One of the problems with China is that the country’s leaders believe that the economy will diligently obey their plans for it. China began cracking down on evaders of capital controls, which created a drop in liquidity. The PBOC did not initially respond to central government’s initiative causing a spike in overnight lending rates that sent reverberations throughout world markets. Eventually, China got everything under control, which only makes it more brazen.
Enter Premier Li telling the mainstream media that China will avoid “wide fluctuations” in its economy. No amount of central planning will be able to deliver stability. China is heading for a huge fall, and it will drag down the world’s economy with it. Remember China’s influence on world markets the next time it has issues. As liquidity disappeared in the country throughout June, world markets fell including that for U.S. treasuries.
Last week, we discussed how rising mortgage rates would crimp housing demand in short order. One may witness this dynamic in both housing permits and starts. Both indicators registered significant decreases last week.
The mainstream media quotes various industry shills in an attempt to blame the weather, but here’s the truth: conditions were adequate for construction, and they were certainly adequate for a clerk to file new building permits as the task generally takes place indoors.
Those journalists love their housing recovery narrative, so you would expect them to defend it to the hilt. As a reminder, there has been non housing recovery, just a slight bounce from the bottom as today’s Charts of Truth illustrate above.
Bernanke’s and the Fed’s yammering did not cause the June Swoon. “Taper Tantrums” make for good copy, but they had little to do with last month’s market volatility. It is no coincidence that China endured a cash crunch at the same time as the taper tantrum.
Since Bernanke made his remarks at roughly the same time as markets began their descent, it is tempting to attribute the decline to his powers, but it is also incorrect. Emerging markets began having difficulties in early May three weeks before he spoke. You know what else began rising in early May? Chinese overnight rates.
The lower VAT will lead to lower tax revenues. A large hole has already opened in Greece’s budget and will have to be dealt with after German elections. The EU is reticent about giving away more money to Greece, so any debt relief will be attached to a depositor haircut in the Greek banks sometime in late 2013 or early 2014.
The widow-maker lives on. One day, somebody will make a killing shorting Japanese bonds, but today is not that day. After some initial volatility, JGBs have settled into just about the same range they had before the BoJ began jawboning in November. Japan is a disaster waiting to happen, but it has been waiting for years. The metrics have been pointing to a large default for years, but Japan continues humming along. Investors should sell their Japanese bonds while they can, but they defy logic and roll over their holdings upon maturation.
There is safety in numbers. Japanese managers who sell their bonds to invest elsewhere will be escorted to window seat if the trade does not work out well. On the other hand, if you stay in Japanese bonds like everyone else, you keep your office until the whole system tanks.
The mainstream media is breathlessly reporting that Abenomics is succeeding due to the “soaring” commercial Japanese real estate investment. Let’s introduce math to the theme, and see if it holds up.
Japanese real estate investment is given as $10.2bn for the 2nd quarter of 2013, which is a reported 78% rise from the same quarter last year. What was investment in the 2nd quarter of 2012? Just solve for x: 1.78x=$10.2bn, x= $5.73bn.
Both figures are nothing to write about. Japan’s GDP is about $5.2tr, so this $10.2bn accounts for about 0.2% of GDP. This is how small this sector is. If the Japanese economy is a jar of 500 pennies, those commercial real estate investments account for one of those pennies up from a little over a half a penny in 2012.
Nothing is changing in Japan despite the BoJ’s best efforts. Invest wisely.