Mish & Max Keiser, Economic & Political Predictions for 2012

December 29, 2011 · Posted in Global Economics · Comment

Here are Mish’s predictions for 2012:

Severe European Recession as the sovereign debt crisis escalates: Austerity measures in Italy, Greece, Spain, and Portugal plunges all of Europe into a major recession. Spain and Portugal will follow Greece into an outright depression.

Political Crisis in Europe: French President Sarkozy loses to socialist challenger Francois Hollande. German Chancellor Angela Merkel’s coalition collapses. The Merkozy agreement is either modified to do virtually nothing or is not ratified at all. This chain of events will not be good for European equities or European bonds.

Relatively Minor US Economic Recession: The US will not avoid a recession in 2012. Retail spending ran its course with the tail-off into Christmas of 2011. The Republican Congress has little incentive for fiscal stimulus measures in 2012 so do not expect any. However, with housing already limping along the bottom in terms of construction and investment (not prices), a US GDP decline will not be severe. The US may see a recession even if GDP barely drops. Certainly the US recession will be far less severe than the recession in Europe and Australia.

Major Profit Recession in US: Profit margins in the US will be torn to shreds as businesses will be unable to reduce costs the same way they did in 2008 and 2009 (by shedding massive numbers of employees).

Global Equity Prices Under Huge Pressure: Don’t expect the same degree of reverse decoupling of US equities we saw in 2011. The US economy will be better than Europe, but equities globally will take a hit, including the US. Simply put, stocks are not cheap.

Fiscal Crisis in Japan Comes to Forefront: Japan’s fiscal crisis and debt to the tune of 200+% of GDP finally matters. The crisis in Japan will start out as a whimper not a bang, but will worsen as the year wears on. If Japan responds by monetizing debt, not a remote possibility at all, Japanese equities will massively outperform in nominal and perhaps even in real terms. “Real” means “yen-adjusted”, not “inflation-adjusted” terms.

Few Hiding Spots Other than the US Dollar: US treasuries and German bonds were safe havens in 2011, but with yields already depressed don’t expect huge gains. Expect to see a strengthening of the US dollar across the board against all major currencies. Moreover, cash (one the most despised asset classes ever), may outperform nearly everything, even if the dollar goes virtually nowhere. Hiding places will be few and far between for much of 2012.

US Public Union Pension Plans Under Attack: States finally realize the need to rein in pension plans much to the dismay of public unions. Social and economic tensions in the US rise.

Regime Change in China has Major Ramifications: China will start a major shift from a growth model dependent on housing and infrastructure to a consumer-driven model. The transition will not be smooth. Property prices in China will collapse and commodity prices will remain under pressure.

Hyperinflation Calls Once Again Will Look Laughable: Unless there is a major disruption in the Mideast (which I do not rule out by any means), oil prices will drop and food prices will follow. If so, we will once again see silly talk from the Fed about preventing “unwelcome drops in inflation”. As always, the deflation key is not prices at all but rather credit and credit marked-to-market. Expect credit in all forms to come under attack and expect junk bonds take a hit as well. By the way, regardless of what happens to oil prices, hyperinflation calls will look silly.

As always, out of all the experts out there, Mish’s predictions are probably the ones I would pay most attention to.

Tags: 2012 predictions, china, europe, gold, mike shedlock, mish

Chinese Government Determined to Let Housing Prices Fall

December 15, 2011 · Posted in General Economics · Comment

China’s massive real estate bust has only just begun to unravel.

In light of that, it’s interesting to see the Chinese leadership take the exact opposite view to the US government’s regarding housing prices:

China’s leaders affirmed they will stick next year with a campaign to bring down property prices even as a “very grim” global outlook threatens growth in the second-largest economy.

The nation will target “basically stable” consumer prices and “unswervingly” implement real-estate curbs, according to a statement after an annual economic planning meeting in Beijing. At the same time, officials will seek “steady and relatively fast growth,” Xinhua News Agency said.

Premier Wen Jiabao’s officials may limit the scale of monetary and fiscal easing to support growth as officials grapple with elevated house prices and local-government debt burdens after record lending in 2009 and 2010. So far, the government has cut banks’ reserve requirements, while leaving interest-rates unchanged at a three-year high.

I don’t think I’ve heard a single US politician in any position of power even hint at the idea that maybe it’s not only desirable but necessary for home prices to come down in order for any meaningful recovery to begin.

The respect for concept prices as a steering and balancing indicator for entrepreneurs and capitalists in an economic system is one of the most basic pillars for understanding the economics of voluntary action, that is free market capitalism.

It’s a bit misleading for the Chinese leadership to say they are going to “bring down” property prices. Property prices are going to come down no matter what they do, the question is just how fast.

It’s possible the the Chinese have learned from the recent attempts of the US and European governments to support or stimulate housing prices and the not so recent ones next door in Japan, and figured if prices are going to come down anyway why not take credit for falling prices and even make it look like it’s them making this happen deliberately?

Tags: china, china housing bust, china property bubble, housing, real estate china

China Housing Bust – Prices in Ordos Fall by 62.5 Percent

November 25, 2011 · Posted in Global Economics · Comment

From China Financial Daily:

Living in the edge of the Ordos storm , Ordos was beset with a different version of real estate lending Wenzhou panic . For example, local ” Jinxin Han Lin Yuan ” project , its second-hand house prices are around 10,000 yuan, while the market price now only is 3750 yuan.

Tags: china, china housing bust, china property bubble, chinese bubble, chinese economy

Gordon Chang: Chinese Government Collapse is Imminent

November 19, 2011 · Posted in Global Economics · Comment

Tags: china, chinese economy, chinese government collapse

Credit & Money Supply in the USA and China

November 19, 2011 · Posted in Global Economics · Comment

As explained before, inflation and deflation within a certain territory are defined as increase and decrease of the total volume of money plus credit in that territory.

Total Credit Volume

Probably the best approximation on the development of total credit outstanding in the US is the Federal Reserve’s so called Flow of Funds report’s data series “Total Credit Market Debt Owed“.

The long term series shows us the historical relevance of 2008’s credit event:

As I predicted before, I believe that the US has reached peak credit in 2009 and is now on a long term path of credit contraction. I would consider the 2010 bump an anomaly, one that was brought about and fueled by massive and unprecedented government stimulus and bailout programs, and a general yet tentative mood of things potentially looking up again.

As I also predicted, it will be those stimulus and bailout programs that will be aggravating the agony and sluggishness, and prolonging the duration of this necessary correction:

Neither is there any need to be surprised about the fact that all countermeasures taken by the government will turn out to be utter failures that will accomplish nothing but aggravate the crisis. For if the cause of the problem has been too much government intervention, then more government intervention will only add to it.

Zooming in, we can see that as of Q2 2011 (the latest quarter available in the data series) it looks like all these countermeasures have run out of steam and total credit has begun contracting again, from around $52,650 billion to around $52,550 billion, a contraction of roughly $100 billion:

Money Supply

I have recently come to realize, mostly based upon this article that the Treasury’s Supplementary Financing Program really seems to be nothing but another sort of checking account that the federal government holds at the Fed, in particular it is actual spendable money, not just a reserve balance that would still need to be loaned out in order to become spendable money. And as you can see, the Treasury does spend the money, since it obviously regularly draws upon that account, to the point where now the balance on there is zero again. Thus I will from now on include it when adding up the different components to come up with theTrue Money Supply.

Based on that we can see that the true money supply is currently at $2,592 billion, and that so far its been able to maintain its growth through 2010 and 2011 for the most part:

The growth rate is currently at around 6.19% and has been recovering from a low 1.28% around April:

During the period from Q1 to Q2 2011, which is the one we observed credit growth for above it has risen from $2,417 to $2,458, so by about $41 billion, which is less than the volume of credit contraction. And since then through now the money supply has roughly risen by another $140 billion (we’ll have to wait for the Q3 Flow of Funds report to see by how much this may or may not have been counteracted via credit contraction).

Overall it seems as though it is still a pretty close call between inflation and deflation, with inflation having certainly been the dominating force during 2010 and maybe also 2011, but slowly coming to a halt as credit expansion seems to have come to an end at this point.

We’ll have to wait and see what the next few months bring.

Money Supply in China

M1 in in China has most recently begun to fall:

The growth rate has now slowed to around 10%, coming closer to that in the US:

Money supply in China is slowing most likely as a result of contracting credit as a correction from prior government stimulus malinvestments.

As I said before, the Chinese housing bust is underway, the Chinese economy is headed for a severe recession, and that’s what the slowdown in the money supply growth rate may very well be indicating at this point.

Tags: china, credit, money supply, US

Chinese Property Owners Smash Showroom in Protest over Falling Prices; The Chinese Housing Bust is Underway

October 29, 2011 · Posted in Global Economics · 1 Comment

Disgruntled over falling prices, Chinese property owners smashed a showroom:

A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.

Property ownsers protest in China

That’s 25% overnight, mind you!

MarketWatch notes that the bubble has begun to burst:

Take a look at the Chinese situation. The bubble has been as big as any we’ve seen.
(…)
Ten years ago, homes in Shanghai sold for about six times an average family’s income. Today that’s 13 times. Shenzhen has gone from five times to 14 times. These are off-the-charts absurd ratios. This is a bona fide mania.

And it works fine until the music stops.

Where are we now?

Prices have started falling. Now, fewer than 46 of 70 major cities saw prices stall or decline in September, reports the National Statistical Bureau. As recently as January the number was just 10.

And the FT writes China property developer warns on price falls:

A 30 per cent drop in property prices would precipitate a collapse in fixed investment in China and the country’s investment-driven economy would experience a so-called hard landing after years of annual growth above 9 per cent, according to UBS economist Wang Tao.

There will be no magic cure for China’s housing, stock, and credit bubbles. Prepare for a hard landing in China and thus a hard landing in stocks and commodity prices (except gold) …

Tags: china, china property bubble, housing in china, real estate china

Young girl gets hit by truck in China; nobody cares …

October 21, 2011 · Posted in Global Economics · Comment

Tags: china

Chinese Economy “Teetering On the Edge”

September 27, 2011 · Posted in Global Economics · 2 Comments

From Bloomberg, On the Move in Asia:

Some posts I wrote before on China:

Rally in Chinese Stocks – Time to Kiss it Goodbye and Cash Out:

The truth is: There is no decoupling. The Chinese economic miracle is a mirage, a very popular one to be sure. If it is China the world is banking on to lead a recovery, then the world is royally screwed.

By the way, the Shanghai Composite index has fallen from around 3000 when I wrote that post to around 2390 now, a 20+% drop.

China’s Bubble Produces Empty (!!!) City:

China’s growth is a mirage, its bubble a monstrous one, its impending crash completely inevitable.

China will not be immune to this global slowdown, in fact it may be leading it.

Update: Another important post I wrote about the macro environment in China, in particular money supply:

The Chinese money supply figure that is closest to my True Money Supply in the US is M1 as reported by the People’s Bank of China:

The money supply in China has easily tripled over the past 6 years.

And here is a comparison between the money supply growth rates in the US and China:

Money supply and credit supply have both been exploding in China, while money supply in the US has rather stagnated or at least grown a lot slower alongside contracting credit.

This is the main reason why I don’t think that the Yuan will remain strong against the US dollar for very long, and it is also why I don’t think the Chinese bubble can continue for much longer, but then … bubble often times last a lot longer than you’d expect.

The only way how the Yuan can maybe remain strong against the US$ for a sustained period of time, in my view, is if the PBC tries to cheapen the Dollar by selling reserves against Yuan, which in turn would exert an upward pressure toward exports from the US into China while having the adverse effect on Chinese exports, and thus hurt China’s politically powerful export lobby.

However, such a policy, too, would find its natural boundaries in the amount of Dollar reserves accumulated by the PBC.

Tags: china, chinese economy

China Manufacturing Slows Further; Australia GDP Drops by Most in 20 Years; US Manufacturing Slows

June 1, 2011 · Posted in Global Economics · Comment

To follow up on what I wrote in March China’s slowdown continues:

HONG KONG (MarketWatch) — China’s manufacturing activity expanded in May at its weakest pace in three quarters, as the economy faced headwinds of high inflation and government efforts to rein in prices, according to rival surveys of companies released Wednesday.

One line caught my eye immediately:

However, analysts said Wednesday that the weaker growth implied in the PMIs isn’t likely to sway the government from its current policy direction, with Credit Suisse analysts saying that “Beijing is fine to see a softening in growth.”

… and a softening in growth is what Beijing is gonna get.

On an obviously related note Australian economy sees sharpest contraction since 1991:

Australia has reported its biggest quarterly fall in gross domestic product (GDP) in 20 years.

Its economy contracted by 1.2% in the first three months of the year compared with the previous quarter, the latest government figures showed.

The government said flooding and cyclones in the resource rich states of Queensland and Western Australia had a significant impact on growth.

Australia’s economy is heavily reliant on exporting its natural resources.

“The economy has hit a temporary pothole courtesy of the natural disasters this year,” said Besa Deda of St George Bank.

Ah yes, the weather. I’m sure the global and in particular the Asian slowdown has NOTHING to do with it ;)

Growth figures are being revised down in the US:

… and Chicago manufacturing gauge nosedives:

A Chicago-area manufacturing gauge dropped by the largest amount in nearly two-and-half years in May, in a further sign that the rise in oil prices and the Japanese earthquake have affected activity.

The Chicago PMI fell to a reading of 56.6% in May, the lowest reading since Nov. 2009, from 67.6% in April.

While that reading is still significantly above the 50-line indicating growth, the eleven-point drop is the biggest one-month deceleration since Oct. 2008 and was worst than the 60% reading that economists polled by MarketWatch anticipated.

Indexes for production, new orders and order backlogs each dropped by double digits. Inventories jumped, which in this case is more likely an indication of unplanned gains due to a lack of sales than stocking up in anticipation of better times ahead.

Say Hi to the global slowdown and a double dip recession in the making …

Tags: australia, china, global slowdown, us manufacturing

Chinese Production Engine Begins to Stutter; Surprise Trade Deficit Reported

March 10, 2011 · Posted in Global Economics · 4 Comments

Bloomberg writes China Reports Surprise Trade Deficit as Export Growth Slumps:

China reported an unexpected $7.3 billion trade deficit, the biggest in seven years, buttressing the government’s case against U.S. arguments for faster gains in the yuan.

Exports rose 2.4 percent in February from a year before, the least since 2009 as Lunar New Year holidays disrupted shipments, and imports climbed 19.4 percent, customs bureau data showed today. Central bank adviser Li Daokui said that the full- year trade surplus will shrink from the 2010 level.

Yuan forwards dropped after today’s release as investors pared bets on the appreciation of China’s currency against the dollar. Premier Wen Jiabao aims to spark domestic demand and reduce the role of exports in the economy through wage increases, rather than the exchange-rate gains sought by the Obama administration.

The plot thickens. China’s unsustainable government credit/inflation induced distortions of market forces cannot be stretched much further it seems.

Faber may have been spot on with his predictions about China crashing within 9-12 months.

This is the development I also expected in terms of what could potentially precede a Yuan crash, which it contrary to what virtually the whole world is expecting right now.

As I said in 2009 already (albeit prematurely, granted)

The truth is: There is no decoupling. The Chinese economic miracle is a mirage, a very popular one to be sure. If it is China the world is banking on to lead a recovery, then the world is royally screwed.

It’s been papered over so far. It can’t be papered over forever.

Everyone is in love with the Chinese story. Everyone has huge expectations of China. Nobody considers the possibility that their politicians might be making the same mistakes ours’ are making.

Such an imbalance between expectations and reality usually ends badly.

May those who don’t know any better make it through the impending hangover …

Tags: china, china growth, inflation china