The New Normal continues as markets tentatively rebound from the mid-year shake-up. Investors remain on the lookout for profit and the mainstream media dubs August market declines as 'buying opportunities'. The global slowdown grinds down a gear as Asian production slumps again and emerging markets…
The New Normal continues as markets tentatively rebound from the mid-year shake-up. Investors remain on the lookout for profit and the mainstream media dubs August market declines as ‘buying opportunities’. The global slowdown grinds down a gear as Asian production slumps again and emerging markets begin showing signs of market instability.
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Mon 7 September
China Foreign Currency Reserves (previous: 532B)
Tue 8 September
China Trade Balance (expected: 48.6B previous: 43.0B)
Wed 9 September
UK Manufacturing Production m/m (expected: 0.2% previous: 0.2%)
Thu 10 September
Australia Unemployment Rate (expected: 6.2% previous: 6.3%)
US Unemployment Claims (expected: 279K previous: 282K)
Fri 11 September
US PPI m/m (expected: -0.1% previous: 0.2%)
Two weeks ago, stock markets experienced a sell-off not seen since the 2008, and commodities (including bitcoin) sold off in unison. Expectations of a Fed September rates hike are waning on deteriorating US employment figures. Meanwhile, and despite heroic posturing, Asia and the emerging markets are experiencing accelerated economic deterioration.
China has cut its growth figure for 2014 economic growth to 7.3% from 7.4% after it emerged that there had been a 32 billion yuan overestimation of the originally stated 63 trillion yuan GDP for 2014.
Zhou Xiaochuan, the governor of the Peoples’ Bank of China, has used his address to the G20 Meeting as an opportunity to talk up the nation’s stock markets. According to Zhou the “volatility is nearing its end“. Funny, that. One would think hubris and a false sense of control was not something you’d want to reveal to the G20. Obviously, its acceptible.
Japan is a bank-based financial system, with systemic similarities to countries such as Germany, rather than the market-based financial systems of the United States and the United Kingdom. This is partly the historical reason for the Yen’s safe haven status – now completely shot thanks to the unprecedented Yen devaluation instated since Abenomics.
Now, Japan faces a visible quandary down the road. As is standard with the modern practice of quantitative easing, central banks typically buy government issued bonds as a means of creating the left-side accounting entries that then allow fractional reserve lending on the right-side.
A peculiar situation is becoming apparent in the Japanese stimulus case, namely that the Bank of Japan will – within two years – have bought most Japanese bonds and derivatives such that its stimulus will have over-run debt supply. This absurd situation is, no doubt, a direct consequence of running the largest central bank credit scheme in history.
Despite the stupendous stimulus, Japan’s economy has failed to create more jobs, consumer spending and the expected inflation. Instead, corruption and funny-money pranks are becoming a scourge.
A recent series of scandals involving the misuse of company funds serves to illustrate the point. The latest disgrace involves Toshiba Corporation, which admitted to overstating profits to give the impression that it was hitting targets – and qualify for government tax incentives. A fortunate result has been that share prices were artificially propped up, with incorrect signals sent to shareholders and investors. Oh dear, time to sell?
With the prospect of the end of BoJ quantitative easing looming, and with only nominal measurable outcomes in the economy, the situation for Japan looks bleak. Once the credit drip runs dry, the subsequent deflation could make of modern Japan an unpleasant example of economic self-strangulation.
South Korea’s year-on-year exports plunged 14.7% in August. The decline was worse than the 5.9% slowdown expected by analysts, and is the biggest slump since August 2009.
Bear in mind that South Korean exports represent some of the world’s most consumed goods, including memory modules, television/monitors and Android handsets produced by the likes of Samsung and LG. Other goods include automobiles and petrochemicals.
China, the world’s second-largest economy, is also South Korea’s largest customer. While most analysts are skeptical of the truthfulness of US and Chinese trade data, few doubt the quality of South Korea’s data.
As we explored in GEO during August, manufacturing surveys out of China confirmed a large-scale slowdown in production. China’s PMI fell to a three-year low of 49.7 in August from a watershed 50.0 in July. The Caixin-Markit manufacturing index dropped to 47.3 in August from 47.8 in July. Any reading below 50 signals a contraction in manufacturing output.
Here’s a quick survey of the broader currency and finance measures in major EM and Asian economies. The point is not to journalistically wallow in the misery, but to highlight that the deterioration is wide and is happening in all of these economies in tandem. That is the canary in the coalmine.
The yen jumped 2.2% during the past week. Japanese stocks (Nikei) plunged 7%. The Brazilian real fell 7.3% last week. The South African rand has dropped 4.2% against the US dollar. The Turkish lira dropped another 2.9% after previous declines and the Russian ruble sank 5.0%.
The Hang Seng China H-Financials Index sank 7.4% last week, having now declined 39% from its June levels.
Several weeks since we’ve heard any news about Greece…
In a great piece of journalism and shot-from-the-hip writing, Edmund S. Phelps gives a lucid breakdown of the Greek economic tragedy since World War 2 and leading up to what we see today. Phelps argues that an endemic societal compulsion for corporatism is at the heart of economic stagnation in Greece. Much like the neurotic pre-occupation with “compliance” and “control” that characterizes UK society and most of Eurpoe, the road to dystopia and paranoid cronyism is paved with societal benefit at the start.
While Greece has reached the heights of corporatism, Italy and France are not far behind – and not far behind them is Germany. All of Europe, not just Greece, must rethink its economic philosophy. – Edmund S. Phelps
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Last modified: January 25, 2020 11:07 PM UTC