Around the Globe 07.12.2013

China Credit Weathers Cash Crunch – WSJ.com.

China Leverage Risks Bypass Super-Saver Households as GDP Slows – Bloomberg.

From chinamoney.com

This article neglects the effects of shadow banking on credit creation.  Regulated lending shows no ill effects of the cash crunch, but the PBOC’s goal in tightening the money supply was to control the growth of credit in the shadow banking system.  We will discover whether or not the policy had the desired effect shortly.

China Can Endure Growth Slowdown to 6.5%, Finance Chief Says – Bloomberg.

Chinese FinMin Lowers the Bar, and Raises the Jitters.

China’s official growth rate will be less than 7.5% this quarter, and the FinMin is preparing markets for a lower rate.  By mentioning 6.5%, he is anchoring the media’s and trader’s expectations so that a 7.1% rate or whatever seems good in comparison.  I leave you to guess at what the unofficial or real rate of GDP growth is.

Draghi Impotent as Fed Trumps ECB on Yield Curve – Bloomberg.

The red ellipse in the chart above shows the ever widening spread between long and short term debt in Germany, which is happening throughout Europe.  Investors are beginning to realize that those long-term obligations are severely impaired in light of Europe’s woes.  Debt restructurings, defaults or whatever you’d like to call them are in Europe’s future whether de facto or de jure.

Consumer Sentiment in U.S. Unexpectedly Declined in July – Bloomberg.

Consumer sentiment slips on fears over stock prices, rates | Reuters.

The rise in consumer sentiment seems over for now.  The mainstream media calls the blip downward a “surprise,” but with a cooling economy how could anyone be caught off-guard with this move? The labor market remains in poor shape and gas prices are rising.  Both Barclays and JPM have cut 2nd quarter growth forecasts to less than 1%, and poor worldwide demand seems ready to crimp growth for the immediate future.  The mainstream media is surprised that this information does not fit its recovery narrative.

Thrift trumps Abenomics as Japan shoppers stick to bargains | Reuters.

Abenomics is running into demographic reality.  Japan’s deflation is in part caused by its aging population.  The young and middle aged raise families, and this is an expensive undertaking creating lots of consumer spending.  The elderly do not spend money so readily.  What Japan needs is not monetary inflation, but a baby boom. Unfortunately, poor economic prospects both limit the size of families and delay their start.  It looks like the magic money machine can’t fix everything.

Portugal’s Bond Market Tanks as Crisis Deepens.

From Bloomberg

Whenever one of the PIIGS threatens to defy the troika, yields rise.  Once investors realize that the threats are empty, the yields fall.  The only leverage Portugal has is the threat to leave the euro.  Since all political parties are committing to remaining within the Eurozone, there is no Plan B and no leverage to renegotiate the deal.  Eventually, the opposition may gamble by supporting an exit, but not today.

Around the Globe 06.28.2013

China Bad-Loan Alarm Sounded by Record Bank Spread Jump – Bloomberg.

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.

Euro Zone Set to Keep Shrinking – WSJ.com.

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 Faces Collapse of Second Key Privatization.

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?

HEARD ON THE STREET: A Stormy Summer Looms for Bonds – WSJ.com.

Lacker Says Markets to Stay Volatile as Fed Debates Tapering QE – Bloomberg.

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.

Japan Recovery Strengthened in May in Boost for Abe: Economy – Bloomberg.

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.

Business Activity in U.S. Cools More Than Forecast – Bloomberg.

US Consumer Sentiment Comes in Higher Than Expected in June.

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:

Thomson/Reuters University of Michigan Consumer Confidence Survey

Gold’s Drop to 34-Month Low Extends Record Quarterly Fall on Fed – Bloomberg.

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.