The mainstream financial press is about to explode:
New Homes Sales Surge!
Abenomics Jolts Exports!
Eurozone Showing Green Shoots!
Let’s remove the spin and see if we really have a dreidel here or something else.
The orange line in our chart illustrates the true extent of the Chinese slowdown. The slackening Chinese economy will import less raw materials and high-end goods driving down economic growth everywhere. The world economy has already begun showing the effects of this new paradigm, particularly in raw material exporters such as Australia and equipment manufacturers like Caterpillar. As you view the chart, remember that there is no such thing as a soft landing.
Just for fun, it looks like Chinese overnight repo rates have begun rising again:
“Yay! Abenomics is working. The trade deficit is narrowing. Yay!” This is the story that the msm reports, which is much different from reality. As you can see from the peaks that I have circled in red, the trade deficit narrows every July in Japan, but this is the first time that it failed to become positive. The trend in Japan’s balance of trade is downward as each successive circled peak is lower than the prior year. Even a 22% fall in the yen is insufficient to put Japan back in black, and this does not bode well for the future.
Americans are deluding themselves again, just like they did during the prior housing bubble. The featured anecdote in the article is about a doctor who can no longer afford the house he wants for his family with the rise in mortgage rates. In order to keep the same initial monthly payment, he opts to take out an ARM instead believing that he will be able to refinance in a few years at a lower rate.
Examine the chart above. Based on the history of mortgage rates illustrated, what are the chances that he will be able to refinance at a lower, fixed rate in the future? Past performance does not indicate future results, but mortgage rates are at historic lows and it is doubtful that they will be down this low again. Across the United States, people are making this very same mistake, which will lead to another mortgage bust as those rates rise and people can no longer afford the larger payment.
New home sales have risen to a little more than one-third their pre-bust levels, but the context of the recent rises is rarely reported. In historical terms, the housing market remains depressed. At the present rate of increase from the trough, we would need another two years or so to reach the long-term average of about 900,000 new homes. Let’s see how sales hold up amidst the rise in mortgage rates when July’s figures are released next month before we talk about the next two years.
Europe has reached a PMI level indicating stagnation, and this is touted as good news. Expectations have become so poor that no growth is heralded as a significant achievement. The Eurozone requires a significant boom to grow itself out of the euro crisis, low growth is simply insufficient for the task at hand. Moreover, the slowdown in China will crimp Eurozone exports going forward leading to another quarter of contraction despite today’s stirring in the flash PMI.
No one ever predicts a recession. As long as the economy continues its sputtering growth, basket-case states and municipalities are off the hook. Shortly after the next recession strikes, more cities will be joining Detroit, and states like Illinois and California will have to choose to either provide services to voters or pensions to retirees.
In the meantime, the risk of holding certain municipal bonds is rising due to potential court treatment of them in bankruptcy. I believe that we have seen the peak in MUB.