Is China About To Drop A Devaluation Bomb?

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Though she had no intention of being funny, we laughed out loud, as undoubtedly many did with us, when incumbent and wannabe IMF head Christine Lagarde said last week in Davos that China has a communication issue. Of course, Lagarde knows full well that Beijing has much bigger problems than communication ‘with the market’. Or, to put it differently, if Xi and Li et al would ‘improve’ their communication by telling the truth about their economy, nobody would be talking about communication anymore.

Mixed signals from China, which is attempting to shift its economy away from exports and investment to a consumer-driven model, have deepened concerns about the outlook for world growth, she said. Uncertainty is “something that markets do not like”, Ms Lagarde told a panel of business leaders and economic regulators in the snow-blanketed Swiss ski resort. Investors have struggled with “not knowing exactly what the policy is, not knowing exactly against what the renminbi is going to be valued”, she said, referring to China’s currency. “I think better and more communication will certainly serve that transition better.”

The world’s second-largest economy this week announced its 2015 GDP growth as 6.9%, its slowest in a quarter of a century. The figure cast a shadow over the summit, where IHS chief economist Nariman Behravesh told AFP that Chinese policymakers had “fumbled” and had “added to the uncertainty and the volatility by their behaviour”. Mr Fang Xinghai, the vice-chairman of China’s securities regulator, said at the same panel that “in terms of communication, we should do a better job”. “We have to be patient because our system is not structured in a way that is able to communicate seamlessly with the market,” he added.

The real issue is what people would think if Beijing announced a more realistic 2% or less GDP growth number. The thought alone scares Lagarde as much as anyone, including the Politburo. The sole option seems to be to keep lying as long as you can get away with it. But how and where the yuan will be valued by China itself has become entirely inconsequential compared to how markets value the currency.

The PBoC spent a fortune trying to straighten the offshore and onshore yuan(s), only to see the two diverge sharply again, as Shanghai stocks posted the biggest loss on Tuesday, at 6.4%, since the ‘unfortunate’ circuit breaker incident. That puts additional pressure on the Hong Kong dollar peg, and ultimately on the mainland China peg to whatever it is they’re trying to peg to.

Beijing might solve some of these problems by devaluing the yuan by 30%, or even 50%, but it would invite a large amount of other problems in the door if it did. Like a full-blown currency war. Still, it’s just a matter of time till Xi and Li either do it voluntarily or are forced to by ‘the market’. Continue reading

Surprises in store

Submitted by Alasdair Macleod –

The month of January has been a wake-up call for complacent equity investors.

From the peaks of last year stock indices in the major markets have fallen 10-20%, give or take. On their own, these falls could be read as healthy corrections in an ongoing bull market, and doubtless there are investors hanging on to their investments in the hope that this is true.

The conditions that have led to the fall in equities are tied up in the realization that global economic activity has contracted sharply. This is now reflected in the performance of medium and long-dated US Treasury bonds, where yields have declined, despite a rise in the Fed Funds Rate. The problem equity markets face is not just a reaction to growing evidence of recession, it is that the normal Fed solution, lower interest rates, is exhausted. The Fed’s put option is now being questioned.

Far from this being an equity correction in the early stages of a credit cycle, which is what the small step towards normalization of US interest rates would have had us believe, the evidence points to a developing debt crisis, whose future course we can now tentatively map, though there are important differences to observe compared with a normal credit cycle.

In a normal credit cycle, bank credit stimulated by artificially low interest rates leads to rising consumer prices and rising bond yields. The recovery in nominal GDP growth supports equity prices, which will have already anticipated recovery, and benefited from the lower interest rates set earlier by the central bank. Eventually the equity bull market starts to lose momentum, when it becomes apparent that monetary policy favours tightening. Interest rates are then increased by the central bank to the point where demand for money is curtailed and the economy stops growing due to debt liquidation.

The dynamic that is missing from this simplistic description of an orthodox credit cycle is the level of outstanding debt. The higher it is, the less of a rise in interest rates is required to trigger a downturn in economic activity. So over a long period of increasing accumulations of outstanding debt, the levels of interest rate peaks on successive credit cycles will decline. This is clearly evident in the chart below of the yield on 13-week US Treasury bills.

Chart 1 28012016

The pecked line shows these declining peaks, and that a short-term interest rate of less than 3% today would now appear to be enough to trigger a downturn. With such a small margin for error, it is clear that any increase in the yield spread between this, the highest quality debt, and corporate debt yields could trigger a cyclical debt liquidation. Bear in mind that this credit cycle has seen an acceleration of corporate debt issuance, in order to enhance earnings to stockholders without requiring an underlying improvement in operating profits. The result of this financial engineering has been to increase the growth rate of corporate debt and significantly reduce the interest-rate level that will result in widespread corporate debt defaults. Continue reading

Durable Goods Confirm Again The Slope

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Durable goods orders and shipments declined much worse in December than November, ending any hope that November’s variation was anything other than simply that. Across-the-board, capital goods as well as durable goods, the numbers year-over-year were nearly flat for November, thus suggesting just how bad 2015 was overall when slightly negative seems like a huge improvement. So where capital goods orders had been -7.15% in September, but -1.8% and then -0.8% in October and November, respectively, December thumped everything back to recessionary reality; -7.69%. In durable goods orders (ex trans), what was -5.42% in September and -4.14% in October briefly turned to -0.91% in November before back down to -3.09% in December.

What is more troubling is that shipments though now persistently contracting, too, are doing so still at a noticeably lesser pace than orders; the 6-month average for capital goods orders is -4.41% vs. -1.75% for shipments. Forward-looking, then, this suggests only more cuts in production and activity to come.

ABOOK Jan 2016 Durable Goods NSA Orders

The longer this contraction goes, the more it looks like slow recession even without any widespread or large-scale cutbacks as yet. Even in energy and oil production, the full fury of the oil crash is nowhere to be found; meaning it can only be lurking ahead. If durable goods already suggest recession tendencies without all that, it focuses attention on what the downside might be with all that. In other words, more still the adjustment phase than yet the cutback phase.

ABOOK Jan 2016 Durable Goods NSA Cap Goods

In seasonally-adjusted terms, durable goods fell a rather significant 1.2% month-over-month, the worst decline since February and confirming the negative interpretations for December. With seasonally-adjusted figures leaving little doubt as to the economic hole, too, we actually gain a better sense of where the economy is at this point. That includes the observation that this recovery never was anything close to that, as durable goods orders in December 2015 were equivalent with not just November 2011 but also March 2006! Almost ten years later and durable goods remain the same level? There is no way that can be anything other than structurally rotten economic support. Continue reading

Gold and Silver Manipulation: Can It Be Verified?

Submitted by Mark O’Byrne  –  GoldCore

Dr Brian Lucey, Dr Jonathan Batten and Dr Maurice Peat have just published some interesting research looking at the thorny issue of whether there is manipulation of gold and silver prices.

In their paper “Gold and Silver Manipulation: What Can Be Empirically Verified?”, they examine the issue of “gold and silver price manipulation, in particular price suppression.”


Source: Gold and Silver Manipulation: What Can Be Empirically Verified? – SSRN

Their research, to be found on the Social Science Research Network (SSRN) website, is not conclusive:

“Do these findings clearly support the notion of price suppression? No. They are at best suggestive,” said authors, Brian Lucey of Trinity College in Dublin, Jonathan Battena of Monash University in Australia, and Maurice Peat of the University of Sydney Business School.

The study highlights contract expiration dates as the likely time for price manipulation or suppression. The researchers said they noticed large spikes in returns around the last three days of each month, which is typically when futures and options contracts expire.

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Nikkei Ends Up After Roller-Coaster Ride On BOJ’s Rate Cut (CNBC)
• US Durable Goods Orders Tumbled 5.1% in December (WSJ)
• Amazon Shares Plunge 13% As Profit Misses Estimates (Reuters)
• The Shipping News Says the World Economy Is Toast (BBG)
• Red Ponzi Ticking (David Stockman)
• China’s Debt-To-GDP Rises To A Gargantuan 346% (ZH)
• The $29 Trillion Corporate Debt Hangover That Could Spark a Recession (BBG)
• Capital Flight Is The Evil Twin Brother Of Currency War (MW)
• Hundreds of Billions of Dollars Have Fled China. Now What? (WSJ)
• China’s January Outflows Soar To Second Highest Ever (ZH)
• Cracks In America’s Economy Are Growing (CNN)
• How Italy’s Bad Loans Built Up (FT)
• Brexit Vote To Turn UK Into ‘Safe Haven’ Triggering EU Disintegration (Tel.)
• Germany Tightens Refugee Policy, Finland Joins Sweden In Deportations (Guar.)
• Mass Expulsions Ahead For Europe As Refugee Crisis Grows (AP)
• Why Europe’s Refugee Crisis May Be Getting Worse (BBG)
• Twelve Refugees Drown As Boat Sinks Off Greek Island (Reuters)
• 24 Iraqi Kurdish Refugees Drown Off Greek Island (NY Times)
• Italy Navy Recovers Six Bodies, Rescues 209 From Migrant Boats (Reuters)