Around the Globe 07.10.2013

Why China Delivered Such a Big Miss in Trade Data.

China Exports Unexpectedly Drop; Imports in Economy Drag – Bloomberg.

China warns of ‘grim’ trade outlook after surprise exports fall | Reuters.

China Trade Data Show Weakness – WSJ.com.

China’ Crude-Oil Imports Fell in the First Half – WSJ.com.

The Chinese economy is heading for a recession, and this has massive implications for the rest of the world.  Commodity prices except for oil will continue to tumble, and Chinese imports will also continue their descent restraining growth in the Eurozone and the entire industrialized world.

Economists believe that China will not enter recession because their models already include a provision for no export growth; however, exports are actually decreasing, and shrinking imports show that China is producing less no matter what the official numbers say.  Moreover, the PBOC’s efforts to control an inflating credit bubble will also crimp growth.  A worldwide recession is in the cards for 2014.  The trends illustrated on our charts are ominous and unmistakable.

EU Unveils Bank-Crisis Plan With 55 Billion-Euro Fund – Bloomberg.

EU Lays Out Single Resolution Proposals for Distressed Banks – WSJ.com.

The last thing the Germans and their FANG coalition members want is an independent European Commission deciding which banks need to be shuttered and resolved.  They oppose this power claiming that it would require a treaty change.  Keep in mind that since the Eurocrisis began, the EU and ECB have been ignoring all of those various treaty provisions, particularly the one against financing governments.

There are two real reasons that the Germans oppose granting the EU the power to shut failing banks.  First, the dodgiest bank on the Continent is probably Deutsche Bank.  The charts show that it is truly TBTF with a derivatives exposure of over 20 times the size of the German economy with assets of one-third of German GDP.  Second, the Germans will not create another contingent liability prior to elections.

Perhaps the Eurozone can use this delay to craft a better banking union.  As it stands today, there is no joint depository insurance scheme, and the resolution fund of €70bn is woefully insufficient.  Moreover, the bank-sovereign link remains intact because of rules that permit sovereign bonds to be held on the books at 100% of par value.  The Eurocrats could have used this relative market calm of the last year to craft a real solution to fix the monetary union and spur growth.  Instead, they have just persisted in their old habits borrowing and spending.

Gold-Oil Ratio Declines to Lowest Since 2008: Chart of the Day – Bloomberg.

Once again the mainstream media fails to… Wait a second.  Lo and behold, I wrote too soon.  This is actually a fairly accurate assessment of the oil and gold markets.  Oil prices have risen due to increased economic activity combined with the standard Middle Eastern crisis premium.  Meanwhile, the price of gold is sinking as people realize that the world will not end tomorrow or even next month.  Gold is probably done sinking for now, but oil could move upward if tensions you-know-where escalate.

Wholesale Inventories Unexpectedly Drop as U.S. Sales Surge – Bloomberg.

Wholesale inventories fall, likely drag on GDP growth | Reuters.

It is a mathematical fact that shrinking inventories subtract from GDP growth, which is one reason why GDP calculations are flawed.  Our chart shows the inventory/sales ratio, which is actually hovering around the lows seen during an expansion.  Perhaps, manufacturers will increase production to replenish inventories over the next few months leading to higher growth or maybe they are reducing production in response to falling orders with this trend continuing instead.  As you can see, economic indicators remain mixed.

In the Race to the Bottom, US Dollar Falls Behind.

The U.S. dollar is up over 10% from its pre-election lows.  A strong dollar is an excellent inflation fighter in our country at the expense of curtailing exports.  This is probably one of the reasons that new export orders have decreased two months in a row:

The strong dollar also causes inflation in emerging markets.  As these currencies weaken, food and energy become more expensive as these goods are priced in dollars.  This dynamic will continue to weigh on world growth.

Currency Controls in Cyprus Increase Worry About Euro System – NYTimes.com.

These controls were put into place almost four months ago, so it’s nice that the mainstream media is finally catching up to the rest of us.  Here is my March 26 post discussing the ramifications of capital controls in Cyprus:

Cyprus No Longer in Eurozone | DARECONOMICS.

The controls implemented as part of the 1st Cyprus bailout created a new de facto currency, the junior euro, J€.  The J€ is so far used only in Cyprus, but it will probably spread to other periphery trouble spots. J€’s give the market the illusion that the Eurozone will not break up so that institutions can continue buying gobs of that sovereign debt while presenting it to the ECB for cash to buy even more.  While this game of musical chairs is currently keeping the Eurozone afloat, it will make everything worse when the unwind actually begins.

Around the Globe 06.30.2013

Central Banks Sell Record Sums of US Debt.

Since the onset of the Great Financial Crisis, foreign holdings of U.S. debt have more than doubled.  One reason for this increase is the United States status as a haven.  Another reason is that countries all over the world were forced to intervene in currency markets.  When a country’s currency strengthened too much, it would sell its own currency and buy dollars, which were invested in treasuries.  Now currencies are weakening too much against the dollar, the process works in reverse.  The chart above is current through 1Q2013, and we should expect a decrease in 2Q2013.

Why Did Chinese ATMs Stop Working? – Bloomberg.

Distrust in government institutions leads to conspiracy theories.  ICBC ATMs stopped working today due to a software upgrade issue.  In the time it took the bank to explain the outage, rumors of its demise had begun circulating.  As the chart above illustrates, the Chinese cash crunch has abated, and no ICBC is not in danger of imminent collapse.

Mired in recession, ex-Yugoslav Croatia joins troubled EU | Reuters.

Croatia should have no problem integrating into the EU.  The charts above show why.  Like the Eurozone, it is in the midst of a six, going on seven, quarter recession.  Moreover, its economic contraction places it firmly within the periphery, so it is on tap to begin receiving German money after Merkel wins a third term in September.  Good times for Croatia.

Spain lenders brace for tough year-end as new rules bite | Reuters.

Spanish NPLs are actually much worse than official figures indicate.  Spanish banks have been using cheap money to roll over bad loans rather in essence doubling down on bad bets.  The bad loans are not just a consequence of Spain’s burst property bubble.  All varieties of loans are performing badly as Spain’s depression wears on.  Spanish banks have not received their last bailout.

Gold Bugged: Contrarians Not Ready to Give Up Yet.

The Golden (Sentiment) Rule: If It Isn’t Off The Chart Now, It Soon Will Be | Zero Hedge.

Goldbugs do not enjoy the cold hard truth of a burst bubble as indicated by some of the comments that I received.  Don’t be mad at me.  I only call them like I see them.  Still mad? Maybe this news will make it better.  The chart above shows that short interest in gold is at record highs, and this usually signals a rally.