Mish's Global Economic Trend Analysis |
- Yuan Movements Highlight China's Attempt to Halt 10th Month of Export Contraction; Major Currency War Coming Up?
- More Currency Intervention Madness: Sweden Draws Line in Sand with Euro
- Core Capital Spending Down 10 Consecutive Months; Soft Rebound in 2016?
Posted: 03 Jan 2016 08:42 PM PST Chinese manufacturers see further deterioration in business conditions, down 10 consecutive months as noted in the latest Caixin China General Manufacturing PMI release. Operating conditions faced by Chinese goods producers continued to deteriorate in December.China Manufacturing PMI Chinese manufacturing has spent far more time in contraction than expansion since mid-2011. Yuan Devaluation Continues China is not exactly pleased to see manufacturers struggle and decided to do something about that last August. In a surprise August move, China Joins Currency War With Surprise Devaluation, Biggest One-Day Move on Record. Back in March, Chinese Premier Li Keqiang told the Financial Times: "We don't want to see further devaluation of the Chinese currency, because we can't rely on devaluing our own currency to boost exports." That lie bit the dust in August. Not to worry, at the time of the devaluation, China said it was a one-time move. Yuan-US Dollar Weekly Chart Somehow that does not have the look and feel of a one-time move. But let's put things in proper perspective. Yuan-US Dollar Monthly Chart From August 2005 the yuan rallied from 8.09 per US dollar to 6.05 per US dollar in November of 2013. That's a yuan strengthening of just over 25%. Since November of 2013, the yuan declined to 6.49 per US dollar. That's a weakening of about 6.8%. Nonetheless, that move represents quite a reversal for hedge funds and others who believed the Yuan would continue to rally vs. the dollar. More fundamentally, the reversal means China has joined the beggar-thy-neighbor approach of weakening a currency hoping to gain or at least stabilize exports. Yuan weakening may also ignite protectionism in Congress. Donald Trump is campaigning on that issue right now. Major Currency War Coming Up? Japan, China, the ECB, Sweden, Brazil, and Switzerland have all been involved with direct or indirect attempts to weaken their currencies. Realistically, it's safe to include the US in that list when the Fed was first country outside of Japan to slash rates to zero. Mathematically, it's impossible for every country to weaken its currency vs. every other currency. That basic fact hasn't stopped a growing list of countries from trying. With the end of QE coupled with rate hikes, the US is no longer in the debasement by force camp, but if the US economy weakens, the Fed is likely to do anything. A huge currency crisis of some nature is undoubtedly coming up. The timing of the crisis and where it starts are both unknown. Mike "Mish" Shedlock |
More Currency Intervention Madness: Sweden Draws Line in Sand with Euro Posted: 03 Jan 2016 10:11 AM PST In an irrational attempt to sponsor inflation, the Swedish central bank, Riksbank, slashed interest rates to -0.35% and conducted several rounds of QE. Those misguided efforts failed to produce the desired 2% rate inflation, so the central bank now threatens currency intervention while drawing a line in the sand with the valuation of the Swedish Krona vs. the Euro. Bloomberg reports Sweden Seen Closer to Krona Intervention to Tame Exchange Rate. Some of Scandinavia's biggest banks are warning investors not to underestimate the risk that the central bank is preparing to intervene in the currency market.Krona vs. Euro Monthly Since February 2009 the Krona strengthened from a high of 11.788 per Euro to 9.1725 to the Euro. That's an increase of 22%. Swedish shoppers are no doubt pleased to get more for their money but the central bank isn't pleased at all. Why the panic? The Krona is right where it was between 2004 and 2008 before it weakened dramatically. Was 2009-2010 Nirvana for Sweden following that weakening? Failure to Learn Brazil begged for inflation, got it in spades and now is very unhappy. Japan tried to hit an inflation target of 2% for decades and failed. In the process, Japan accumulated the highest debt-to-GDP ratio of any advanced country. Switzerland instituted a currency peg and unleashed massive volatility when it was forced to abandon the peg. Why does the Riksbank think it will succeed when nearly every currency intervention in history has failed? The answer is simple. Central bankers are trained, arrogant fools. They believe in all kinds of things the market has proven does not work. Challenge to Keynesians The simple fact of the matter is "Inflation Benefits the Wealthy" (At the Expense of Everyone Else) . Those who disagree can respond to my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit" Mike "Mish" Shedlock |
Core Capital Spending Down 10 Consecutive Months; Soft Rebound in 2016? Posted: 03 Jan 2016 06:28 AM PST Core Capital Spending Down Every Month Since January Year-over-year core capital spending by manufacturers has been in negative territory for the last 10 months. Core capital spending is defined as nondefense capital goods, excluding aircraft. The current year-over-year decline is about 1.78%. Part of the decline is due to the oil industry collapse. Another part is due to corporations deciding to invest in share buybacks rather than their actual businesses. Core Capital Spending Since 1994 Big declines in core capital spending occurred in the last two elections, but this dip does not yet measure up. Signs of a Soft Rebound? The Wall Street Journal discusses the 2016 forecast in Will Business Spending and Profits Rebound This Year? Unconvincing Forecast The text of the article does not sound as convincing. Here are a few snips. The Federal Reserve had enough confidence in the economic recovery to raise interest rates in December, but it remains unclear whether global growth will be buoyant enough to reverse weak business investment."This Recovery Still Stinks" That sentence corresponds with my take. However, the Journal notes a December tax bill makes permanent the research-and-development tax credit and faster capital-equipment write-offs for small businesses and a highway bill provides $305 billion of federal funding for roads and other transportation projects over five years. Chad Moutray, chief economist of the National Association of Manufacturers, had this to say: "The tax legislation eliminates annual uncertainty over whether these incentives will be renewed. You can start planning for what you're going to be investing in 2016 and 2017, and that's huge." Backwards? It seems to me Moutray has things backwards. Any uncertainty over whether incentives would be removed should have pushed demand forward, not backwards. If companies thought tax credits would expire, they would have had a tendency to spend in 2015, not 2016. Is Moutray is just another cheerleader like we see at the National Association of Realtors? Yet, the Journal quotes Robert Sires, CEO and owner of Bay State Cable Ties LLC, a Crestview, Florida maker of nylon cable who said "I delayed some purchases, not knowing what would happen" with the tax situation. That statement would make perfect sense if we were talking about new credits for 2106, not extensions to credits expiring in 2016. Banana Peels Sires next comment, and also the end of the Wall Street Journal article gets back on track: "Still, customers have been cautious recently, placing smaller orders. Everybody feels like they're standing on a banana peel," said Sires. All in all, the Journal seems rather unconvinced about the "Soft Rebound" thesis, and I am even more skeptical. Mike "Mish" Shedlock |
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