Subdued Demand, Diminished Prospects

IMF looks at the World Economic Outlook.

Global growth, currently estimated at 3.1 percent in 2015, is projected at 3.4 percent in 2016 and 3.6 percent in 2017. The pickup in global activity is projected to be more gradual than in the October 2015 World Economic Outlook (WEO), especially in emerging market and developing economies.

In advanced economies, a modest and uneven recovery is expected to continue, with a gradual further narrowing of output gaps. The picture for emerging market and developing economies is diverse but in many cases challenging. The slowdown and rebalancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh on growth prospects in 2016–17. The projected pickup in growth in the next two years— despite the ongoing slowdown in China—primarily reflects forecasts of a gradual improvement of growth rates in countries currently in economic distress, notably Brazil, Russia, and some countries in the Middle East, though even this projected partial recovery could be frustrated by new economic or political shocks.

Risks to the global outlook remain tilted to the downside and relate to ongoing adjustments in the global economy: a generalized slowdown in emerging market economies, China’s rebalancing, lower commodity prices, and the gradual exit from extraordinarily accommodative monetary conditions in the United States. If these key challenges are not successfully managed, global growth could be derailed.

Source: International Monetary Fund

Understanding the Chinese Transition

John Mauldin looks at the latest happenings in the Chinese Economy and their significance.

China Beige Book’s fourth-quarter report revealed a rude interruption to the positive “stable deceleration” trend. Their observers in cities all over that vast country reported weakness in every sector of the economy. Capital expenditures dropped sharply; there were signs of price deflation and labor market weakness; and both manufacturing and service activity slowed markedly.

That last point deserves some comment. China experts everywhere tell us the country is transitioning from manufacturing for export to supplying consumer-driven services. So if both manufacturing and service activity are slowing, is that transition still happening?

The answer might be “yes” if manufacturing were decelerating faster than services. For this purpose, relative growth is what counts. Unfortunately, manufacturing is slowing while service activity is not picking up all the slack. That’s not the combination we want to see.

Something else China Beige Book noticed last quarter: both business and consumer loan volume did not grow in response to lower interest rates. That’s an important change, and probably not a good one. It means monetary stimulus from Beijing can’t save the day this time. Leland thinks fiscal stimulus isn’t likely to help, either. Like other governments and their central banks, China is running out of economic ammunition.

One quarter doesn’t constitute a trend. Possibly some transitory factors depressed the Chinese economy the last few months, and it will soon resume its “stable deceleration” course. It is hard to imagine what those factors might have been, though. The data is so uniformly negative that it sure looks like something big must have changed.

What does this economic weakness say for Chinese stocks? Probably nothing. It should be clear to all that the Chinese stock market is completely unrelated to the Chinese economy. They don’t move together, nor do they move opposite each other. They have no consistent connection at all – or at least not one we can use to invest confidently. I went to Macau when I was in Hong Kong a few weeks ago, just to observe the fabled fervor with which the Chinese gamble. The place did indeed have a different “feel” than Las Vegas does. I’m not the only one to think that the Chinese stock market is just an outpost of Macau, but one in which leverage and monetary stimulus can overload the system.

Let me say that there are real companies with real value in China. But the rules on the ground, not to mention the accounting, make it a particularly treacherous market to invest more than your own “gambling money.”

Source: Mauldin Economics

Chinese Economy braced for a Reality Check

Valentin Schmid evaluates the Bank of America Report on the Chinese Economy.

The Chinese regime still has considerable power over the markets. After a 7 percent crash of the Shanghai Composite on January 4, it managed to reverseanother 3 percent drop on January 5.

So, in the very short term, all is well. In the long term and even in 2016, Bank of America sees big problems ahead for the Chinese economy. According to their analysts, the regime has to fight multiple battles at once and will ultimately lose to market forces.

“We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem,” states a report by Bank of America’s chief strategist David Cui.

The report points out that a spike in private sector debt almost inevitably leads to a financial crisis. China’s private debt to GDP ratio went up 75 percent between 2009 and 2014, bringing total debt-to-GDP to about 300 percent. Too much to sustain.

This is “a classic case of short-term stability breeding long-term instability. It’s our assessment that the longer this practice drags on, the higher the risk of financial system instability, and the more painful the ultimate fallout will be,” Cui writes.

For the coming crisis, Cui believes China will probably have to devalue its currency, write off bad debts, recapitalize the banks, and reduce the debt burden with high inflation.

After the events of last August, and after the International Monetary Fund finally included China in its reserve currency basket, the regime completely abandoned the stable currency objective and let the yuan drift lower. The regime promises reform, and even follows through in some cases. But if push comes to shove, it resorts to central planning to mould the market according to its needs, with less and less success.

“It seems to us that the government’s policy options are rapidly narrowing-one only needs to look at how difficult it has been for the government to hold up GDP growth since mid-2014. A slowdown in economic growth is typically a prelude to financial sector instability,” writes Cui, and predicts the Shanghai Composite to drop by 27 percent in 2016.

Source: Bank of America Report

 

What Do German Central Bankers Know That We Don’t?

Graham Summers from GainsPainsCapital comments:

Ben Bernanke and the rest of the US Federal Reserve bet the farm that they could engage in countless monetary interventions, keep interest rates at zero, and print over $2 trillion in new money without damaging the US’s credibility.

They were wrong. Indeed, Germany just fired a major warning shot to the US Federal Reserve.

On Monday, Germany announced that it will be moving a significant portion of its Gold reserves out of storage with the New York Fed and moving them back to Germany.

A few background details.

  • Germany has the second largest Gold reserves in the world behind the US.
  • Since the early ’80s, Germany has stored the largest portion of its Gold reserves with the New York Fed (45% vs. 13% in London, 11% in Paris and the remaining 31% in Frankfurt).
  • In the fall of last year, German officials began raising the issue of auditing its reserves at the NY Fed.

Why would Germany suddenly decide that it wants to change a policy it has had in place for over 30 years?

More importantly, how did it go from wanting to audit its reserves to actually removing them from the NY Fed’s care?

In simple terms, Germany has just announced that it doesn’t trust the US Fed.

The world’s Central Banks have been staging a global currency way for several years now. Germany, China, Japan, and the US all want to keep their currencies weak to improve exports and minimize their debt loads.

In the case of Germany, it’s the second largest exporter of goods in the world behind China. More than anyone in the EU, Germany wants a weak Euro. However, every time the Fed announces a new policy, the US Dollar falls, the Euro rallies and German exports fall off a cliff.

Germany is now openly telling the Fed that it is done playing around. This will have severe consequences in the financial system.

Remember, the only thing holding the financial system together is belief in the Central Banks. If the Central Banks (it was Germany’s Bundesbank that is behind the Gold move) stop trusting one another or grow openly antagonistic, then things will get very bad very quickly.

For months now we’ve been asserting that the “improvements” in the global economy and financial system were a mirage. Germany’s move has confirmed this. If the financial system was in fact safe and the global economy was improving, Germany would not feel the need to repatriate its Gold.

Which begs the question, what exactly do German Central Bankers know that we don’t?

Source: http://gainspainscapital.com/2013/01/16/what-do-german-central-bankers-know-that-we-dont/