China slowdown

Today's numbers show an unexpected trade deficit of $1.6bn for Indonesia, and the HSBC PMI for India is showing a contraction. Ships are queued up off Singapore, and the A$ (traded by many as a proxy for China because of Australia's huge exports of raw materials) is falling as the central bank is forced to cut rates to prop up the economy.

Yet somehow China is still supposed to be serenely cruising along at 7.5+% growth for now and all eternity.

Hmmmmmm....  Something is rotten in the State of Denmark.....  Or whatever the quote is.

KEEP CALM AND STAY LONG BONDS

Much is being made of recent sell-offs in government bond markets across the world. With the exception of Japan, which is a disaster waiting to happen as i have mentioned before, I would suggest there is no reason to panic.

It seems the fear started with comments from the Fed, firstly via Bernanke and then from the Fed minutes suggesting that it may be time to start planning to scale back the $85bn a  month in bond purchases currently being undertaken. Not end the purchases, but scale back. It would appear many market participants had assumed this was never going to happen. How could they be so stupid? It has to happen at some point, and when it does it is a GOOD sign, as it means the Fed finally judges that the US economy is able to stand on its own feet without the need for constant support. I think however, that the markets reactions over the past 10 days or so show that we are nowhere near that point. The Fed will not want to come out and comment or act on the current gyrations if it can avoid it, and will presumably hope to simply let the current wobble in sentiment fade away, but if necessary they will either talk or act to calm markets and restore order. They need a significant drop in unemployment before there is any move to end QE, and that doesn't look likely to happen in a hurry.

The spillover into other markets looks even stranger. The US is the only economy with enough internal demand and trade to stand alone and stop QE. The UK can't without recovery in Europe, and the Europe haven't even started true QE yet, let alone be close to stopping it.

And for anyone who thinks China and Asia are going to lead a recovery, here is a photo from this morning of the ships in the holding pattern off Singapore's East Coast (not sure how well a panorama photo will work on a blog - hopefully you can click it to see more detail). Lots of ships is a bad sign. These are ships that have unloaded a cargo but have not taken anything new on and are simply waiting for a job. Many of these ships  have been here for weeks waiting for somewhere to go. Trade is stagnant.

Rates are going nowhere for a long time. Stay long. If you can, get longer.

China, and a statistical rant

Makes a change from Japan, though I'm not sure this is going to be much more cheery. 

HSBC's purchasing manager index for China came in sub 50 and somehow people are surprised. I have no idea why. All anyone has to do is look at the number of ships sitting in Asian ports waiting for a cargo to see world trade is on it's knees. 

The problem with all these bank and academic economists is they all sit in offices staring at flashing numbers on screens which are almost always backward looking - last months retail sales, inflation, export and import volumes etc ( also these numbers are released by government departments which often have a very obvious reason to make them flattering, making the numbers questionable at best). 

They should look out of the window once in a while and trust the evidence of their eyes. 

Japan yet again

Today's FT main article makes scary reading. According to the BoJs own calculations a 100bp rise in long term government bond yields would lead to mark to market losses of 20% of capital for regional banks and 10% of capital for major banks. Those are huge numbers, and JGB yields have already backed up 30-40bp since QE35 (or whatever the number is - I've lost count) started. 

Losses like that would totally hobble the financial system and create a huge credit crunch as banks simply stop lending to preserve capital. 

But as I pointed out earlier, JGBs have to be a sell. If the BoJ is set on creating inflation of 2% within 2 years then why would you hold on to a bond paying less than 1%?

And all the time the population continues to age and shrink, and there is no sign of a move to let immigrants in to at least try to arrest the demographic collapse.

Damned if they do, damned if they don't....

I hope I'm wrong but I just can't see how this ends well. 

Japan again....

Seems I'm not alone in my Japan views - from today's FT online -

Kyle Bass bets on full-blown Japan crisis

He makes the argument with much more technical detail than I did but the gist is the same - Sell JGBs - the demographics and the numbers are against them. 

Japan

Abenomics - the ultimate death or glory shot. If it comes off they might just squeak enough growth out of the economy to get their debt under control. Might. If not, then they're totally screwed, with a debt load that is totally unserviceable. Having said that of course, that's the way they're going anyway so this is just going to speed the journey up if that is indeed where they end up.

I have a huge fear the end is going to be messy. The current growth is certainly great news, but I think it's a flash in the pan caused by the sudden devaluation of the Yen. They're starting from too weak a debt position to be able to overcome the problems of structural inertia, terrible demographics and innate Japanese conservatism.

One thought for the investors out there, whichever way it goes, JGBs are a huge sell. 

Success = inflation = rising rates = sell JGBs. 

Failure = bankruptcy and/or hyperinflation = sell JGBs.

Light at the end of the tunnel?

Could there be light at the end of the tunnel? There are commentators talking it up (no one dates mention green shoots yet but it can't be far off) but I'm still suspicious of this burst of optimism, even if it is only cautious optimism at the moment. My imperfect indicators tell me world trade is not on fire - the ships have never been more plentiful off the coast here and that's a bad sign - a parked ship is a ship with nowhere to go and nothing to deliver. I do think e are getting close to the bottom in the UK and US where aggressive early moves to crystallise bad debts and get them off the books are finally bearing fruit, but Europe is still a mess, India is in trouble and Asia, with the exception of debt fuelled Japan, is at best ticking over.

Which brings me neatly to Japan....