Mish's Global Economic Trend Analysis

China's Fake Export Numbers Under Close Scrutiny
Europe Dumps Global Warming Efforts; Good Idea?
France Unemployment Hits New Record High; Hollande's November Pledge Reviewed
50th Anniversary of War on Poverty Coming Up; Success or Failure?
Deflation Will Return: Europe First, Then US; Global Supply Arbitrage

China's Fake Export Numbers Under Close Scrutiny

Posted: 27 Jan 2014 10:59 PM PST

China's export numbers are so unbelievable that even mainstream media doesn't believe them. Bloomberg has the story correct, but its title could use a bit more punch.

Please consider China Trade Puzzle Revived as Hong Kong Data Diverge

China's trade numbers, distorted by fake exports last year, are set to come under renewed scrutiny after a discrepancy between Hong Kong and Chinese figures for bilateral trade widened to the largest in eight months.

Hong Kong's December imports from China fell 1.9 percent from a year earlier to HK$176 billion ($22.7 billion), the city's statistics department said yesterday. That compares with $38.5 billion in exports to Hong Kong reported earlier this month by China's customs administration, up 2.3 percent, based on data compiled by Bloomberg.

Economists split on how to interpret the latest numbers, which follow reports earlier last year that invoices for fake exports were used to disguise capital inflows, inflating China's trade data before regulators in May cracked down on the practice. Exaggerated overseas shipments would mean that global demand is weaker than China's statistics indicate.

"From the last few months' data, we have seen hints that some Chinese exports are fake and in fact that reflects hot money inflows," said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong.

China's exports to Hong Kong in December exceeded the city's reported imports from the mainland by about 70 percent, the biggest difference since April.

Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said the gap between China's reported increase in exports to Hong Kong and the city's reported decline in imports isn't big enough to raise any red flags when compared to the difference earlier in 2013.

That's because China records exports when goods leave, while Hong Kong waits 14 days after items arrive in port to record them as imports, Shen said.

Round Tripping

Another possible explanation for the discrepancy is "round tripping" of goods that are exported from China to Hong Kong and then back to the mainland, Australia & New Zealand Banking Group Ltd. said in a report yesterday.

"The round-tripping trade has become an avenue to fuel China's capital inflows," as the current account may have been "improperly used as an alternative way of liquidity injection," economists Liu Li-Gang and Raymond Yeung wrote. The gap in interest rates fuels the practice and policy makers in China and Hong Kong "need to closely watch the potential risks such activities present to the financial system."

Place your bets. But I suggest no data from China is likely to be very reliable, especially export and GDP numbers.

Moreover, if export numbers are inflated, then GDP numbers are inflated by definition.

Of course, GDP is already overinflated for two other reasons:

GDP is not adjusted for various shadow banking schemes and other malinvestments that will eventually be written off.
GDP is not adjusted for massive amounts of air and water pollution that will at some point have to be cleaned up.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Europe Dumps Global Warming Efforts; Good Idea?

Posted: 27 Jan 2014 06:33 PM PST

Regarding the religious debate over global warming, I am pleased to report Green Fade-Out: Europe to Ditch Climate Protection Goals.

The EU's reputation as a model of environmental responsibility may soon be history. The European Commission wants to forgo ambitious climate protection goals and pave the way for fracking -- jeopardizing Germany's touted energy revolution in the process.

The climate between Brussels and Berlin is polluted, something European Commission officials attribute, among other things, to the "reckless" way German Chancellor Angela Merkel blocked stricter exhaust emissions during her re-election campaign to placate domestic automotive manufacturers like Daimler and BMW. This kind of blatant self-interest, officials complained at the time, is poisoning the climate.

At the request of Commission President José Manuel Barroso, EU member states are no longer to receive specific guidelines for the development of renewable energy. The stated aim of increasing the share of green energy across the EU to up to 27 percent will hold. But how seriously countries tackle this project will no longer be regulated within the plan. As of 2020 at the latest -- when the current commitment to further increase the share of green energy expires -- climate protection in the EU will apparently be pursued on a voluntary basis.

Global Warming Hysteria

I am certainly not against improving the quality of the air we breathe.

Without a doubt, China needs a massive breath of fresh air and a flood of unpolluted water as well. So do emerging market countries in general.

Rather, I am against carbon trading schemes, taxpayer funding of green energy, and other silliness based on global warming hysteria.

In contrast to what the global warming advocates have predicted, a UN report shows the Earth has cooled for 15 years.
In spite of hysteria over the melting of ice caps that theoretically would put the entire state of Florida underwater, Antarctic ice has been growing for decades, reaching a 35-year high in 2013.
Humorously, a research ship attempting to prove global warming got trapped in unusually thick ice this January and had to be rescued by icebreakers.

Does any of that matter? Realistically, not one bit. More importantly, it does not matter one bit if the earth has been warming for the previous 100 years.

The simple facts of the matter are as follows:

The earth has gone through periods of cooling and warming that have lasted tens of thousands of years.
Random fluctuations in nature, lasting decades or longer happen all the time.
It is preposterous to make any kind of realistic assessment regarding the last 100 years or even the last 1000 years.
Even if it was possible to make a realistic assessment as to what is happening and why, carbon trading schemes and taxpayer subsidies are a ridiculous way to solve the problem.

Gratefully, Europe appears to be abandoning the mass hysteria. It's probably the only smart thing European Commission president José Manuel Barroso has ever done while in that role.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

France Unemployment Hits New Record High; Hollande's November Pledge Reviewed

Posted: 27 Jan 2014 02:40 PM PST

In November, French president Francois Hollande announced he had met his electoral pledge to halt the rise in joblessness by the end of 2013.

No one with any economic sense believed it.

Today in the face of a new record high unemployment rate, Hollande says unemployment has "stabilised".

No one with any economic sense believes his statements today either.

Please consider France Unemployment Hits New Record High.

France revealed on Monday tha the number of registered jobless rose to a record 3.3 million in December, belying President Francois Hollande's pledge to reverse the trend by the end of last year.

The number of job-seekers rose by 10,200, the labour ministry said. If those holding part-time employment were taken into account the number of unemployed rose to 4.89 million, another record.

Hollande, a Socialist who is under fierce pressure to tackle unemployment and with polls showing his approval ratings the lowest of any president in modern French history, claimed in November he had met his electoral pledge to halt the rise in joblessness by the end of 2013.

Despite the bleak figures, Hollande - who is currently in Turkey - said that unemployment had "stabilised" but added that "this is not enough."

Stabilization?

December unemployment rose 0.3 percentage points compared to November
In the past year, unemployment rose 5.7 percentage points
By what obscure definition does that performance constitute stabilization?

The average monthly rise in unemployment is .475 percentage points. Thus, it's a relative success for unemployment to rise only 0.3 percentage points. But relative success and stabilization are not the same thing, except of course in political fantasyland.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

50th Anniversary of War on Poverty Coming Up; Success or Failure?

Posted: 27 Jan 2014 11:26 AM PST

Before you can assess the success or failure of a program you must first understand the mission. Then, with the objectives of the mission in mind, one can measure success or failure.

If you set the bar low enough or modify the mission, then anything can look like a success. Conversely, everything fails if standards are sufficiently high.

Thomas Sowell discusses those ideas, in relation to the war on poverty, in Fact-Free Liberals.

Since this year will mark the 50th anniversary of the "war on poverty," we can expect many comments and commemorations of this landmark legislation in the development of the American welfare state.

The actual signing of the "war on poverty" legislation took place in August 1964, so the 50th anniversary is some months away. But there have already been statements in the media and in politics proclaiming that this vast and costly array of anti-poverty programs "worked."

The real question is: What did the "war on poverty" set out to do -- and how well did it do it, if at all?

Both President John F. Kennedy, who launched the proposal for a "war on poverty" and his successor, Lyndon B. Johnson, who guided the legislation through Congress and then signed it into law, were very explicit as to what the "war on poverty" was intended to accomplish.

President Kennedy said, "We must find ways of returning far more of our dependent people to independence."

The same theme was repeated endlessly by President Johnson. The purpose of the "war on poverty," he said, was to make "taxpayers out of taxeaters." Its slogan was "Give a hand up, not a handout." When Lyndon Johnson signed the landmark legislation into law, he declared: "The days of the dole in our country are numbered."

Now, 50 years and trillions of dollars later, it is painfully clear that there is more dependency than ever.

Ironically, dependency on government to raise people above the poverty line had been going down for years before the "war on poverty" began. The hard facts showed that the number of people who lived below the official poverty line had been declining since 1960, and was only half of what it had been in 1950.

On the more fundamental question of dependency, the facts were even clearer. The proportion of people whose earnings put them below the poverty level -- without counting government benefits -- declined by about one-third from 1950 to 1965.

All this was happening before the "war on poverty" went into effect -- and all these trends reversed after it went into effect.

By any reasonable measurement of war on poverty mission statements made by presidents Kennedy and Johnson, the war on poverty was a miserable failure.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Deflation Will Return: Europe First, Then US; Global Supply Arbitrage

Posted: 27 Jan 2014 03:09 AM PST

In an email update last week, Saxo Bank chief economist Steen Jakobsen commented "Europe has a more than 50:50 chance of deflation, while the US is 25:75 against."

Steen is talking about a general decline in prices of goods and services, which is also how central bankers use the term deflation. For now, let's use that definition. I will tie things back to money and credit (my preferred way of discussing inflation and deflation) a bit later.

In contrast to Steen, I believe deflation is near-certain in Europe, and strongly odds on in the U.S.

Global Supply Arbitrage

A simple statement by economist Andy Xie is what got me thinking about the prospects of deflation once again: Demand is local, supply is global.

Here is the complete context as noted in Keynes Is Dead, Abenomics Fizzles, US Fails to Reach Escape Velocity, Stimulus Fatigue

Keynes Is Dead

I have argued for many years that this round of globalization has fundamentally changed how an economy works, even for a large one like the United States. While demand is and always has been local, the supply side has become genuinely global. Both manufacturing blue-collar jobs and most white-collar jobs have become global. Today's information technology allows a multinational company to position research, marketing, finance and managerial jobs to anywhere. Hence, when a country stimulates demand, it's met by supply from anywhere.

Supply From Anywhere

With supply arbitrage in mind, please consider Invasion of Spanish Builders Angers France Struggling to Compete.

The earth movers digging out a sandy pit in the beach town of Biarritz could be any construction site in France. Except the builder of the 300 homes and its workers are Spanish. In the neighboring town of Anglet, a Spanish company built the concert hall inaugurated this month. A kilometer up the road, in Bayonne, a Spanish company is building a 15-lodging apartment block.

And that's just in a small corner of southwestern France.

The losing French bidders are crying foul, saying the Spanish pay lower wages and cut corners on regulations. The Spanish, fleeing a construction slump and an unemployment rate of 26 percent at home, say they're just using European Union rules allowing free movement of businesses and workers.

"We thought for a long time we were in an industry that couldn't be shifted offshore," said Didier Ridoret, president of the French Constructors' Federation, or FFB. "Instead, the reverse happened: the offshore came to us."

With the best French bid in Anglet priced 40 percent higher than the winning offer, reversing the trend won't be easy.

French builders say a majority of homes in border regions are now being built by Spaniards, Portuguese and Italians.

"These contracts are often awarded solely on the basis of price," said Patrick La Carrere, head of the builders' federation in southwest France. "The Spanish have much lower charges so they can always undercut us."

For companies hiring Spanish builders, the choice is clear. The 2 million-euro contract for the Anglet concert hall was awarded to Altuna y Uria SA, based in the Basque town of Azpeitia, after its bid was 800,000 euros less than the best French offer, said Jerome Poties, head of culture for the town.

According to accounting firm KPMG, Spanish companies pay 30 percent of a worker's salary in social security contributions, and the employee pays 6.35 percent. In France, companies can pay as much as 45 percent and labor another 22 percent.

It's not just lower charges that help Spanish firms, said Maxime Alimi, an economist at Axa Investment Managers in Paris.

"There have been reforms in Spain that have made labor more flexible," Alimi said. "In France, salaries are extremely rigid. It's a tendency that's not likely to change."

"The Offshore Came To Us"

The offshore came to France. And the implications are enormous.

In Europe, with free movement of citizens, supply of labor could theoretically come from anywhere. In practice it didn't, at least on a large scale. But that is starting to change, and the repercussions will be huge.

Worst Ahead for France

Spain is still in the state of economic depression, but the worst is arguably behind. For France and Italy, the worst suffering is clearly ahead. Both countries are in huge need of work rule reforms and pension reforms. Public sector spending must decline. Wages and prices are going to have to decline for France to be competitive.

One way or another, it's going to happen. Even in Germany, the harmonized CPI is barely positive, with the most recent reading at 1.219%.

What happens if President Hollande lives up to his promises to make France more competitive and to reduce the size of the public sector?

Not many believe he will do that, but it really won't matter. The offshore came to France.

Currency Crisis

A second deflationary factor in Europe is the emerging market currency crisis. Foreign bank exposure to Turkey is $350 billion, and Greece is particularly exposed. For details, please see Start of a Global Currency Crisis?

Stress Tests

A third deflationary factor in Europe is the pending stress tests. Although the ECB Watered Down 2014 Stress Tests Second Time, some banks are still likely to have capital shortfalls.

Increased lending? Forget about it.

Recession in Germany and France

In December, France's statistics body, the INSEE, said France would avoid recession. I did not believe it then, and I sure don't now given Eurozone PMI Strengthens, Except France.

It's going to be very difficult for Germany to avoid recession when France slides back into one.

Europe First, Then U.S.

In the U.S., the Fed and others way overestimate the robustness of the jobs market. The discrepancy between the household survey and the establishment survey is 65,000 jobs a month.

For details, please see Employment vs. Jobs Discrepancy based on December 2013 Data, released in January.

Retail Sales Cost-Cutting, Competition, and Cannibalization

Numerous retailers are cutting employees. Wal-Mart, J.C. Penney, Macy's, Target, Aéropostale, and numerous other retailers have announced cutbacks as noted in Tsunami of Retail Store Closings and Downsizings Coming; Expect Layoffs and Shorter Hours.

Notably, Sam's Club CEO Rosalind Brewer announced a 2% Reduction in Sam's Club Employees to thin middle-manager ranks. Where are those managers going to get another job?

In "Retail Sales Cannibalization" I noted

"Brewer aims to better compete with brick-and-mortar rival Costco as well as to take on online membership clubs like Amazon Prime service. She seeks to double revenue and turn it into a $100 billion business, roughly the size of Costco."

Is doubling revenue remotely possible? If so how?

The only way it is possible is via reducing prices and costs to the bare bone and taking customers away from Amazon, Macy's, J.C. Penny and its own parent company, Wal-Mart.

The deflationary repercussions are enormous.

The China Factor

China is slowing. This puts pressure on commodities which in turn puts pressure on producer prices, then final prices.

A 3 billion-yuan ($496 million) Chinese trust product is on the verge of collapse. $496 million is a tiny amount, but it's also a sliver of the problem.

Bloomberg reports China Trust Products Gone Awry Evoke Soros Crisis Echoes

China's $4.8 trillion in shadow-banking debt, arranged by trusts and fund managers with less transparency than commercial-bank loans, was equivalent to as much as 55 percent of the nation's 2012 economic output at the end of that year, according to Moody's latest estimate.

Goldman estimates the 2 trillion yuan in lending by trusts last year accounted for 10 percent of financing in the economy and a removal of credit flows from trusts would knock 0.8 of a percentage point off the nation's growth rate. Gross domestic product will expand 7.45 percent this year, the slowest since 1990, a Bloomberg survey of economists signals.

The first default of a trust product in at least a decade would shake investors' faith in their implicit guarantees and spur outflows that may trigger a "credit crunch," according to David Cui, China strategist at Bank of America Merrill Lynch in Hong Kong. The government and state banks may bail out a significant portion of bad debt "to prevent a financial crisis," he said. Guangdong International Trust & Investment Corp. failed to pay Yankee notes in 1998, the nation's first default since the People's Republic of China's founding in 1949.

A credit crunch in China will not be good for global growth, and that is on top of China's efforts to ease slowly.

For further discussion, please consider ZeroHedge's report China's First Default Is Coming: Here's What To Expect.

Equity and Bond Bubbles

The Fed (central bankers in general), once again spawned enormous asset bubbles in equities, corporate bonds, and housing.

For discussion, please see Bubblicious Questions: What Causes Economic Bubbles? When Do Bubbles Burst? Can the Fed Prevent Bubbles?

The popping of bubbles is inherently deflationary.

Housing Bubble Returns

Even though household formation by millennials is at a record low percentage, home sales are at modest levels thanks to investor demand in the form of all-cash buying: All-Cash Home Sales Hit Record 42% of Sales.

CNBC reports All-cash offers crushing first-time homebuyers

Insatiable demand from hedge funds, private equity investors and foreign buyers, all armed with ready cash, are elbowing first-time buyers out of the housing market.

First-time buyers tend to purchase lower-priced homes, but all-cash investors have cornered the market on those, leaving little behind. All-cash purchases accounted for 42.1 percent of all U.S. residential sales in December, up from 38.1 percent in November, and up from 18.0 percent in December 2012, according to a new report from RealtyTrac.

The equity, corporate bond, and home bubbles are poised to burst. When they do, demand for goods and services of all kinds will decline. In turn, prices will drop.

Subprime Car Loans

Automakers have been relatively happy lately. Unfortunately, Subprime Car Loans are the driving force.

As the fifth anniversary of the Federal Reserve's policy of keeping interest rates near zero approaches, the market for subprime borrowing is again becoming frothy, this time in the car business instead of housing. U.S. auto sales, on pace for the best year since 2007, are increasingly being fueled by borrowers with spotty credit. They accounted for more than 27 percent of loans for new vehicles in the first half of the year, the highest proportion since Experian Automotive began tracking the data in 2007. That compares with 25 percent last year and 18 percent in 2009, as lenders pulled back during the recession. "Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery," Adam Jonas, an analyst with Morgan Stanley, wrote in an October note to investors.

The money for subprime loans comes from yield-starved investors who buy bonds backed by them. Issuance of such bonds, which pay higher rates than U.S. government debt, soared to $17.2 billion this year, more than double the amount sold during the same period in 2010, but still below the peak of about $20 billion in 2005, according to Harris Trifon, an analyst at Deutsche Bank.

Technology, Education, Medical Expenses

Competition in electronics, computers, and even computer storage is intense. Falling prices are the norm.

Two days ago Microsoft announced "new worldwide prices" to match Amazon Web Services prices. "Effective March 13, customers will see lower prices for Block Blobs Storage and Disks/Page Blobs Storage matching AWS' prices. We're also making the new prices effective worldwide which means that Azure storage will be less expensive than AWS in many regions."

In general, price deflation reigns in areas where that has been little government interference in the free market.

Two areas of highest price inflation have been healthcare and education. However, online eduction offerings are starting to eat away at what used to be a rising-cost, brick-and-mortar college experience.

The number and quality of accredited online schools and colleges is growing, and costs have come down. On September 3, I wrote Future of Education is At Hand: Online, Accredited, Affordable, Useful

Healthcare Costs Slow

At long last, healthcare costs have started to slow. NPR reports Health Care Costs Grew More Slowly Than The Economy In 2012

Obamacare had nothing to do with the trend even though the Whitehouse tried to take credit, and even though we are talking about 2012, before the exchanges were operable.

Moreover, actuaries suggest the Affordable Care Act likely produced a small overall increase in spending.

Some cite lingering effects of the recession for slowing costs. I suggest it's nothing more than "what can't go on, won't".

Deflation in Terms of Credit

Above I talked about reasons why prices are likely to decline. But what about credit?

Subprime loans are likely to blow up once again. Demand for business loans will plunge. Writeoffs of all kinds will increase. Asset prices including stocks, corporate bonds, and houses will all take a hit.

These are all symptoms of deflation in a practical sense.

What about money supply?

I have little doubt the Fed (central bankers in general) will step on the money supply spigot in response to another slowdown. But credit dwarfs money supply.

Once again, those who view inflation and deflation in the myopic eyes of money supply alone will come to the wrong conclusions about prices of goods, services and assets, just as they did in 2008 when they thought hyperinflation was just around the corner.

Those who understand credit and credit market to market will get the picture right. I repeat my claim that I made in 2007. The US will go in and out of deflation over the course of a number of years.

Deflation is once again nearly at hand, but Europe will be first.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Home Refinance Calculator

Monday, January 27, 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

No comments:

Post a Comment