Jul 31, 2012

More Fake Chinese Statistics

An article on Caixin Online is an interesting example of how national and provincial statistics are "compiled" in China. Schoolhouse Shock exposes the dismal state of public education in poor rural areas. This is of course terrible for the long-run economic prospects of the residents (and the overall economy). But it also shows how all the educational statistics are completely fabricated. Regarding drop-out rates, the article says:

Some officials at schools in Gansu Province said on condition of anonymity that the dropout rate is roughly 30 to 40 percent in junior high schools.
Provincial government statistics put the dropout rate at 0.6 percent. Central government figures for Gansu state the dropout rate is lower than 3 percent and declining.

This should be a wake-up call to those tempted to give China's National Statistics Bureau the benefit of the doubt. If educational statistics are so far from reality, why would the economic ones be any better? 

Jul 23, 2012

Don't Blame Europe This Time - It's All About China

Asian stock markets have opened the week extremely weak (no pun intended). No doubt much of that is due to the SPX rolling over on Friday, but there is more. The Nikkei is down 1.8%, Hang Seng almost 3% and Shanghai 1.2% - all of them more than the 1% or so drop of the S&P in the last trading session of last week.

The mainstream media is quick to blame the noise out of Europe, but there is

Jul 18, 2012

Equities Ignoring Negative Data is Cause for Concern

This has been the trend over the last week - bad economic data comes out, yet the market plows on onwards and upwards. Last Friday, Univ. of Michigan Consumer Confidence disappointed by a point and a half (72 vs 73.5 expected). Ignoring that completely, the SPX rallied hard, investors choosing to focus on the positive but heavily engineered JPM earnings instead. It was a similar story when July Retail Sales printed a dismal -0.5% on Monday vs +0.2% expected.

The market tends to ignore bad data points in one of two situations. It does that at the bottom of long bear markets, under heavily oversold conditions,

Jul 17, 2012

RBA Says Enough Is Enough

The Reserve Bank of Australia published the minutes of its July 3rd Monetary Policy Meeting (at which they left the overnight rate unchanged at 3.50% - which was market consensus at the time). After presenting various reasons that the economy is slowing but not catastrophically so, that inflation is contained and will probably continue to be for awhile, the RBA concludes that the previous cuts that have lowered the rate from 4.25 to 3.50 in the space of half a year should be enough to stimulate the economy in the near term.

Given all the uncertainties about China's response to their slowdown, the future path of the European crisis and the recent slowdown in the US, it does make sense to not shoot all of their bullets at once. 

Jul 16, 2012

Market Musings - EUR, China


Using the time-honored headline test, this may mean that the Euro's woes are coming to an end. Technically the chart appears to be stabilizing as well. In addition, the market's focus is shifting to the inconsistencies in China's economic statistics, leading some to believe that the whole data set is actually the product of the propaganda department and not the National Statistics Bureau. Efficiency must have really improved enormously if the zero growth in electricity consumption is indeed correct, given that GDP growth was +7.6% annualized.

Jul 7, 2012

The Job Numbers Were Bad - But Apparently Not Bad Enough

On Friday Non-Farm Payrolls for June showed an increase of 80k versus a (revised upwards) expectation of 100k. Not surprisingly the stock market sold off on the news, but eventually closed less than 1% down on the day. The US economy is growing very slowly but it is nevertheless growing. Which in some sense is a bad thing, as it means that Big Ben will probably not have an opportunity to come to the rescue with another round of Quantitative Easing.

Jul 3, 2012

Will the Fed Sink the Stock Market?

OK, this headline was probably guilty of deliberate catchiness. Of course the Fed will not sink the market. But Wall Street's easy-money addiction might. Relying on "Big Ben" to save the day  has become an instinctive thought process on Wall Street ever since the launching of QE2. When bad data comes out, it is taken as a positive development, because it just might be the last straw that pushes the Fed to action.

Well, not so fast. While everyone would agree that the trillions of dollars printed by the Fed

Jul 2, 2012

A Famous Investor Falls for Confirmation Bias

It is human nature to selectively focus on the evidence that supports one's position and to ignore the rest. This is a layman's explanation of what behavioral psychologists refer to as "confirmation bias". It is also a very common reason why inexperienced traders lose money - they get "married" to their position and hold it long past the point at which their reason for entering it has lost validity. 

In his CNBC interview Financial ‘Armageddon’ Will Happen Despite EU Deal Jim Rogers holds the view that despite the large one-day rally, the agreement at the EU summit on Friday is

Jul 1, 2012

Commodities Super-Cycle Revisited

Back in January we wrote a post highlighting that money has now started exiting commodity funds for the first time in the past ten years. (See Commodities Super Cycle Reversing Course.) This event has proven quite significant, as can be seen by observing the price action of most non-agricultural commodities this year. Gold and Oil are down significantly year-to-date, despite continued calls for a rebound by commodity bulls.

It is quite clear that something fundamental has changed. For example Oil is still very much correlated with equities, but despite Friday's massive bout of short-covering, it tends to go down

Jun 29, 2012

Better Late Than Never - Chinese Data Is Publicly Questioned

We have thought for some time that data published by the National Bureau of Statistics and other official organs of the Chinese government should not be taken at face value. See for example Can One Trust China's Economic Statistics? written in early February. A week ago The New York Times came out with a detailed account of much of the mounting evidence in Chinese Data Mask Depth of Slowdown, Executives Say.

There are many reasons to suspect that, even without having actual evidence that falsification is happening. And we don't always need evidence, because in order for an investor to be profitable

Jun 26, 2012

Follow Us on Twitter

Just a quick reminder that those who only read the blog and not the twitter feed may be missing important timely changes of our market calls. For example on Jun 19th we called for the Australian dollar to appreciate following the RBA statement. Aud/Usd did indeed rally to 1.02 on June 21st, after which we reversed our position with a tweet calling for a sell-off. To avoid missing up-to-the-minute commentary and view changes, follow @WhatifEconomics.

Jun 19, 2012

AUD to Appreciate on Hawkish RBA, Resilient Economy

Before the June RBA meeting, the market was predicting even chances of a quarter and half point cuts. This was despite the fact that relatively speaking Australia's economy has been faring quite well despite the recent weakness in China. Well so much for that, as the minutes of RBA's monetary policy meeting showed today.

The Board considered whether the recent information warranted a further reduction in the cash rate. The arguments were finely balanced.
Cutting aggressively was apparently not even discussed. The question was whether to cut at all.

May 15, 2012

The Gold Bubble has Burst

By now it is clear to everyone that there is nothing fundamentally "safe" in Gold or any other precious or industrial metals. As a non-productive asset its value is only based on expectations of future demand. There is nothing inherently wrong with that, if the demand was real - say for jewelery or industrial uses. However when an investment's value is only derived from expectation of even more investments chasing the same asset, it becomes pure speculation. Or to go to an extreme, even a Ponzi scheme.

Apr 27, 2012

Social Networks - a Bubble but Just Getting Started

Facebook's acquisition of Instagram has raised a few eyebrows but also has plenty of VC's and entrepreneur-wannabes salivating. If a 2-year old company with 13 employees and no revenue can be worth a billion dollars, well then the sky is the limit! As long as you are in the right space.

Since any of the staid cashflow or income-based models do not apply to this amazing growth sector, we need a brand new way of valuing such companies. One way people are looking at the recent acquisition

Apr 24, 2012

Australian Dollar's Double Jeopardy

This week it feels like the AUD was punished twice for what is essentially the same "crime". On Monday morning Asian time, the Producer Price Index (PPI) disappoints, coming out 0.6% lower than expected. The Australian dollar promptly sells off against the USD and JPY. This makes perfect sense - lower PPI generally feeds into lower inflation, thus an increased likelihood of a rate cut at the next RBA meeting. So far so good.

Overnight, SPX stabilizes and most "risk" currencies bounce a little in line with the equity market. On Tue morning Asian time, Australia's Consumer Price Index disappoints by a roughly equivalent amount. On this data release, the AUD drops again.

Apr 16, 2012

A Contrarian View on China's Currency Move

The latest push by Beijing to accelerate the opening of China's capital account to foreign investment is undoubtedly a good thing. A good thing for the world as it helps reballance the global economy. However it is being hailed as a cure-all for China's slowing economy in China Currency Move Nails Hard Landing Risk Coffin. Not meaning to pick on Paul Markowski here (although as long-term adviser to Beijing he is hardly impartial) - this is the general view across the financial media at the moment.

We believe it is also incorrect. Beijing is clearly aware of the undeserved benefits that acrue to the

Apr 10, 2012

NAB Lowers Australia GDP Estimate. More Revisions to Follow?

It is starting to hit home that most sectors of Australia's economy are not benefiting from the riches generated by the export of natural resources to China. National Australia Bank, one of the big four banks in the country has lowered its GDP estimate for 2012, saying that

Despite a mining boom, the Australian economy has performed poorly in the first few months of 2012, and policy makers are expecting unemployment to rise in coming months

(See Australian Bank Cuts Growth Forecast For Economy).

The tentative decrease from 3.25% to 3% is quite modest and will most likely be followed by further

Apr 4, 2012

Australia Should Learn from Brazil in Fighting the Resource Curse

Australia continues to suffer from the "Dutch disease" with export revenues from the resource extraction industries pushing up the value of the local currency and thereby making manufacturing and the services (such as tourism) uncompetitive. This is a theme we have discussed before - see for example Australia's Two Speed Economy. The situation continues worsening, with an anticipated return to trade surplus failing to materialise in the Feb trade data released today (deficit of AUD -480mm, relative to consensus for a surplus of  AUD 1.1bn).

It should be quite clear that the strong currency is hurting many non-resource sectors of the economy. Yet other than including in their Monetary Policy press release a boilerplate statement to the effect

Apr 2, 2012

The China PMI Contradiction. Or Who Can You Trust?

Very often the simplest explanation is the best. Why did HSBC's China PMI show a 4th consecutive month of contraction in March, while the official numbers generated by the National Bureau of Statistics indicate continuing growth?

Two months ago in Can One Trust China's Economic Statistics? we looked at some indications that the official government statistics may be untrustworthy. As all the evidence points to a serious slowdown,

There May be Trouble in Beijing

Ever since the neo-Maoist princling Bo Xilai was dismissed from the top Communist Party post in Chongqing, rumours have been circulating of a military coup in Beijing. Asia Times writes
Rumor mills on China's active blogosphere were rife with claims that a military coup had occurred in Beijing, with gunfire, tanks and soldiers on the streets.
They do appear far fetched, and could be easily dismissed as such, if it weren't for the official denial and draconian measures against websites that may have facilitated their spread. In China arrests over

Mar 28, 2012

There Will be No JPY Black Swan

Everyone is talking about The Yen's Looming Day of Reckoning by Andy Xie in which he spells gloom and doom about Japan and the yen. Japan's economy has indeed been trapped in a prolonged period of sub-trend growth and deflation. The strong yen makes things worse by reducing the competitiveness of the country's exporters.

But why a catastrophic collapse? In late Dec in Japan Nov Trade Deficit Worsens - Usd/Jpy to Turn the Corner Soon we thought the government or the BOJ should take steps to weaken the yen, which would impact positively Japan's economy and its exporters, which in turn can jump-start an outperformance of

Mar 26, 2012

Germany to Directly Supervise Spain's Budget Reforms

We have long maintained that the ongoing sovereign debt crisis in Southern Europe will precipitate further European integration. (See Another Step Forward in the Creation of the United States of Europe). With the second Greek bailout a done deal, the market's attention has again shifted to Spain. Last week yields on Spanish government bonds were once again up at 5.5%.

Today Dow Jones Newswires reported that a German government delegation will fly to Madrid to

corroborate first hand the government's reforms and assess the true risk of the new deficit target
Reading between the lines this means that representatives of the German government will have a direct

Mar 24, 2012

The Landing Will Be Hard

As we have opined in previous posts on its banking system and real estate market, China's economy is in a pretty bad shape. This is corroborated by a couple of recent economic statistics. Last Sunday, China's National Bureau of Statistics published the new housing numbers for February, saying that
Comparing with the previous month, among 70 medium and large-sized cities, the sales prices of newly constructed residential buildings declined in 45 cities while that of 21 cities remained at the same level. For 4 cities with increasing prices month-on-month, the increases were 0.1 percent.
The real economy (as opposed to asset prices) is not doing great either. On Thu HSBC's manufacturing

Mar 15, 2012

China's Wen Admits Banking System Dysfunctional

China's outgoing premier Wen Jiabao seems to have struck a sentimental note in his closing remarks at the NPC (China's parliament). This is completely normal but what is a bit surprising is that he pretty much admits China's system of financial intermediaries is dysfunctional. According to Caixin he said:
The problem is that companies, especially the smaller ones, need huge amounts of capital but, banks can't satisfy them. Meanwhile, the market is awash with private capital seeking opportunities."
China's state-owned banks pay negative real rates to depositors, while funneling capital to strategic

Mar 14, 2012

FOMC Statement Punishes Gold, Boosts Stocks

The guardedly upbeat comments in the March FOMC report yesterday pushed equity markets to new multi-year highs. At the same time Gold bugs were disappointed by the lack of any mention of QE3. The statement starts with the following comments about the general economy:

Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further
As discussed in a previous post, recently Gold has been trading as the anti-dollar, mostly swayed by the

Mar 9, 2012

AUD Continues to Track Overall Risk Sentiment, Ignores Fundamentals

Over the past few days, all eyes have been on the Greek debt swap, with S&P futures quite volatile, swayed by rumours and expectations. At the same time Aud/Usd continues to trade in risk-on / risk-off mode, paying little heed to the economic reality. It underperformed slightly when GDP came out worse than expected on Wedn morning, but pretty much ignored worse employment data on Thu and an surprising trade deficit Fri morning. Overall things are not looking great at all, but the currency is

Mar 7, 2012

EU Credit Crunch Takes its Toll on Exports Despite Weak Euro

As released by Eurostat yesterday, the Eurozone and EU GDPs for the fourth quarter of last year dropped into negative territory. Looking at the components of the calculation, exports were down -0.4%. This was during a period when the EUR had weakened considerably against the dollar in the aftermath of the S&P downgrade of the US and subsequent equity markets sell-off. Usually a weaker currency should boost exports rather than dampen them. Also throughout Q4 the economies of

Mar 5, 2012

Gold Fails to Recover from Bernanke Shock

In the end of January, the price of Gold received a large boost when the Fed extended its prediction of zero short term rates until the end of 2014 (a year longer than previously announced). The market started pricing in another round of quantitative easing but those hopes were dashed with Bernanke's testimony before Congress last week. After a fast 5% drop, inevitably bids came in, but the bounce was short-lived. Given the strength of the US economy (relative to other developed countries) it looks like the need for Gold as a hedge against monetary collapse is becoming less pronounced. It is

Feb 28, 2012

Increasing Likelihood of Policy Error in China

With the upcoming once-in-a-decade leadership transition, many inconsistencies are showing up in China's monetary and fiscal policies. The most famous example was with the relatively small city of Wuhu in southern China, which tried to implement incentives to spur home purchases, only to retract them later, with a fairly unconvincing explanation. More recently the government of Shanghai announced a plan to ease restrictions on purchases of second homes, which is certainly at odds with the central government's stated goal of trying to cool the housing market.

Undoubtedly a lot of the inconsistencies are due to different entities and midlevel communist party

Feb 25, 2012

More Cracks Appear in AUD's Facade

According to Marketwatch and other sources, Fitch has lowered the ratings of three of the top four Australian banks. As discussed previously, the action has been flagged well in advance. The Marketwatch article says the AUD dropped and it probably did to a small extent right after the announcement. Overall though, the market is still quite complacent of the issues "down under" and trades with a built-in expectation of continued strength in the Australian economy. The focus has been almost exclusively on the Greek drama and the Iran standoff and its impact on the world supply of oil. It appears that investors are still not really making the link between the weakness in China and its suppliers of raw materials.

Feb 21, 2012

RBA Complacent on China as Evident in February Minutes

If China's bubble were to burst, that would clearly take Australia's economy down with it. The minutes of RBA's February meeting show a complete complacency over China's economic slowdown (and the power of Beijing to control it):
Importantly, though, the Chinese economy continued to expand strongly, albeit below the pace of the past couple of years, and inflation there had moderated. Prices and turnover in the Chinese residential property market had fallen, especially in the coastal provinces, where measures by the authorities to cool the market had been most aggressive;

Feb 16, 2012

3 Reasons Why Spx is Due for a Pullback

Technically the market has broken the uptrend started with the low of 11/25 and tested again on 12/20 and 1/30. The 14-day RSI has also just come off overbought levels thus triggering a sell signal.

Individual investors are more bullish than anytime during the past 6 months. The weekly sentiment survey by the American Association of Individual Investors shows 51% bullish, which is higher than at any time going back until at least the 9/22 survey. Having retail involvement is generally sign of a healthy market, except that

Feb 15, 2012

BOJ Inflation Targeting Spurs Japan Outperformance

Japan's economy has been mired in deflation for the most part of 2 decades. Consequently capital stays idle in zero-yielding bank accounts (where it is duly recycled into purchases of government bonds) rather than invested in a productive way. This is all likely to change with the Bank of Japan yesterday finally announcing a specific inflation target. The combined savings of all the people in Japan amount to a massive amount of financial capital. If inflation does pick up, and people wake up to the need to look for meaningful ways to invest it, this can really jump-start the economy and propel the Nikkei to ever higher levels. (Especially if you

Feb 14, 2012

Sentiment on Australian Stocks is Slowly Turning Bearish

In relation to an earlier WhatIf post on the wisdom of RBA's decision not to cut rates, it was quite interesting to see Australian currency, policy may limit stock gains on Marketwatch. Higher rates are clearly a potential danger for Australia's economy. This had been pretty much ignored by the market and mainstream media, but it appears that the trend is changing. Also please refer to this WSJ article that came shortly after the rates announcement.

(For more WhatIf posts, click here)

Feb 10, 2012

Australia's Two Speed Economy

The Reserve Bank of Australia has released its quarterly statement on monetary policy and economic conditions. In it they note that the resource sector is indeed booming, as
it is likely that over the next year the level of business investment in the economy
will reach its highest level, relative to GDP, in at least half a century.
The report also goes on to say about the rest of the economy:

Feb 9, 2012

Beijing's Iron Grip Fails to Fine-Tune China's Economy

The Chinese economic super-bubble is currently all about real estate which is vehemently refusing to follow the direction set by the omnipotent hand of the central government. WhatIf surmised in an earlier post that such attempts are likely to fail. And true enough, the situation appears quite dire as Xinhua reported yesterday that
Commercial property sales in China's booming Zhejiang province fell sharply in 2011 following tough government curbs. The total floor space sold slumped 20.5 percent year-on-year
This slump has also had a devastating impact on the highly leveraged smaller developers, as the article goes

Feb 7, 2012

RBA Playing With Fire - Keeps Rate Unchanged

Today the Reserve Bank of Australia decided to keep the cash rate unchanged at 4.25%. Analyst consensus was for a quarter point cut. Also the OIS market was implying a ~75% chance of a cut. RBA's decision comes as a surprise, given the recent labor market weakness and drop in retail sales. Governor Stevens' statement reads a little bit like "everything is on track and on trend so why change anything?", but does recognize that
Year-ended CPI inflation will fall further over the next quarter or two. In underlying terms, inflation is around 2½ per cent. Over the coming one to two years, and abstracting from the effects of the carbon price, the Bank expects inflation to be in the 2–3 per cent range.
As inflation is unlikely to present a problem in the near future and given the challenges to global growth (and China in particular) a rate cut might have been a lot more prudent. As always time will tell.

Feb 6, 2012

Israeli Strike on Iran Appears Ever More Likely

In a recent interview for NBC quoted by Reuters, Obama says
I don't think that Israel has made a decision on what they need to do. I think they, like us, believe that Iran has to stand down on its nuclear weapons program.
What he does not say, however, is that the US would be against such an attack. He appears to leave the diplomatic door completely open for Israel to do as they see fit to protect their national security. The timing
of Netanyahu's statement that
In such a region, the only thing that ensures our existence, security and prosperity is our strength
as quoted by Bloomberg is certainly no coincidence. Overall it looks ever more likely that Israel will resort to military action against Iran, barring a breakthrough in the talks on Iran's nuclear program.

Feb 5, 2012

At Least One Seller Cashing Out on Facebook Before the IPO

The forthcoming Facebook IPO has been all the hype - and large amounts of it. Most of the pundits have been negative, citing overblown Price/Sales ratio and a shift in user base from developed to developing countries. Since the sentiment is quite negative, the IPO would probably do OK at least at first. The Nasdaq closing at an 11-year high on Friday certainly indicates strong investor demand for tech stocks and the social network space has a scarcity of liquid public stocks as a vehicle for betting on the future of the sector.

There are signs that the hype may be too much. According to Reuters, a woman in Wisconsin was arrested

Feb 4, 2012

Beijing Cannot Deflate China's Real Estate Bubble

According to comments made at a State Council meeting and published by Reuters, Chinese Premier Wen Jiabao
wants to see a "reasonable pull-back" of housing prices.
The government will clearly keep tightening credit to developers and restricting purchases of multiple homes for speculative purposes. The intentions are certainly admirable - everyone agrees that affordable housing is a must for social stability. However once the bubble has inflated, it often can only either keep inflating further or simply burst.

Feb 1, 2012

Can One Trust China's Economic Statistics?

The Dec reading of the Chinese official Purchasing Managers Index came in better than expected at 50.5. This would indicate a small expansion in manufacturing activity. If it were free of official manipulation, that is. And therein lies the issue with China's economic statistics - it is not clear if the numbers can be trusted.

Anecdotal evidence has been pointing to shrinking margins and difficulty in obtaining financing for the majority of Chinese small and medium manufacturers. Guangdong province is home to a large percentage of Chinese manufacturing and has in the past been dubbed "the factory of the world". However a survey by the

Jan 30, 2012

Fitch Places the Big 4 Aussie Banks on Negative Watch

In a press release, Fitch has placed Commonwealth Bank, NAB, Westpac and ANZ on negative watch, citing that
Australian... banks are each subject to many of the same themes and trends as other banks globally including an uncertain macroeconomic environment and evolving regulatory regimes.
As we have mentioned before, Australia's economy is not necessarily sounder or on a better footing than the rest of the world, if one were to take into account its strong reliance on China.

Another Step Forward in the Creation of the United States of Europe

In politics crisis only brings opportunity for radical reforms. As WhatIf mentions in a previous post, the ongoing situation in Greece will only help further the fiscal consolidation of the Eurozone. And now the next step along that long road has officially been made. According to this Reuters article,
"If the Greeks aren't able to succeed themselves with... (the austerity measures), then there must be stronger leadership and monitoring from abroad, for example through the EU," added Roesler, chairman of the Free Democrats (FDP) who share power with Chancellor Angela Merkel.
Germany is thus openly asking that Greece give up a token of sovereignity in return for their next bailout. Of course this will certainly not pass this time. But the fact that this radical (some may say outrageous!) step has been suggested and is even considered, very much indicates the future direction of European integration.

Jan 27, 2012

Commodities Super Cycle Reversing Course

According to this Reuters article,
Last year had the lowest commodity inflows of the past nine years, with fresh investments dropping almost 78 percent compared with 2010, Barclays Capital said on Thursday.
Investors in precious metals and energy had a very volatile experience in 2011 and many are wondering if it really is the sure bet that they expected. For example Gold has had a big rollercoaster of a ride and Silver has been even more volatile (see a previous WhatIf post Gold Appears to have Lost its Shine for more details on the metals).

With Beijing trying to rebalance China's economy away from investment and towards consumption, the huge bursts of residential construction and capital investment may be behind us. As we have seen before, construction is unlikely to be picking up anytime soon and if China is headed for a slowdown, demand for most industrial commodities will drop considerably. Barclay's prediction of volumes and prices picking up notwithstanding, it appears that the market has reached a turning point in its 10-year cycle.

Jan 25, 2012

Japan Logs Annual Trade Deficit in Calendar 2011

On the back of bad numbers for Nov (see Japan Nov Trade Deficit Worsens - Usd/Jpy to Turn the Corner Soon) Japan has logged another negative surprise for Dec, as announced on The Ministry of Finance website today. This makes the first annual trade deficit in 30 years. The income earned on foreign exchange reserves will likely partially offset that but there is no doubt that Japan's fiscal and current account position is only getting worse. Once the market starts pricing that in, we would expect an upside breakout of Usd/Jpy with an intermediate target in 85.00 area.

(For more on Japan's fiscal situation see Japan's Budget Mess. This WhatIf post is from about month ago but the analysis is still valid.)

Jan 24, 2012

AUD a New Safe Heaven? Bad Joke

As WhatIf has mentioned earlier, the fundamentals are not looking good for Australia. All the non-resource sectors appear to be stagnating, to a large extent hurt by the strong currency. At the same time material exports, while very strong at the moment, are mostly going to China. And China is slowing down.

There has been some talk in the market / media of the AUD becoming a new safe heaven as one of the very few remaining AAA economies. It's a nice story but clearly not true - a minor hiccup in equities still sends Aud/Usd tumbling. As it should, seeing as Australia's economy is to a large extent just a leveraged, liquid bet on China.

Jan 23, 2012

Greece Talks Restart but Brinkmanship Continues

In line with WhatIf's analysis yesterday, the Greece talks have indeed hit a snag over the weekend. CNBC reports that IIF says creditors at limits of "voluntary" Greek deal. There is nothing surprising there, as Greece's negotiations with the "Troika" have been a never ending game of political brinkmanship. And to be fair to the private creditors, there is no legal justification for the losses (a.k.a. "haircut") they are expected to take, given that the ECB will be repaid in full.

Jan 22, 2012

Greek Talks Break Down

Equity markets and the Euro have rallied hard last week in anticipation of a deal to be reached between Greece and its private creditors during negotiations in Athens. However the negotiators on the creditors' side left Athens on Saturday without an agreement having been announced. It appears that the talks have hit a snag yet again. The Institute of International Finance was quick to deny it but that rings hollow. If Dallara and Lemierre had really planned to leave on Saturday, the reduced time frame should have been taken into account during the talks. Sometimes there is no better confirmation than an official denial!

Jan 19, 2012

Australia's Markets Defying Gravity (For Now)

Today the Aussie employment numbers surprised on the negative side. About 30k jobs were lost in December according to the Australian Bureau of Statistics press release. This compares to a consensus estimate of a net creation of 10k jobs, for a negative surprise of -40k. Both the Aussie stock index and the Aud/Usd fx rate met this with slightly more than a yawn.

The -40k surprise may not seem like a whole lot, but normalized by population size (22mm in Australia vs 310mm in the United States) this would be equivalent to US payrolls disappointing by approx 560k and such news would have completely tanked the SPX!

The Aussie (the currency that is) has been trading in line with global risk sentiment and out of synch with the fundamentals of the local economy. Other currencies have done that in the recent past, most notably the Euro. However when the regime shifts and the market starts pricing in the negative fundamentals the moves can be quite large. We just need to wait for the decoupling.

Jan 18, 2012

Chinese Real Estate in Broad Decline

We have already seen anecdotal evidence of sharp price cuts by property developers eager to move inventory of unsold homes (China's Housing Crash is Gathering Momentum) or sharp drops in the most speculative luxury vacation home market (Property Prices in "China's Hawaii" Down Almost 30%). The market reversal is now spreading with Dec marking the third month in a row of negative average growth of home prices in all of China. Moreover, according to Reuters, prices dropped in 52 out of 70 cities. The situation is far from desperate but can get worse very fast with the government continuing efforts to reduce property speculation, developers losing access to funding and new home sales slowing to a crawl. The real trouble will probably start when prices in all cities start dropping at the same time.

Jan 17, 2012

Mass S&P Downgrade Will Help Further European Fiscal Consolidation

The analysts at S&P love the limelight. The timing of their announcements plus the multiple rumours and leaks (sometimes subsequently denied) seems to indicate so. But putting that aside, the mass downgrade issued on Friday has had a few interesting side-effects. Finally France has had to face the reality that there is only one regional superpower in Europe and it is not them. Also the revision of the outlook on Germany's credit rating from negative to stable has shown that the core is still strong and has probably contributed to the relative strength of the Euro. (As a large exporter Germany is the main beneficiary of the common currency - please refer to The Flip Side of Germany's European Bailouts).

The pundits have been quite negative on the "European experiment" in the aftermath. And admittedly the economic situation in the European Union certainly does not look rosy. But one should not forget that the Euro is first and foremost a political project. It is an attempt to bring a fractious continent together and avoid the political and military mistakes of past centuries. And sometimes the only way to push through painful reforms is when there is simply no alternative. By escalating the European credit crisis, rating agencies will ultimately help Europe on the path to harmonization of fiscal policies.

Jan 16, 2012

Gold No Longer a Hedge Against Currency Debasement

On Friday after the close, S&P issued a credit downgrade on a number of European countries. This had been anticipated ever since they had been placed on credit watch in December. As would be expected, the Euro dropped to a new multi-month low against the USD and stock markets followed. What may not have been fully expected is that Gold also dropped with the news and tracked the US equity market. Gold was supposed to represent a hedge against fiat currencies (read "paper money") and should have spiked when the European situation worsened. Yet this did not happen and it traded like any old investment asset in line with overall risk sentiment. Buy at your own risk. (For more details, refer to Gold Appears to have Lost its Shine and a more recent WhatIf post Technical Bounce in Gold To Present a Selling Opportunity)

Jan 13, 2012

Imminent Greek Exit Positive for the Euro

The drive for ever more "austerity" in Greece is having the opposite results. It is pushing the Greek economy further into recession, reducing tax revenues, worsening the country's fiscal deficit and debt load, and thus only necessitating further belt-tightening. It is a vicious cycle with no way out. Even the IMF has acknowledged that and it is now becoming clear that the only choice is bankruptcy or a Euro exit. An option that was politically inconceivable 6 months ago is currently on the table. (See Greek Euro Exit Weighed By German Lawmakers on Bloomberg.)

From the beginning it has been somewhat ill-defined notions of contagion, exacerbated by forced "voluntary" debt forgiveness that has lead the crisis to spread into Spain and Italy. So much so that even the troubles in non-Eurozone Hungary lead panicked investors to dump EU government bonds and the currency (see previous WhatIf post).

With Greece out, the situation would appear manageable and in retrospect Fitch's warning of "cataclysmic' collapse of the common currency would likely mark the low for the Euro against other G-7 currencies. At the time the panic was running so high that investors were willing to pay to lend their money to safe-haven Germany (see prior WhatIf post on negative German yields). Time is running out for Greece and it will likely reintroduce the drachma, putting an end to this chapter of the Euro crisis and giving a major boost to the Euro.

Jan 11, 2012

Gold Approaching Sell Target of 1650

In a WhatIf post from a week ago we were expecting a bounce in the Gold market with a sell target of around 1650. Spot bullion is now trading at 1635 with daily RSI in the 50's. We are approaching the target and Gold is no longer oversold so it would be appropriate to consider the timing of an entry. Recently the metal has been trading with a positive correlation to equities, and yesterday the S&P500 printed a new multi-month high, so we should wait for a change of sentiment in the equity market before establishing a short in Gold.

Jan 10, 2012

The Price of Credibility or Why Hildebrand Quit

The head of the Swiss National Bank Philipp Hildebrand quit his post over a USD 500,000 currency trade executed by his wife without his knowledge (see Bloomberg article). She sold CHF and bought USD just before the SNB floored the EURCHF rate at 1.20 thus profiting around  USD 50,000. It is quite clear that the trade was executed without his knowledge. Still the ethical question would have remained and could have endangered the central bank's credibility which is its most valuable asset. With credibility weakened, the Euro peg may have come under pressure by speculators and a good policy may have been ruined. The Swiss economy needs the reprieve from a constantly appreciating currency and so the objective was worthwhile. (Incidentally Japan could also benefit from a similar exchange rate regime - for that refer to a previous WhatIf post.)

Jan 9, 2012

Negative Yield on German Bills Indicates Maximum Level of Panic

Today's auction of German 6 month bills resulted in investors paying a negative yield (see Reuters article). Of course this does not make sense logically, but it has happened before - 3m US Treasury bills were in such high demand in the middle of the financial crisis in late 2008 that the winning bids were so high that yields went negative. In both cases investors are afraid to keep their money in the bank in case it goes bankrupt and would rather pay a fraction of a percentage point for the peace of mind. So either the Eurozone is coming to an end sometime very soon or the panic has reached such proportions that a bounce (in the Euro, as well as Eurozone sovereigns) is coming very soon. I would be tempted to bet on the latter.

Jan 6, 2012

China's Housing Crash is Gathering Momentum

While it is nothing new, watching this in real time is really quite instructive. Vanke is the largest mainland property developer and according to Caixin Online:
In the fourth quarter, Vanke's sales in 14 major cities dropped 45 percent by area from a year earlier, while home transactions in smaller cities also slowed down significantly 
The drop in sales of 45% is staggering! At the same time properties are exiting the construction pipeline, increasing inventories and necessitating an aggressive sales approach (read "fire sale"). Developers are already starting to offer deep discounts on new condos. Realtors are also getting desperate - one WhatIf source in Shanghai said agents would position themselves at crossroads and after waiting for the light to turn red, try to pass out leaflets to the drivers of expensive cars.

Hungary Takes the Euro Hostage, But Watch Out for Short Covering

Most people were probably unaware that lawmakers in Hungary had recently re-written its entire constitution. The new so-called Basic Law took effect Jan 1st and now has everyone up in arms. Tens of thousands protested against it in Budapest on Jan 2nd (see Reuters article) and many EU and US leaders have officially expressed concern. The controversial law appears to limit the independence of the judiciary, the media and the central bank. The concern that the central bank will have to do the government's bidding is what caused talks for an IMF bailout to break down last month and is making sovereign default a realistic possibility. The uncertainty has caused a near collapse of the domestic economy, with the Forint dropping to multi-year lows against the Euro and the most recent government bond auction requiring a yield of 2% higher than the one in December and still remaining undersubscribed.

Hungary is not even part of the Eurozone, but that has not stopped the fear of contagion from making investors dump EU government bonds and the Euro itself. The constant string of bad news coming out of the EU has made everyone nervous to the point of selling first and asking questions later - somewhat similar to the way the Asian Crisis of 1997 engulfed good and bad economies alike. This panic has taken EURUSD down to levels last seen in Sep 2010. At the same time the speculative futures positioning on the pair is at an extremely bearish level, so a short covering may be overdue.

Jan 4, 2012

US Sanctions on Iran May Backfire

On Saturday Obama signed the most recent and toughest US sanctions on Iran, effectively shutting out Iran's central bank from transactions denominated in USD (see Reuters article). Their aim is to provide Iran with an incentive to end its nuclear program but has so far only prompted Iran's navy to threaten closing the Strait of Hormuz (through which 40% of world's crude oil is transported). So far nothing out of the ordinary - politics does get boring without a little brinkmanship. What the US probably miscalculated is the internal economic collapse this has caused - Iran's currency has dropped around 30% since the sanctions were announced. This will certainly punish the regime but will also drastically affect the lives of ordinary people and provide further domestic support for the government to play tough with the US. North Korea is a good example against driving an opponent into a condition where he has nothing left to lose. The last thing anyone wants is an Iranian submarine sinking a US warship and potentially taking the conflict to the brink of an all-out war.

Jan 3, 2012

Technical Bounce in Gold To Present a Selling Opportunity

The metal has bounced from a low of 1522 reached in thin trading in the last few days of Dec. The precipitous drop from a Sep high of 1920 had taken it into oversold territory amid anecdotal evidence of large funds reducing positions into year-end. There will undoubtedly be fast money playing the bounce, but should it trade into the 1650 level this would present a good selling opportunity. The fundamentals for Gold continue to be quite negative, with the world's biggest consumer, India logging a 50%+ drop in imports in the third quarter of last year (see Reuters article). The US dollar was the first major currency to suffer from the effects of quantitative easing but will arguably also be the first to recover. Since Gold has been heavily used as a bet on the de-dollarization of the world economy, one of its main investment functions is also waning.

Jan 2, 2012

What if 2012 is the Year of the Samurai?

Forget the dragon, cards may be stacking up for Japan to outperform significantly in 2012. The Nikkei was down 17% in 2011 and in fact after peaking just over 20 years ago it is currently trading at around 20% of that all-time high (true, the component stocks and weights have changed so this is not an exact comparison). In fact for the majority of currently active investors and fund managers simply ignoring Japan has been a very successful strategy for most of their careers.

But lets take a careful look. Japan has a smoothly functioning, possibly overly harmonious, society with amazing infrastructure and a highly educated and motivated labor force. The quick recovery from the recent tsunami and nuclear disaster was no mean feat. When power shortages were looming in the summer, a modest amount of moral suasion by the government was enough for businesses and consumers to reduce consumption and mostly avoid blackouts. Japan, Inc. is alive and well.

And on a global scale the alternatives are disappearing fast. In terms of equities, US is unlikely to do anything spectacular, Europe is probably setting up for a recession, as for the BRICs its definitely time to handle with extreme care. Except for Treasury's, government bonds can be quite painful and even Gold is no longer the safe haven of years past. It is by no means a certainty, but the year of the samurai may be upon us.

Jan 1, 2012

Forget Japan - China Is Still in Treasury's Crosshairs

Much has been said in the popular press about the recent semi-annual Treasury FX report (officially Report to Congress on International Economic and Exchange Rate Policies) and how it has targetted Japan for its unilateral interventions, while again choosing not to label China a currency manipulator. See for example Reuters article. This view is not completely without merit. Indeed, when Japan last intervened in the FX markets in 2004, the Treasury described the actions purely factually without divulging an opinion. Compared to that, the current treatment does seem somewhat negative:
"...the United States did not support these interventions. It is worth noting that these operations took place at a time when foreign exchange market activity and risk aversion were being predominantly influenced by financial developments elsewhere in the global economy that were impacting all of the major currencies." (See full report)
What is important here, however, is that there has been no negative rhetoric out of Washington right after the interventions or immediately before the official publication of the report. Also the language used is still very much benign. In fact, I believe the negative mention of Japan is included to make the report appear as unbiased as possible in order to avoid giving China a chance to complain about its objectivity. And while it was not labeled a currency manipulator for political reasons (as in practice it certainly is) China and not Japan is still the main target for Washington's foreign exchange policy.