PBOC’s Efforts At What Cost?

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The Chinese central bank has managed to instill some order in both onshore and offshore RMB markets, but at what cost? The amount of intervention that was induced severely strains only the future at those maturities. Central banks are nothing if not short-termists in the purest sense, so repeating what doesn’t work never factors; all that matters is right now.

In that sense, the PBOC has re-pegged the CNY exchange rate which has had the added effect of generating more placidity in yuan money markets. CNH money rates which had skyrocketed at the outset of the attempt have been brought under control at least at the shortest maturities. Further out, the 3-month CNH HIBOR rate, for instance, remains severely elevated and suggesting the difficulties or limitations facing this kind of PBOC desperation.
ABOOK Jan 2016 Money HIBOR 3MABOOK Jan 2016 Money HIBOR Short

Invoking such large liquidity strides cannot be taken any other way; the PBOC was clearly desperate to have replayed its earlier failure in pegging CNY. The pressures will only build for eruption at some point in the not-enough-distant future. Undoubtedly the upcoming Golden Week holiday was a factor for consideration, as China will again take a break from its prominent Asian “dollar” position. The PBOC is leaving nothing to chance in the short run, therefore also leaving little doubt as to how little confidence remains of liquidity.

The parallel timing of the CNY/US$ break (from “devaluation”) and the opposite reflection in JPY further directs the notion of these straining circumstances. The Asian “dollar” is undoubtedly at the center of all this, which focuses not just attention upon China’s efforts but also why and how they will ultimately be doomed. As noted consistently, China’s great imbalance, the baseline for all that has transpired, is not China’s to control.

ABOOK Jan 2016 Money CNYUSDABOOK Jan 2016 Money JPY

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Red Ponzi Ticking

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

There is something rotten in the state of Denmark. And we are not talking just about the hapless socialist utopia on the Jutland Peninsula——even if it does strip assets from homeless refugees, charge savers 75 basis points for the deposit privilege and allocate nearly 60% of its GDP to the Welfare State and its untoward ministrations.

In fact, the rot is planetary. There is unaccountable, implausible, whacko-world stuff going on everywhere, but the frightful part is that most of it goes unremarked or is viewed as par for the course by the mainstream narrative.

The topic at hand is the looming implosion of China’s Red Ponzi; and, more specifically, the preposterous Wall Street/Washington assumption that it’s just another really big economy that overdid the “growth” thing and is now looking to Beijing’s firm hand to effect a smooth transition. That is, an orderly migration from a manufacturing, export and fixed investment boom-land to a pleasant new regime of shopping, motoring, and mass consumption.

Would that it could. But China is not a $10 trillion growth miracle with transition challenges; it is a quasi-totalitarian nation gone mad digging, building, borrowing, spending and speculating in a magnitude that has no historical parallel.

So doing, It has fashioned itself into an incendiary volcano of unpayable debt and wasteful, crazy-ass overinvestment in everything.  It cannot be slowed, stabilized or transitioned by edicts and new plans from the comrades in Beijing. It is the greatest economic trainwreck in human history barreling toward a bridgeless chasm.

And that proposition makes all the difference in the world. If China goes down hard the global economy cannot avoid a thundering financial and macroeconomic dislocation. And not just because China accounts for 17% of the world’s $80 trillion of GDP or that it has been the planet’s growth engine most of this century. Continue reading

US Economy: On a Knife’s Edge

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Gross Output Remains Under Pressure

We should mention right from the outset that recent data releases – weak as most of them were – are still not confirming an imminent recession with certainty. The situation remains a bit fuzzy: we see a lot of weakness in important data, and considering the overall picture – which includes what is happening globally – we can infer that the likelihood of a significant economic downturn this year is extremely high, but it’s not inevitable. While it is still possible that a recession can be dodged this year, that seems a low probability outcome by now.

 

img_7122-hdrPhoto credit: Darren Ketchum

 

Last week the government has updated the gross output (GO) per industry data, which means we now have the picture until the end of Q3 2015. In terms of GDP, Q3 wasn’t much to write home about either (2% real), and we can see from GO that there has been weakness in quite a few business areas. The parts of the economy that are responsible for the bulk of wealth creation didn’t really do all too well. Our suspicion that the trends observed in the Q2 gross output data would continue has been confirmed – and in all likelihood, Q4 will once again show weakness. Below we compare the y/y change rates of selected gross output data to those of new orders for capital goods and industrial production.

 

1-Gross Output and Ind ProdThe lines ending in Q3 show the gross output data of: all private industries, mining, manufacturing, wholesale trade, retail trade. As you can see, only retail sales managed to show positive growth momentum among these – growth in every other sector (including the combined data) has weakened further, with manufacturing, mining and wholesale trade all in negative territory (note that utilities and construction output, which are not shown above, both grew). The black line depicts the growth rate of new orders for non-defense capital goods, the purple line (which is the most up-to-date series at the moment) shows the y/y rate of change in industrial production – which has likewise turned negative – click to enlarge. Continue reading

Skyscraper Mania Goes Global

Submitted by William Bonner, Chairman – Bonner & Partners

New Skyscrapers Wherever one Looks

Readers may recall our recent discussion of the construction of the Jeddah Tower (see “Soaring to Bankruptcy” for details). This skyscraper is a typical symptom of an artificial boom that has moved past its due date, so to speak. The idea behind the skyscraper index is that in light of the immensity of projects that involve the construction of the tallest building in the world (or one of the tallest), they are only realized once the notion that boom conditions will continue forever has become firmly ingrained. By the time this happens, the boom is usually quite close to giving way to a bust.

 

Central Park TowerCentral Park Tower , a.k.a. the Nordstrom Tower, which is going to be finished in 2019. At a height of 547 meters (1,795 ft.) it will be the tallest building in the United States, as well as in the entire western hemisphere

Image credit: Extell

 

It is quite costly and time-intensive to build such an enormous structure. One needs to keep in mind that the effort involves much more than just the construction phase. Planning, permitting, solving technical and logistical challenges, organizing the necessary funding, etc., all have to be considered as well. The long term nature of such projects also means that they are far more likely to be tackled when interest rates are low – and especially when they are too low, i.e., suppressed below the natural rate by central bank intervention. As we have pointed out in the article on Jeddah, from an analytical perspective real estate can be viewed as akin to capital goods.

In recent years we have noticed that a string of very tall buildings has been erected all over the world. Many of them were even briefly considered the “tallest” at the time they were conceived. There was a noteworthy concentration of such projects in China and in oil-producing nations.

Even Iraq (!) is reportedly planning to build the tallest building in the world in Basra – the 1,152 meter (3,778 ft.) tall “Bride of the Gulf”. This one would even put the Jeddah Tower in the shade. We strongly suspect that the plans were made back when oil was still trading in triple digits. We also suspect that the “Bride” will remain stuck in the conceptual stage for the time being. Continue reading

The Implications of Federal Reserve Accounting in ‘Missing Money’

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Someone emailed me this article published at Yahoo! Finance that purports the Fed’s tightening is going to send stocks soaring, the DJIA mentioned specifically heading toward 25,000. The way in which this thesis was derived is the object of inquiry, starting with the belief that QE4 (QE5 by my reckoning) is forthcoming. This is not due to the Fed realizing its grave economic mistake but because the bond market is supposedly close to implosion.

Thus, more QE will be needed to save the treasury market and indirectly send stocks on a 2013-like odyssey. The foundation for this speculation, however, is what calls for clarification:

In order for this to occur, the Fed would need to reverse its current tightening stance and expand its balance sheet again with more quantitative easing. This would require a tremendous shock because the Fed does not want to lose credibility by reversing monetary policy too soon.
Lamoureux believes this shock will come from a U.S. government bond market implosion, which in turn will stem from the Fed’s second mistake—draining money from the economy too quickly.
Since September 2014, the amount of money that banks park at the Fed, called excess reserves, has dropped by $370 billion.
Lamoureux believes this money has temporarily plugged a hole in the bond market, which is teetering on the precipice of collapse.

So what Mr. Lamoureux claims is that the balance of reserves at the Fed is both “tightening” and “draining” but at the same time being used in the treasury market to “plug a hole” if only temporarily. As with most things about central banks, the math is right but little else is.

It is entirely true that reserves, excess or not no longer matters in any meaningful sense, have declined by about $350 billion since September 2014. The Fed’s H.4.1 statement for September 17, 2014, (the article doesn’t specify which week, so I picked one in the middle) shows total reserves of $2.797 trillion against the January 21, 2016, H.4.1 that declares only $2.455 trillion – a difference of -$343 billion. Is that the Fed tightening? Not remotely.

ABOOK Jan 2016 Money Bank Reserves

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Buy “Physical Gold” Coins and Bars – Bloomberg Interview GoldCore

Submitted by Mark O’Byrne  –  GoldCore

  • Gold: the 3,000 year old “fashion” is back in favour
  • Rising interest rates – when happen – are positive for gold
  • This seen in data, charts – 2003 to 2006 period and 1970s
  • Given risks today – higher allocations of as much as 30% are merited
  • Important to own “physical gold” coins and bars in safest vaults in world
  • Important to own physical due to increasing likelihood of COMEX default

goldcore_bloomberg_January_2016
GoldCore discussed the outlook for gold on “Bloomberg Markets” yesterday with Matt Miller and Mark Barton and the interview can be watched here

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Nikkei Climbs, But Shanghai Extends Fall (CNBC)
• Why China’s Capital Flight Carnage Will Continue (Telegraph)
• A China Bank Contagion Could Blow Up Global Markets (CNBC)
• China Accuses George Soros Of ‘Declaring War’ On Yuan (AFP)
• Head Of China’s Statistics Bureau Investigated For Corruption (AFP)
• Inquiry in China Adds to Doubt Over Reliability of Economic Data (NY Times)
• Cash Is King as Europe Adapts to Negative Interest Rates (BBG)
• Europe Bank Rout Erases $434 Billion In 6 Months (BBG)
• The Market’s Troubling Message (Ashoka Mody)
• EU Botched Billion Euro Bail-Outs During Financial Crisis (Telegraph)
• World’s Biggest Wealth Fund Speaks Out on Missing Liquidity at Banks (BBG)
• Apple Reaches Peak iPhone, So What Now? (MW)
• Apple: ‘Extreme Conditions Unlike Anything We’ve Experienced Before'(BBG)
• AIG To Return $25 Billion After Activist Siege (FT)
• The Black Hole of Deflation Is Swallowing the Entire World (GWB)
• The Future is Blivets (Dmitry Orlov)
• The Agonies of Sensible People (Jim Kunstler)
• Clock Ticks Down On EU Passport Free Travel Dream (AP)
• Danish Parliament Approves Plan To Seize Assets From Refugees (Guardian)
• Belgium Wants Camp for 300,000 Refugees in Athens (DM)