As the chart illustrates, the 7 Day repo rate has been declining rapidly as the PBOC adds liquidity and jawbones, but the Chinese financial system remains stressed. Longer term repo rates remain high, and bad loans have been rising since late 2011. While the cash crunch has abated for now, the Chinese credit bubble is bursting. Look out below.
The Eurozone is mired in a recession with no end in sight, but the mainstream media must point to a light at the end of the tunnel to conform the latest news to its Eurozone Recovery Narrative. Here’s an excerpt:
Many recent economic data releases and surveys have suggested the contraction is easing and may end soon. Figures released Friday showed German retail sales rose in May following three straight months of decline, while French consumer spending also increased.
Italian and French retail sales are both declining, which is unsurprising considering record unemployment rates. The mainstream media has been calling an end to this recession since October and as long as it does not change its tune it will be right someday. Today is not that day.
Greece will never be able to sell all of its state assets at the prices it desires. Similar to many third world countries, Greece does not protect property rights well, and businesses are subject to arbitrary and capricious regulations that hinder productivity. This is a problem, because a hole is opening up in the Greek budget and is being exacerbated by the lack of privatization receipts. The troika privatization projections are highlighted above. While the sums seem small, they loom large in the German elections. Will Merkel make it to September 22 without the Greek situation exploding?
Rates have stabilized for now, but the action will heat up as the summer progresses. When retail investors see how much money they have lost so far in their bond funds, they will continue selling them to avoid more losses leading to the funds liquidating specific positions. While this is occurring, don’t expect government rates to follow. The money from liquidations has to go somewhere.
The Japanese recovery did strengthen giving the mainstream media fodder for its Japanese recovery meme. Placing the PMI an production numbers in context would really add to this story, but that type of analysis would also not support the narrative. As the chart above shows, Japan has been down this road before with rises quickly leading to stagnation and contraction. We will know by year end if Japan’s recovery is self-sustaining, but I have a feeling that this time won’t be different.
U.S. economic data has been mixed recently. Today, the Chicago manufacturing report showed a declining rate of expansion on the way to stagnation while UMich’s Consumer Sentiment increased. Good news and bad news, or is it more like bad news and bad news? The last time the Consumer survey was this high was on the eve of the Great Recession:
The Gold Rout of 2013 continues. The recent high prices have led to increased production and salvage, and finally the supply increases have pushed the price down. This is how every gold bull market ends. The price is now below the price of production, but this fact is of little solace to investors. When a rally ends, prices tend to over-correct to the downside.