unintended counter effects. We’re not there yet. The process of bubbleification may just be starting. But with that will come the unintended consequences of monetary expansion that sow the seeds of chaos. 

Death of an Indicator

Excerpt:

The current yield curve, and the Federal Reserve Bank of Cleveland’s estimated probability of a recession, suggests that the chances for a recession in the near future are low. That is if the yield curve indicator is functioning as it has during the last half a century.

 

 

But we don’t know that the yield curve is still functioning in the same manner it has. The Cleveland Fed cautioned:

Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate that the expected chance of the economy being in a recession next October is 8.2 percent. So although our approach is somewhat pessimistic as regards the level of growth over the next year, it is quite optimistic about the recovery continuing…

 

Of course, it might not be advisable to take these numbers quite so literally, for two reasons. First, this probability is itself subject to error, as is the case with all statistical estimates. Second, other researchers have postulated that the underlying determinants of the yield spread today are materially different from the determinants that generated yield spreads during prior decades. Differences could arise from changes in international capital flows and inflation expectations, for example. The bottom line is that yield curves contain important information for business cycle analysis, but, like other indicators, should be interpreted with caution.”

Mish – who believes we are already in a recession – is completely discounting the continued predictive ability of an inverted yield curve… “Forget about probabilities and statistics and measures of so-called leading indicators (such as the stock market which does not lead), and the yield curve that is useless when zero-bound. Instead, simply focus on data from around the globe, especially new orders.” (Plunging New Orders Suggest Global Recession Has Arrived)

According to Mish: “The yield curve is artificially distorted by Fed policy and cannot invert with the Fed holding short-term rates at zero.”

The economy is not a stock market indicator; the stock market is not an economic indicator

In Leading Economic Indicators, examining five common economic indicators, Mish observed:

Time and time again I hear ‘The stock market acts six months in advance.’ Six months in advance of what? I fail to see how it is acting six months in advance of anything. If one is looking for leading economic indicators, the stock market is surely not one of them.

 

Also note that if one wants a stock market indicator the economy is surely not it. Look at the plunging GDP in comparison to the stock market for recent proof. Look at the homebuilder chart above for recent proof. Look at the historic S&P 500 chart for proof. Seriously, the S&P is a hopeless leading economic indicator and the economy is an equally hopeless stock market indicator…

Read the full newsletter: Market Shadows Newsletter (Nov. 19, 2012)

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Grantham: Biggest Housing Bubble Since 807 A.D. Has Burst


Preface: Many claim that housing is currently experiencing a rebound.  Whether or not that ends up being verified, the housing crash which started in 2007 was so massive that it is historic in its significance.

Top economists and economic agencies have recently verified that bubbles cause huge crashes, and are thus bad for the economy.  See this, this and this.

We’ve previously noted that the housing bubble which burst in 2007  was bigger than the Great Depression … and perhaps bigger than any housing bubble in 700 years:

The question is, given the boom we had between 2001-2007, how bad a bust might we have?

 

Well, in the greatest financial crash of all time – the crash of the 1340s in Italy, which brought on a new dark Age – real estate prices fell by 50 percent by 1349 in Florence when boom became bust.

 

How does that compare to 2001-2007? The price of Southern California homes is already down 41%, Southern California hasn’t fallen as fast as some other areas, and we’re nowhere near the bottom of the market.

 

Moreover, the bubble was not confined to the U.S. There was a worldwide bubble in real estate.

 

***

 

Housing bubbles are now bursting in China, France, Spain, Ireland, the United Kingdom, Eastern Europe, and many other regions.

 

And the bubble in commercial real estate is also bursting world-wide. See this.

Jeremy Grantham just said that our recent bubble was the largest in  1,200 years:

Investors should be wary of a Fed [who] is led by a guy [Bernanke] who couldn’t see a 1-in-1200-year housing bubble!

2007 – when the housing bubble popped – minus 1,200 years brings us to 807 A.D.

To give a sense of how long ago that was, Charlemagne had just  defeated the Saxons – one of the tribes forming the famed Anglo-Saxons – and forcibly converted them to Christianity. England didn’t become a country until hundreds of years later, during the Norman Conquest of 1066 .

But the housing bubble which burst in 2007 was arguably the largest in history … ever.

As we’ve noted:

In “What Goes Up”, I discussed the law of booms and busts. A big boom with easy credit leads to a big bust.

 

***

 

The Economist magazine wrote in 2005 that the worldwide boom in residential real estate prices in this decade was “the biggest bubble in history“. The Economist noted that – at that time – the total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nations.

 

***

 

The bigger the boom, the bigger the bust. Because we have likely just lived through the greatest boom in history, we may see the biggest bust in history. (No wonder the guys who predicted this crisis are gloomy about the future. Is this why the big players are selling everything that’s not nailed down to raise cash?)

 

If true, this is saying something dramatic. Because the bubble in 1340 Italy was so big that its bust helped precipitate a new dark age.

Too bad that the government helped to blow the bubble, and hasn’t done anything meaningful to help homeowners.

We also noted something that is now obvious to all:

The real estate bubble formed the base upon which a series of bubbles in derivatives were built. Specifically, mortgages were packaged in “collateralized debt obligations” (CDOs), which were sold in enormous volumes all over the world. Credit default swaps were then bet against the companies which bought and sold the CDOs.

 

Now, with housing prices crashing, the CDO bubble is crashing, as is the CDS bubble.

 

A series of other derivatives bubbles are also crashing. For example, the “collateralized fund obligations” – sort of like CDOs, but where the assets of a hedge fund are the asset being bet on – are getting creamed as hedge funds are forced to sell off many hundreds of billions in assets to cover margin calls.

 

As everyone knows, the size of the global derivatives bubble was almost 10 times the size of the world economy [Update: It was actually 20 times the world economy]. And many areas of derivatives are still hidden and murky.

 

So the bust of the derivatives bubble could even be bigger than the bust of the housing bubble.

Too bad the government helped to blow the derivatives bubble, and isn’t doing anything to rein in derivatives now.  See this, this, this and this.

Hostess Mediation Fails, Liquidation To Proceed; Furious Laid Off Workers Now Turn On Labor Union


Last week, when discussing the next steps for the company, and specifically the hope that mediation may resolve the epic animosity between management and workers, we stated that “What makes a mediation improbable is that the antagonism between the feuding sides has certainly hit a level of no return: “Several unions also objected to the company’s plans, saying they made “a mockery” of laws protecting collective bargaining agreements in bankruptcy. The Teamsters, which represents 7,900 Hostess workers, said the company’s plan would improperly cut the ability of remaining workers to use sick days and vacation.” Sure enough, moments ago we learned that mediation has now failed and the liquidation may proceed. And since in America nobody understands that proper sequence of events involved in a bankruptcy liquidation, where the valuable parts always end up being acquired by someone, in this case the Twinkie brand and recipe, let the pointless Ebay bidding wars over twinkies continue. As for what really happens next, if indeed Bimbo is prohibited from acquiring the assets in the Stalking Horse auction due to anti-trust limitations, then the buyer will almost certainly be a “financial”, i.e., another PE firm, whose coming means the end of any hopes and dreams of preserving union status at fresh start Hostess, or whatever the new firm will be named.

From the WSJ:

Hostess Brands Inc. said Tuesday night it would proceed with liquidation plans after mediation fails.

Earlier Tuesday, the head of the bakers union whose strike precipitated Hostess liquidation plans didn’t attend a last-ditch mediation session and wasn’t hopeful about its prospects, he said.

“I’m not too optimistic about this mediation,” Frank Hurt, president of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, said when reached earlier Tuesday afternoon in Columbus, Ohio. He said he couldn’t get to New York, where the session was taking place; instead, he said, the union’s secretary-treasurer was attending.

 

The mediation came at a judge’s suggestion after the Twinkie maker said Friday that a week-long strike by the bakers left the company no choice but to seek a bankruptcy judge’s approval for liquidation.

 

The judge, Robert Drain, urged mediation, citing among other things the hope for saving some 18,500 jobs. The company filed for bankruptcy protection for the second time in January.

 

The judge indicated Monday that if mediation wasn’t successful, Hostess could return to court Wednesday to pursue its liquidation plan.

 

Doug Mansky, a Hostess driver in Detroit and a member of the International Brotherhood of Teamsters, was in the process of moving to a cheaper condominium on Tuesday, after his union had agreed to an 8% pay cut that he said would shave $200 a week from his income. After Judge Drain cleared Hostess to impose the same new labor terms on the bakers union, they went on strike.

 

“I hope things work out. I’m going to be 49 and trying to find a job in a market that’s terrible,” Mr. Mansky said.

Sadly, the reality of learning just how bad the labor market truly is, all smoke and mirrors of a recovery aside, will now have to be experienced by not only Mr. Manksy but 18,499 of his fellow co-workers, who may have been duped into hoping by their union that by holding out a hardline stance, they would gain something.

They have now lost everything. And not too unexpectedly, the workers are now turning on the Union!

[S]ome Hostess workers in another union awaiting the
mediation results criticized Mr. Hurt, the 20-year president of the
bakers union, who defended his decisions and actions during the
company’s bankruptcy process.

 

Scott Quenneville, a Hostess truck driver represented by the Teamsters, said he feels his colleagues were misled by Mr. Hurt into believing that a buyer would swoop in for the company. Mr. Hurt on Sunday said he thought there was a good chance a buyer would emerge who would give union members their jobs back.

 

Frank misled a lot of people. He was not going to settle for anything less than closing the company down, because they didn’t want that 8% pay cut,” said Mr. Quenneville. “If you don’t want the job, leave the job. Why ruin 18,000 jobs?”

 

I didn’t mislead anybody on anything,” Mr. Hurt said. He said he didn’t tell workers preparing to strike that a buyer for Hostess was definitely waiting in the wings.

 

Mr. Hurt said, “I don’t want anybody to think that anybody is guaranteeing anyone anything, but we did know that there were people taking a look at this company.”

This would be a truly fantastic drama, if people’s lives were not at stake. And no, not one former Hostess worker will retain their job at the new company: that much is certain.

As we said, if only people had a basic understanding of how bankruptcy truly worked, and what the real state of the economy was, then Hostess’ workers may have had a chance and some amicable comrpomise would have been possible.

Then again, if people in America actually understood economics and simple finance, then the “Ohio outcome“, and many others, would have likely been quite different.

Now we can only hope we were not correct about the ultimate outcome too: namely that the US government will effectively hijack the bankruptcy process, and in doing so “bailout” a junk food maker, just so 18k votes can be preserved at the expense of creditors and making yet another mockery of the bankruptcy process, and property rights in the US.

Then again, this is precisely what the Union was likely hoping for all along, because once the government starts bailing everyone out, just where does it draw the line?

Now The Hard Part Begins: The China Challenge


Authored by Minxin Pei; originally posted at The Diplomat,

Relativity is the key concept in measuring the success of China’s power transition.  By this standard, one has to grudgingly congratulate the Chinese Communist Party for producing its first-ever, nominally at least, complete transfer of power from one top leader to another last week.  The outgoing party chief, Hu Jintao, retired from both his party post and his position as the commander-in-chief, allowing Xi Jinping, now China’s new leader, to claim full authority in one stroke.  Had Hu followed the precedent set by his predecessors, Deng Xiaoping and Jiang Zemin, and decided to stay on for two extra years as the chairman of the party’s central military affairs committee, this would have been a semi-failed transition.

The good news does not stop there.  As expected, the Politburo Standing Committee, the party’s most powerful decision-making body, has been downsized from nine to seven, thus making it easier for Xi to build a coalition in a body often paralyzed by decision-making through consensus.

Perhaps the best news for Xi is that the bar for his success has been set relatively low by the departing administration’s failure to pursue real reforms during the preceding decade.  So even minor initiatives to tackle some of China’s social and economic problems should make Xi look good by comparison.

Judging by his first, albeit brief, public speech, Xi certainly did not disappoint.  His remarks at the ceremony unveiling the new standing committee on November 15 were direct and notable for the lack of tired official slogans and rhetoric.  His confident demeanor strengthened his public image as well.

Unfortunately, that is where the good news ends.  Compared with Hu’s rise to the top a decade ago, Xi certainly has gained more power.  But it is worth pointing out that he will face enormous constraints, at least in the short term, in gaining decisive influence at the top level of the Chinese power hierarchy.

The most immediate obstacle to any prospects of major policy shifts lies at the very top.  The new standing committee has a strong conservative presence.  The perception of the new team is that it is dominated by relatively mediocre  and risk-averse leaders.  Xi may not find many allies who would support an agenda of bold reforms, assuming that Xi has such an agenda in mind (something we honestly do not know).  The line-up of the new committee confirms that the selection was based partly on seniority (all the two-term Politburo members under 68 were promoted), but mainly on the need to maintain a balance of power among various factions and interests.   Such considerations have produced a team that lacks reform credentials or shared policy preferences.  It would be too optimistic or premature to believe that such a delicately balanced body could address China’s problems quickly and decisively.

Xi must also be concerned with the influence of retired leaders, in particular, Jiang Zemin, 86, and Hu Jintao, 70. Jiang proved his enduring political clout by managing to put two to three of his loyalists on the committee.  Hu was less successful in appointing his supporters to the standing committee, but apparently got a good deal for “retiring naked” (quitting all positions).  Of the 15 new Politburo members, at least half are his protégés, including one 49-year-old rising star who will be well-positioned to contend for a spot on the standing committee in five years’ time.  If anything, Hu’s influence will remain considerable in the coming five years.

Because of these political constraints, Xi will have to balance the imperative for him to establish his image as a decisive and different leader with the political necessity of getting along with his colleagues on the standing committee and the retired leaders. The result of this delicate balancing act is likely a cautious start characterized by the adoption of relatively easy policy measures designed mainly to differentiate the new leadership from its immediate predecessor.

One such measure may be a thorough reform of the hukou system (household registration) that denies rural migrants full citizenship rights.   Allowing them to become full urban residents enjoying all the rights and benefits of city dwellers will be both socially just and economically beneficial.   In the past, opposition from large cities in coastal areas and the public security apparatus has blocked the reform.  But today, since more than 200 million migrants have settled in the cities already over the few decades, and improving their status can unleash enormous economic dynamism as well as create an instant constituency for Xi, it is highly likely that Xi will make this issue a top priority.

Another issue that may further enhance Xi’s political capital is the abolition of the much-hated one-child policy Political opposition to this reform is even weaker – one can think of only one interest group, the family-planning commission, that will try to block such a move.  Obviously, one important political consideration is that this bold move will effectively overturn a policy closely associated with Deng Xiaoping.  But on balance, Xi may conclude that this is a risk worth taking.

On the economic front, however, Xi’s room for maneuver is smaller.  While he may continue to expand some promising experiments on financial liberalization, significant reforms that will hurt the state-owned enterprises, local governments, central bureaucracy and families of the elites are certain to encounter fierce opposition.  Xi may choose not to pick a fight he cannot expect to win easily.

Political reform – at least of the kind that will introduce more democracy and civil liberties – is extremely unlikely.   The risks for Xi are simply too high.  The two Politburo members perceived to be reformers – Li Yuanchao and Wang Yang – failed to make it into the standing committee mainly because they are seen as likely champions of political reform.   Xi is obviously aware of what happened to the two top leaders, Hu Yaobang and Zhao Ziyang, who advocated political reform during the 1980s (Both lost their jobs).

Compared with the constraints he faces on the domestic policy front, foreign policy actually may be an area over which Xi will gain control more quickly and decisively.  Given the urgency of the escalating Sino-Japanese tensions over the Senkaku/Diaoyu Islands, Xi will have to act fast to  avoid a foreign policy crisis.  Of course, Xi’s long-term foreign policy objective is stabilizing Beijing’s relations with Washington since the underlying competitive dynamics are driving the two countries further apart.  But this goal will be elusive unless and until he fixes Sino-Japanese ties.

Whether Xi can pull this off is anybody’s guess.  He will have to invest some political capital and take real risks in moderating China’s positions and stopping the now routine patrols of the waters close to the disputed islands (such patrols are designed to contest Japan’s sovereignty claims, but may trigger a tough response from Tokyo that leads to further escalations).  Japan’s political establishment will also have to cooperate by not taking actions that make it impossible for Xi to make symbolic concessions. 

So the bottom line in evaluating China’s new leadership in general, and Xi in particular:  he and his colleagues will have to walk the walk. His predecessors have done enough talking already.