A new Chinese export — recession risk

Martin Wolf

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©David Sparshott
 
 
Is a global economic recession likely? If so, what might trigger it? Willem Buiter, Citi’s chief economist and the Financial Times’ erstwhile Maverecon blogger, answers these questions:

Yes” and “China”. His case is plausible. This does not mean we must expect a recession. But people should see such a scenario as plausible.
 
Mr Buiter does not expect world output to decline. The notion here is a “growth recession”, a period of growth well below the potential rate of about 3 per cent. One might imagine 2 per cent or less. Mr Buiter estimates the likelihood of such an outcome at 40 per cent.

His scenario would start with China. Like many others, he believes China’s growth is overstated by official statistics and may be as low as 4 per cent. This is plausible, if not universally accepted.
 
It might become even worse. First, an investment share of 46 per cent of gross domestic product would be excessive in an economy growing 7 per cent, let alone one growing at 4 per cent.
 
Second, a huge expansion of debt, often of doubtful quality, has accompanied this excessive investment. Yet merely sustaining investment at these levels would require far more borrowing.
 
Finally, central government, alone possessed of a strong balance sheet, might be reluctant to offset a slowdown in investment, while the shares of households in national income and consumption in GDP are too low to do so.
 
Suppose, then, that investment shrank drastically as demand and balance-sheet constraints bit.

What might be the effects on the world economy?
 
One channel would be a decline in imports of capital goods. Since about a third of global investment (at market prices) occurs inside China, the impact could be large. Japan, South Korea and Germany would be adversely affected.

A more important channel is commodity trade. Commodity prices have fallen, but are still far from low by historical standards (see chart). Even with prices where they are, commodity exporters are suffering. Among them are countries like Australia, Brazil, Canada, the Gulf States, Kazakhstan, Russia and Venezuela. Meanwhile, net commodity importers, such as India and most European countries, are gaining.

Shocks to trade interact with finance. Many adversely affected companies are highly indebted.

The resulting financial stresses force cutbacks in borrowing and spending upon them, directly weakening economies. Changes in financial conditions exacerbate such pressures. Among the most important are movements in interest and exchange rates and shifts in the perceived soundness of borrowers, including sovereigns. Changes in capital flows and risk premia and shifts in the policies of important central banks exacerbate the stresses. At present, the most important shift would be a decision by the US Federal Reserve to raise interest rates.

As Warren Buffett said: “You only find out who is swimming naked when the tide goes out.” According to the Bank of International Settlements, credit to non-bank borrowers outside the US totalled $9.6tn at the end of March. A strong dollar makes any currency mismatches costly.
 
These may start on the balance sheets of non-financial corporations. But the impact will be transmitted via their losses to banks and governments. Thus, reversal of “carry trades”, funded by cheap borrowing, might wreak havoc.
 
A visible shift is a decline in foreign exchange reserves, driven by deteriorating terms of trade, capital flight and withdrawal of previous capital inflows. This might cause “quantitative tightening”, as central banks sell holdings of longer-dated safe bonds. This is one of the ways that these shocks might be transmitted to the high-income countries, including even the US. But this also depends on what the holders of the withdrawn funds do with it and on the policies of affected central banks.
 
What we might see, then, is a series of real and financial linkages: declining investment and output in China; weaknesses in economies dependent on that country’s purchases or on prices set by its buying; and reversals of carry trades and shifts in exchange rates and risk premia that stress balance sheets.

How might policymakers respond? China will surely let its currency fall rather than continue to lose reserves, not least because usable reserves are smaller than headline numbers, which include infrastructure investments in Africa and elsewhere that cannot quickly be sold. The policy space of other emerging economies is greater than in the past, but not unlimited. They will be forced to adjust to these shocks rather than resist them.

Meanwhile, the policy choices of high-income countries are restricted: politics has almost universally ruled out fiscal expansion; the intervention rates of central banks are near zero; and, in many high-income economies, private leverage is still quite high. If the slowdown were modest, nothing much might be done. The best response to a big slowdown might be “helicopter money”, created by the central bank to stimulate spending. But its use seems quite unlikely.

The conventional rules.

In brief, a global growth-recession scenario “made in China” is perfectly plausible. If it were to happen, a decision by the Fed to tighten now would come to look downright foolish. We are not talking about the sort of disaster that accompanies a global financial crisis. But the world economy will remain vulnerable to adversity until China has completed its transition to a more balanced pattern of growth, and the high-income economies have recovered from their crises.

That is still far away.

sábado, septiembre 19, 2015

FED LAB EXPERIMENTS COULD FAIL / DAVE´S DAILY

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 Fed Lab Experiments Could Fail

0
 
 
 lightning animated GIF

The hangover from yesterday’s Fed announcement and news conference was a dud. The FOMC is seeing its Keynesian experiments possibly fail as we’re now in the stretch run of the experiment which is the exit to interest rate normalization.

Even though the FOMC did nothing Thursday, bulls either are having a hissy-fit about future policy normalization or bears are convinced Yellen & Company has lost their collective credibility.

After Thursday’s “sell the news” price drop, Friday saw much more selling as quadwitching elevated action into the negative close.

As markets tried and failed to put three positive days together it only means charts from a technical perspective get messy destroying would be trends. However, we believe since markets closed August with a break of the monthly 12 period Moving Averages generally this means the 7 year rally is over.

The ownership of this 7 year market action exclusively lies with Fed experiments.
 
There’s little to add, the markets doing all the talking.

Let’s see what happens.



9-18-2015 5-54-26 PM

There wasn’t much news this day beyond another decline in Leading Indicators which dropped to 0.1% vs 0.2% expected.

Markets opened weak and stayed there throughout the trading day staying near their lows.

Market sectors moving higher included: Volatility (VIX), Treasury Bonds (TLT), Gold (GLD), Gold Stocks (GDX), Silver (SLV) and the Dollar (UUP).

Market sectors moving lower included: Everything else.

The top ETF daily market movers by percentage change in volume whether rising or falling is available daily.

Volume was heavy once again on more distribution and breadth per the WSJ was negative while Money Flow basically reversed the prior week’s gains.

9-17-2015 6-14-53 PM
9-18-2015 3-16-03 PM YTD



Charts of the Day


  • SPY 5 MINUTE

    SPY  5  MINUTE


  • SPX DAILY

    SPX DAILY

  • SPX WEEKLY

    SPX WEEKLY

  • INDU DAILY

    INDU DAILY

  • INDU WEEKLY

    INDU WEEKLY

  • RUT WEEKLY

    RUT WEEKLY

  • NDX WEEKLY

    NDX WEEKLY

  • AAPL WEEKLY

    AAPL WEEKLY

  • XLB WEEKLY

    XLB WEEKLY

  • XLE WEEKLY

    XLE WEEKLY

  • XLF WEEKLY

    XLF WEEKLY

  • XLI WEEKLY

    XLI WEEKLY

  • XLP WEEKLY

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  • XLY WEEKLY

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  • XRT WEEKLY

    XRT WEEKLY

  • IYT WEEKLY

    IYT  WEEKLY

  • XLU WEEKLY

    XLU WEEKLY

  • IYR WEEKLY

    IYR WEEKLY

  • ITB WEEKLY

    ITB WEEKLY

  • HYG WEEKLY

    HYG WEEKLY

  • TLT WEEKLY

    TLT WEEKLY

  • UUP WEEKLY

    UUP WEEKLY

  • FXE WEEKLY

    FXE WEEKLY

  • GLD MONTHLY

    GLD MONTHLY

  • GDX MONTHLY

    GDX  MONTHLY

  • SLV MONTHLY

    SLV MONTHLY

  • DBB MONTHLY

    DBB MONTHLY

  • USO MONTHLY

    USO MONTHLY

  • DBB MONTHLY

    DBB MONTHLY

  • EFA WEEKLY

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  • IEV WEEKLY

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  • EEM WEEKLY

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  • EWZ MONTHLY

    EWZ MONTHLY

  • RSX WEEKLY

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  • EPI WEEKLY

    EPI WEEKLY

  • FXI WEEKLY

    FXI WEEKLY

  • NYMO DAILY

    NYMO  DAILY
    The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

  • NYSI DAILY

    NYSI DAILY
    The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

  • VIX WEEKLY

    VIX WEEKLY
    The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.


 
 
 



Emerging-Market Currencies: It’s Not Just About the Fed

The Fed is in focus for emerging currencies, but China, commodities and domestic problems are increasingly weighing on performance too.

By Richard Barley

Federal Reserve Building in Washington, U.S. The Fed is in focus for emerging currencies. Photo: Samuel Corum/Anadolu Agency/Getty Images


Emerging-market currencies have dealt investors an unhappy hand as focus on a U.S. interest-rate increase has built. The Brazilian real has fallen more than 30% against the dollar this year; the Turkish lira hit a record low this week; the Malaysian ringgit is down 17%.

But the U.S. Federal Reserve isn't the only risk investors have to contend with: commodities, Chinese growth and domestic vulnerabilities are in the mix. A Fed rate increase might reduce uncertainty, one component of the emerging-market selloff; a pause might also offer temporary relief for battered investors. Either way, it won’t be universal.

True, the roots of the pain in emerging foreign-exchange markets lie with the Fed. The so-called taper tantrum of 2013 first raised concerns about countries that were over-reliant on loose global monetary policy. The Turkish lira fell 17% that year, for instance. But the slide has continued since then, and so is far from a new phenomenon.

Yet a full-blown crisis hasn’t emerged, unlike in previous periods of dollar appreciation. One reason: the pressure has instead been borne by investors in local-currency assets, which have become a bigger source of financing for emerging nations. Fitch says that of the $1 trillion in sovereign external debt added by rated nations between 2008 and 2014, half represents cross-border borrowing in local currencies.

Now, while the Fed is in the spotlight, the picture is actually more complicated. The emerging-market growth engine, with China at its heart, has flagged, hitting commodities prices and producers. The meltdown in oil turned the Russian ruble from being a currency that remained stable when the taper tantrum hit into one of the worst performers: since mid-2014 it has halved in value against the dollar.

And there are home-grown problems as well. The Brazilian real’s latest decline, to its weakest since 2002, followed a downgrade to “junk” status by Standard & Poor’s due to the country’s fiscal and political challenges as it struggles with a sharp economic downturn. Turkey too faces political turmoil. Russia failed to capitalize on a period of relative stability to diversify its economy away from oil.

Even if uncertainty around the Fed’s intentions lifts, in particular if it were to signal a very cautious approach to raising rates, emerging-market currencies look set for only temporary relief. Those with fewer domestic problems should fare better, particularly since revulsion for emerging-market assets has reached high levels. The Mexican peso, for instance, may offer opportunity, says BlueBay Asset Management. Société Générale SCGLY 1.11 % ’s asset allocators favor the Polish zloty and Hungarian forint against the South African rand and Turkish lira, as the European growth outlook is brighter.

But for countries with domestic troubles or exposed to a slowdown in China, foreign-exchange woes likely won’t fade quickly. While weaker exchange rates can act as a safety valve, they also threaten to import inflation and damage companies that have borrowed heavily in dollars.

Unless these countries take action, U.S. rate increases could only raise the pressure.