US MARKET – TURNING POINT &
GLOOMY PROGNOSIS?
Bearish
volatility dominated global financial markets except the US dollar last week
after Ben Bernanke signaled a possible timeline of quantitative easing if US
economic recovery is sustained. It is a paradigm shift of setting definitively for
the first time a determination to wind-up quantitative easing. Markets seem to
be both fearful and confused - global equities, bond, gold, base metals and to
a lesser extent oil – the entire asset classes virtually took a big hit. Gold
and oil being priced lower in US dollar is understandably reciprocal of its uptrend
direction but not US equities. US bond prices fall as market factored in higher
interest rate forward projecting forward continued recovery of the US economy.
But the contradiction inexplicable is why did US and emerging market equities concurrently
shook violently downwards if Bernanke’s recovery story is bought?
This writer took a peep at the 12-months CBOE
volatility index chart (VIX) as at 21 June 2013 – it shows huge intra-day
volatility on the dates 20 June 2013 and 21 June 2013.
VIX is a
fear index/gauge – one of the financial market tool often used to measure of
its expectation of volatility over the next 30-day period. http://en.wikipedia.org/wiki/VIX Therefore, in theoretical construct,
it could signal a major change of market direction either from bullish to
bearish or the reverse.
And VIX last week hit the 21 level mark - a
repeat of its January 2013 volatility level. That was a turning point which saw
US equities rising strongly on a bull run taking the S & P index (SPX) to
an all-time high within a whisker of 1600 points in late May
.
Only this
time, US equities market heading south, another turning point predicted on the
VIX volatility chart of uncanny parallel? Maybe, I am not interested in the
speculative implication of VIX pointer of risks return paradigm in this
instance. That is strictly for stock market participants on the trading floor
to decide. What I am certainly interested to know is this – did the collective
signals from bearish SPX and extremity of volatility found in VIX indicator
point to flawed frailties of Bernanke’s gamble of last roll of his dice before
he leave office – that is to say the US economy is NOT RECOVERING or will be
failed of its recovery once the quantitative easing tapers off. I am assuming
that current stock prices fully price in and months ahead of changing economic
fundamentals as postulated in (flawed) finance theory. More of this connect or disconnect will be discussed later
– with reference to Weyerhaeuser Inc (WEY), Caterpillar Inc. (CAT) and the last
quarterly reported earnings of top US entities
.
On this
presumption, Bernanke’s conditional optimism, in this interpretation of mine,
is “wrong” – the tapering of Fed Reserve bond buying is fatal of Bernanke’s
Minsky moment. A “Minsky moment” is a sudden
major collapse of asset values which is part of the credit cycle or business
cycle – that is all bull market is inherently unstable. In layman’s term equivalent, one would say
quantitative easing is US economy, minus that, the US economy will tank, maybe
collapse back into recession again and worse than that experienced in 2008/2009
GFC. Is that what the US and global economy is heading to?
WAS THERE A US ECONOMIC RECOVERY?
Part of the
answer to this question needs discovery if there was in fact US economic
recovery. Or was the bullish US equities market rally since last December
simply a product of massive funds inflow flooding in of yet another asset
bubble with risks of extreme volatility and then collapse? Let me look at some
hard data.
First, let us take a close look at US quarterly GDP growth
statistic. https://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm.There is not much of conviction that
of US GDP growth in 2012 that could explain the massive equities rally in the
first two quarters of 2013. US first quarter GDP rose by a downward revised 1.8%
and highlights of that growth as published by the US Bureau of Economic
Analysis (BEA) told of following key contributing factors supporting the
acceleration of growth.https://www.bea.gov/newsreleases/national/gdp/gdphighlights.pdf. BEA spoke of Inventory investment
turned up notably, more than accounting for the acceleration in first-quarter GDP growth….Also, business
investment slowed, reflecting a downturn in structures and a slowdown in
equipment and software. I SEE NO SIGN OF UNDERLYING FUNDAMENTALS supporting the
strong first quarter 2013 growth because it was mainly business inventory re-stocking
(awaiting forward sales) and downturn in business spending (lack of confidence
in business prospect forward).
On those observations, I would suggest that the
equities market rally since year beginning is misguided and out of kilter with
economic fundamentals – US stock market is disconnected with reality in the
market-place. It already turned south late May, BEFORE Bernanke’s “black
Thursday” pronouncement. This seems out of character of prevailing views in
financial press with a fair weight of opinion supporting a view that the
outlook is for improving economic data in the US. One factor, not noted in the
market place is that halting recovery in China and US has always benefited from
uplift of China’s or the Fed’s stimulus actions in various ways but both window
of rescue is shutting down soon. http://finance.yahoo.com/news/ben-beijing-party-comes-end-041132735.html
Constrained
liquidity of access to cheap money is now a new factor of risks in an entirely
different trading environment and stock markets globally are reassessing its
outlook. Much as Bernanke remains positive of an improved US economic outlook, one
must also remember the true fact that Bernanke’s prescription for quantitative
easing tightening timeline is neither categorical nor confident of certainty.
At his news conference outlining an end of its stimulus, Bernanke said….”"If
things are worse, we will do more. If things are better we will do less." http://www.nytimes.com/2013/06/20/business/economy/fed-more-optimistic-about-economy-maintains-bond-buying.html?_r=0#h[] Of course, Bernanke had no idea of
what the serious credit crunch was like in Beijing nor was he privy to the set
of glum economic data emerging in China just prior to the Fed’s decision
following a two-day
meeting of the Fed’s policy-making committee. Both timing and cycle are critical. In this substantial changed external
circumstance, the impact on the economy of the Fed’s own credit cycle
tightening decision will take longer to evaluate. Two of the twelve members
FOMC dissented, including the usually hawkish James Bullard who preferred a
delayed response awaiting clearer inflation signal from a stronger economy
taking hold. Bullard’s dovish stance implies the FOMC decision was premature as
recovery cycle has yet to grow its root.
STRONG ECONOMY, BAD MARKET OR “CLEVER” MARKET, WEAK
ECONOMY?
The deep and
widespread rotational sell-off, both before and post-Fed’s decision, at
stimulus tightening in gold, US bond and equities markets tell me that the
market is BAD. So the unknown in that hypothesis above is whether the US
economy is as strong as the Fed’s optimism suggests. Or is financial market
“clever” of its nervous judgment because the US economy is fundamentally weak –
the fear being that the credit cycle tightening could turn into a rout across
all asset classes after the irrational exuberance of unsupportable bull chase of
risky assets fed on the opium of money-printing liquidity which now is about to
end. It is Ben Bernanke’s Minsky moment? So let me walk you back at my past
forecast, recent statistics, financial news and some anecdotal corroborating
evidences in the market-place.
WEYERHAEUSER, CATERPILLAR & US
CORPORATE SECTOR PERFORMANCE.
Let me walk you all
back to my writings of UPDATE 13 - GLOBAL
ECONOMIES HEADING FOR TURBULENCE, WATCH OUT CHINA – PART II
http://global-economies-outlook.blogspot.sg/2012/09/update-13-global-economies-heading-for_2949.html.
I wrote these thoughts.
“There is
a trickle of signs that the US housing sector is stirring at the bottom but
this author believes it is not conclusive. Warren Buffet has been expressing
optimism on the US housing market for months and it seems he was wrong too,
having plonked $3.85 billion on Residential Capital LLC only to see it filed
for bankruptcy in May 2012. http://www.huffingtonpost.com/2012/06/18/warren-buffett-bets-big-o_n_1606964.html. Clayton Homes, Berkshire Hathaway’s
financier arm to the US residential showed improved results.http://www.marketwatch.com/story/buffetts-clayton-homes-hints-at-housing-recovery-2012-08-03. US
housing starts have been on the uptrend since last October rising to an
adjusted rate of 760,000 in June. http://annapoliswaterfront.blogspot.sg/2012/07/usa-today-reports-housing-starts-in.html But still
way below the 1.5 million mark that economists would regard as normal market
condition. There are some tentative signs of tepid housing “recovery” or at
least some hopeful signs of bottoming from its falling abyss since early 2012.
Dan Fulton, CEO of US second largest timber company, Weyerhaeuser (WY),
reported a spectacular December 2011 qtr earnings, higher revenue than
analysts’ consensus expected and promises of stronger outlook in 2012.http://www.cnbc.com/id/46255972.
Weyerhaeuser sells all kinds of wood-based building materials and a real estate
division to give it a good proxy insight into the US real estate sector before
any other backward-looking national economic data. It is the first hint of
return of consumer confidence. WY
reported an even stronger second qtr with sale turnover up by 11% to $1.79
billion. http://www.marketwatch.com/story/weyerhaeuser-q2-net-soars-on-gain-higher-revenue-2012-07-27?siteid=bigcharts&dist=bigcharts. . Very interesting, Caterpillar’s Form 10-Q SEC filing first
quarter 2012 reported “significantly higher sales volume in
North America across all major products” in its construction
sector. Homebuilder stocks like D.R. Horton (DHI), Pulte Group (PHM),
Lennar (LEN) & Toll Brothers (TOL) rallied one-way up since year beginning
giving further hint that the US housing market continues to heal. Held back by
lower inventories of 144,000 new homes (against May’s 143,000) – the lowest on record
dating back to 1963 - and higher prices, new home sales in June fell to a
seasonally adjusted annual rate of 350,000, according to the latest Commerce
Department data release. http://finance.yahoo.com/news/us-home-sales-fall-350k-140710146.html. First time home buyers now account for only one-third of
home sales compares to about half traditionally. http://www.marketwatch.com/story/fewer-home-buyers-are-first-timers-2012-08-22.
The
vast majority looking for a home already owns a home.”
So what is the key summary of those observations – at
least up to September 2012? The US
housing sector recovery commencing in early 2012 was shallow and tentative. The
Fed was fearful of a stalled economy if housing sector falters again. In
September 2012, the US Federal Reserve further expanded its holdings of
long-term securities via QE3 with an open-ended purchase of $40 billion per
month of mortgage debt in an effort to boost growth and reduce unemployment. The focus was on housing-led recovery
drive. http://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.html. Buying mortgage bond drove down borrowing costs. The lower rates spurred a wave of refinancing and the
stronger pace of home buying lifted house prices
http ://www.nytimes.com/2013/06/20/business/economy/fed-more-optimistic-about-economy-maintains-bond-buying.html?_r=0#h[]. Did that succeeded? It has to be
qualified “yes” at least in the eyes of the FOMC. It sees the “downside
risks to the outlook for the economy and the labor market as having diminished
since the fall.” http://www.federalreserve.gov/newsevents/press/monetary/20130619a.htm And as financial markets start to sniff that the Fed may soon
signal its plans to curtail support (as it did last week), interest rates are
beginning to rise and the big fear is mortgage refinancing may beginning to
wane unraveling the housing sector and the economy.
THE FED’S FAT OPTIMISM?
Investors continued
to be spooked badly by this Fed credit tightening plan – right now it is a
stand-off between Bernanke and financial markets – who will blink first?
Given the observed
realities that financial market does discount ahead of changing fundamentals,
there are signs that the US housing sectors has already backtracked. Let us
look at the one-year chart pattern of
- Weyerhaeuser
( WY)
-
D.R.
Horton (DHI)
-
PulteGroup
(PHM)
-
Lennar
(LEN)
-
Toll
Brothers (TOL)
at http://bigcharts.marketwatch.com It is telling, I have no illusion about this. You
will see that THEY ALL TURNED BEARISH BY END OF MAY 2013 – weeks BEFORE
the FOMC decision of 19 June 2013 on curtailment of quantitative easing. FOMC
statement actually spoke of housing sector “has strengthened further”. Latest May statistics on existing-home sales rose to an annual rate of
5.18 million units, the highest since November 2009, and selling prices were up
15.4 per cent on year prior same period comparison. Part of that bearish about turn since June beginning could
be found on interest rate rise noted in US Treasuries 10-year bond to 2.60% - a
far cry from 1.64% at May beginning not seen since August 2011 and still
rising. http://finance.yahoo.com/echarts?s=%5ETNX+Interactive#symbol=%5Etnx;range=5y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; This rapid
rise in yield, which is used as a benchmark for mortgage rates, is a cause for
concern. Current 30-year mortgage rate is now 4% - the first in the year and
market watchers noted that mortgage refinancing has waned. http://finance.yahoo.com/blogs/daily-ticker/housing-recovery-precarious-says-economist-gary-shilling-111451505.html. As interest rate falls last year, there were a lot
of mortgage refinancing which added to the housing “demand” but as interest
rate rises since last June, that segment of “demand” eased. Mortgage
application is not a reliable proxy estimate of underlying housing recovery. The
lingering suspicion of this writer is that the Fed’s optimism is behind the
curve of capturing the interest rate changes impact and the true fragility of
US housing sector recovery in its outlook assessment. We, for example,
don’t know is the rising demand is the
result of Fed’s own liquidity stimulus through much of 2012 or it carried some
strength on its own momentum of demographic and income effects. The rapidly
rising mortgage rates since June this year have not been given time to work its
dampening effects – a big unknown of a risk factor.
The Fed’s reasonable presumption has
been that gains in housing have helped fuel consumer confidence and underpin
spending. As long as this presumption holds, the US economy is travelling up
the recovery trajectory to permit safe withdrawal of stimulus accommodation
without the risks of expansion backsliding into recession again. But is the
Fed’s right?
Noting
month-to-month fluctuations, new construction of housing in (latest) April hit
a pause to an annual rate of 970,000 units after reaching a 5-year high pace of
1.04 million annual rate of beginning constructions of new home in March 2013.http://www.bloomberg.com/news/2013-05-16/housing-starts-in-u-s-probably-fell-from-almost-five-year-high.html
The May new
home sales jump to a 5-year high to an annual rate of 476,000, the Commerce
Department said. http://www.marketwatch.com/story/new-us-home-sales-jump-to-5-year-high-2013-06-25?link=MW_story_latest_news . Lennar - US third largest builder,
which reported a better-than-expected 2nd qtr earnings of 61c per
share, benefited from land sales and stronger spring order book. It expects “a
solid housing recovery” suggesting that rising mortgage rates have not yet
dampen housing demand. http://www.marketwatch.com/story/tuesdays-movers-lennar-nordstrom-2013-06-25?siteid=bigcharts&dist=bigcharts I am seeing and gladly share a
glimmer of cautious hope.
Economist
& investment adviser Gary Shilling,
however, warns housing rebound is a
“precarious recovery because it is based on rentals. It’s not based on new
homeowners” who “are the basis of any solid rally.” Weyerhaeuser’s wood product division reported
its strongest qtrly earnings since 2005 profited from a “strengthening housing
market” http://investor.weyerhaeuser.com/2013-04-26-Weyerhaeuser-Reports-First-Quarter-Results. WY forecast a flat 2nd
qtr 2013 outlook forward.
In similar
tone, the US Conference Board’s consumer confidence
index jumped to 81.4 in June, the best reading since January 2008 and up from
74.3 in May. http://www.marketwatch.com/story/consumer-confidence-reaches-five-year-high-in-june-2013-06-25?dist=lcountdown. Consumer spending rebounded 0.3%
increase in May after dipping a revised 0.3% decline in April – a long drop
from 2.6% rate gain notched for the
first three months of this year. http://www.reuters.com/article/2013/06/27/us-usa-economy-consumer-idUSBRE95Q0LU20130627
Unemployment
creeping marginally lower, stronger home prices and stocks surging higher,
consumer balance sheet certainly looks better now even if it is a long way from
pre-GFC levels. Sustained consumer spending is now more income growth dependent
rather than debt binge – and for this reason, I surmise, more sensitive to
growing interest rate impact on mortgage exposure.
US MANUFACTURING SLUGGISH, HOUSING
GAINING TRACTION BUT GLOBAL GROWTH BACKSLIDING
What about
the corporate sector? It is lagging. Manufacturing side which has been a
valuable driver of the 4-year-old recovery has been stumbling of late. The
Chicago-area June PMI manufacturing reading fell to 51.6 from 58.7 in May – a
steep fall. http://www.marketwatch.com/story/chicago-pmi-cools-in-june-to-below-forecast-level-2013-06-28 US labor Department statistic
revealed that manufacturing employment declined for three consecutive months –
a clear hint that the upturn of sustained and BROADER economic activity may
still be some time away. http://online.wsj.com/article/SB10001424127887324188604578545101834427298.html
Caterpillar Inc, for example, has not performed. In its 1 qtr 2013
earnings release and forecast, globally, Caterpillar saw conditions within the
global mining sector have deteriorated substantially noting a 17% fall in
revenue base and 45% earnings decline as compared to same qtr 2012. But in the
US, CAT said they are encouraged and “are becoming more optimistic on the
housing sector in particular”. http://www.caterpillar.com/cda/files/4390080/7/1Q13%20Caterpillar%20Inc.%20Results.pdf Demand
for mining equipment has fallen sharply as mines scale back on investments in
equipment in response to falling commodities prices – a clear sign of
backsliding of global growth and subdued outlook. The bigger risks are external
market conditions than US seemingly healing domestic sector. In fact,
the revised US GDP figure showed U.S. exports actually fell 1.1% in the first
quarter instead of rising 0.8%. And imports show a 0.4% drop and not a 1.9%
gain originally estimated in the first qtr. These statistics reflected a
weakened state of global economy. http://www.marketwatch.com/story/us-growth-in-first-quarter-downgraded-2013-06-26?dist=lcountdown. The
mirror reflection of that can be seen across top US corporate 1st
Qtr 2013. Revenue at 25 out of 30 largest listed entities comprising the Dow
Jones Industrial index were sputtering in the 1st qtr 2013 compared
to same period the year before. http://blogs.marketwatch.com/thetell/2013/05/03/caterpillar-leads-declines-in-q1-revenue-for-dow-components/.
Despite this stock markets continue
to trade at record highs at least till end May. US stock market enthusiasm
belied the reality of inventory cycle re-balancing rather than strong
underlying corporate performance. Hence unemployment remains stubbornly high
and falling in manufacturing. Weyerhaeuser, Caterpillar and component stocks in
the Dow Jones Industrial Index are good proxy measure of the state of US
housing sector and thus its narrowly housing-based economic recovery. Until May
2013, it looks like a strong US equities market, weak struggling economy. With
the steep correction in June, it now looks more like “clever” US stock market,
weak economy except for a more promising housing sector
.
BERNANKE UNSURE & CHINA REMAINS A
WORRYING ENIGMA
Neither
Bernanke nor Marc Faber believes that this Fed tapering off is a sure one-way
bet. As Faber pointed out correctly, the US 10-year Treasury bond bottomed out
in July 2012 has been uptrend since. Faber is betting on gold, not S& P 500
or any other commodities. http://blogs.marketwatch.com/thetell/2013/06/21/marc-faber-more-sp-downside-commodities-horrible-except-gold/ Global economy is not benign,
particularly, the asset bubble risks in China remain a daunting major worry.
The Chinese economy has slowed a lot as businesses are strapped for cash
despite massive liquidity influx – leaving the obvious to ask of where has all
those stimulus money gone to? There is huge gap separating the pace of credit
growth and GDP growth - how come so much money circulating and no economic
activity generated? One possibility is a lot of money might have flowed into
property speculation and zombie debtors in shadow banking. Systemic risks in
Chinese shadow banking is rising – nobody know who is the borrower, lender and
quality of collateral asset and the true extent of floating non-performing
loan. One view holds that interest payment consumes at least 9% of the credit;
the balance went into maturing principal redemption. There is little NEW
productive investment or enterprise. http://www.businessinsider.com/is-china-facing-a-minsky-moment-2013-6. That could partly explain why the
central bank, is tightening its purse and central government is playing
hardball forcing business to restructure and curbing the growth, inefficient,
unregulated indiscipline in the vast expanse of shadow banking. http://money.cnn.com/2013/06/25/news/economy/china-shadow-banking/index.html?hpt=hp_bn1. Chinese banks are State-owned, so
they won’t be all allowed to fail but subsequent easing by the PBOC to relieve
the liquidity crunch faced by banks is modest and conditional upon lending
discipline. The fear is a nightmarish run on the banks by depositors catching
the PBOC inadequately prepared. A soft landing exercise could turn unexpectedly
into a harder landing though not necessarily a hard landing. http://www.smh.com.au/business/chinas-banks-tread-fine-line-in-chase-for-growth-20130628-2p2r0.html.
China is undergoing a difficult
balancing shift in monetary policy away from the ineffectual stimulus yet
engineering sufficient liquidity to boost economic growth in favor of slower
sustainable pathway since early 2012. A number of banks – including Barclays, Credit
Suisse, Goldman Sachs, HSBC, Bank of America-Merrill Lynch and Credit
Agricole — have recently downgraded
their China’s GDP forecasts to as low as 6% instead of Beijing’s
targeted 7.5% GDP growth for 2013. http://blogs.marketwatch.com/thetell/2013/06/26/think-7-growth-in-china-is-slow-try-6-says-credit-suisse/.
Tight money policy also explains, perhaps, why
the nexus between surging commodity prices across the board and China’s metal
demands has been broken. It is NO LONGER the commodity-intensive rampant growth
story but more selective now – import volume of iron ore used in steel-making
is still growing but prices weaker. Copper and nickel are (use in manufacturing
and housing) weaker than steel and zinc (use in infrastructure). http://www.mineweb.com/mineweb/content/en/mineweb-political-economy?oid=195792&sn=Detail CHINA REMAINS A WORRYING ENIGMA and
falling manufacturing PMI is putting policy-makers in Beijing under enormous
pressure.
MONETARY POLICY IS NOT A THERMOSTAT
SWITCH BUT MORE LIKE A MELTDOWN NUCLEAR REACTOR IN CRISIS
Financial
market’s negative hostility to the Fed’s retreat from continued monetary stimulus
speaks little of the Fed’s ambivalent confidence and the risks efficacy in the
use of monetary policy in managing macro-economic aggregates. Like all central
banks, the Fed is more focus on employment goals than inflation and would
tolerate some inflation (even desirable) to incentivize growth. This is exactly
what the Fed said… “partly reflecting transitory influences,
inflation has been running below the Committee's longer-run objective…” As long
as unemployment falls and growth is takes a firmer hold, the Fed has room to
timely optimizing the tightening its quantitative easing as long-term
inflationary pressure is well within target range. I am inclined to suspect
that in current climate, this macro-economic model is flawed, even
dysfunctional. Why?
If the monetary
economic model works, why the persistent need the stimulus spending in the last
4 years? My instinctive fear is economy has been sustained solely by
quantitative stimulus – stripped naked of this stimulus, the economy will melt
down. Secondly, the systemic toxic contagion of prolonged addiction to QE is
uncontainable or at least very difficult to manage – whilst the repeated doses
of quantitative easing at nearly zero interest rate did prevented the US
economy from stalling, the massive costs of fiscal imbalance shown up in the
form of risk assets bubbling, capital asset misallocations into speculative
activity, not real economy to reduce unemployment, and accumulation of public
debt liability seen in huge explosion of the Fed’s balance sheet will undermine
and endanger the recovery path hoped for. There is continuing future funding
costs attached to this escalation of fiscal indebtedness.
Monetarist economists live in the fiction of financial stimulus as if it
is a thermostat that can be adjusted up and down at will of economic lever as
central banks so desire. It is flawed thinking. In times of economic instability
and tepid uneven growth, like now, central banks, globally, will find it harder
and harder to restore fiscal balance in the same way as a nuclear power plant
can be restored to stable safe operation once the meltdown commences. It may
find that it has to switch off, for some moment or permanently, its reactor
resulting in the oxygen of energy supply to keep its electricity generation in
support of economic activity either imperiled or even denied. That is why Ben
Bernanke emphasized….”
however, that the timing of the retreat depends on the health of the economy;
if growth falters, the central bank would slow, or even reverse, the process….”
Bernanke may find that it is much harder
to correct a mistake of a Minsky moment than for the Fed to print more money or
to continuing to tolerate financial institutions’ keyboard printing of more
credit typically to hedge funds’ toxic speculating in commodities, bond and
equities market. Hence, we are witnessing extreme volatility across the entire
asset classes and, in increasing turbulent fear, hot money seems to flow into
the safe refuge of the mighty US dollar. China in this opium-like dependency on
financial stimulus is also facing the risks of sudden crunch of economic
activity from strangulation of cash access in its banking sector. For the PBOC
– China’s Central Bank - to indiscriminately supply more cash, it would allow
itself to play hostage to ever thirsty demands for cash from shadow banking
interests. As Vasu Menon from OCBC correctly told Bloomberg news – “China has
to downsize its shadow banking”. http://www.smh.com.au/business/markets-live/markets-live-asx-near-2013-lows-20130624-2orew.html#ixzz2X64bOmKP This could stall or derail
its own structural economic reform agenda, and further escalating its real
estate asset bubbles. China has to shut this financial stimulus life support of
its economy which is increasingly ineffective and inefficient – the same way
Ben Bernanke confronts now as much of EU.
CRUNCH TIME NOW
If
Bernanke’s magic wand of withdrawing US economic dependency on QE doesn’t work,
and US again slip into a recession, the climb back WILL BE HARDER – the Fed and
central banks globally would have weakened and exhausted of resources, energy
and vision. So what are the risks factors of vulnerabilities?
“As “smartie “ Tharman
Shanmugaratnum, Singapore’s DPM said, correctly – “ there is a particular
over-reliance on monetary policy in the advanced economies, and a lack of
progress on both the fiscal and structural reforms to get us out of the
problem” – Fiscal & Structural reforms a priority, says Tharman, page 4,
Business Times, May 21 -2013. In a few words – the world has NOT solves its
structural macro-economic imbalances. This will not change in the near future –
the hard road, pains and more turbulence are still ahead.” http://www.tremeritus.com/2013/06/17/gold-greed-fear-or-what-else-part-iii/. Unspoken officially as it is, the
Singapore Government must very worry of its asset bubbles in our real estate
sector – if China implodes despite the US economic recovery gaining some
traction. The Monetary Authority of Singapore has, yet again, set new tighter
rules on bank lending to property purchases. http://www.channelnewsasia.com/news/singapore/mas-sets-new-home-loan/727950.html. Singapore’s household debt stood at
about 279% of our GDP in the first quarter of this year – any asset deflation,
particularly property, would have grave consequences for both domestic banking
and households.
Mr. Wang Shi, Chairman, China Vanke -
the largest residential property developer in China – warned again that mainland's property market faces the risk of a
"bubble", reiterating concerns raised three months ago. http://www.scmp.com/business/china-business/article/1255011/china-vanke-chair-wang-shi-again-warns-china-housing-bubble He said…"If the bubble lasts, it will be
dangerous." And if “not controlled,
the results will be catastrophic”. He is in the business and likely to be in
the know despite what Jim O’Neill said of no liquidity crunch in China posing
not risks to the stability of Chinese economy. http://www.cnbc.com/id/100841076 "The
notion that there's a genuine liquidity crunch is crazy. China's biggest
underlying macroeconomic dilemma is that they save too much. If they wanted to
bring rates down to zero they could do it in five seconds," said O'Neill.
But if China pump up its money supply to uncontrolled zero costs, what would
happen to the property bubble that Mr. Wang Shi warned of catastrophic result
again? Even without the looming risks of property bubble risks in China, there
are other strong emerging headwinds.
Bond yields
going too far and too fast
Bond yield surged too fast – the 10 year Treasury bond jumped more than 100 basis
points in just two months touching 2.6%. http://www.cnbc.com/id/100852546 The
reason is that central banks are said to have sold record sums of US government
debt last week. The rapid surge suggests strong upward momentum, interest rate
is likely to move higher threatening steep escalation of mortgage rates and US
housing recovery. Nomura warned that US yield spike could unravel the relative
calm and stability in EU zone as funds flow out in search for higher yields. http://business.financialpost.com/2013/06/24/high-bond-yields-flash-warning-of-fresh-financial-crisis/. A weaker Euro relative to the
dollar must mean higher inflation in EU. As growth falters or fall back into a
recession, the debt loads on public finance and unemployment in precarious EU
economies must rise, putting pressures on the ECB for renewed financial
support.
Emerging
economies hard hit by liquidity outflow, slowing China
China’s forecast slowdown and the scaling back of Fed bond
purchasing program will undermine growth in emerging economies notably in India
and Brazil leading to slower global growth in consequence. HSBC has trimmed its
2013 global growth forecast to 2 percent. The adversity of slow growth or worst
still recession will be magnified by the common observations that globally
wages have been generally stagnating but inflation and asset inflation wealth
cultivation have largely by-passed the middle class. Global economies have
squandered opportunity in the last 4 years to restructure their economies to
higher productivity, greater flexibility, pursued structural reforms and
increased spending on technology to create new dynamism to spur real growth and
cut unemployment. It was still the same old resource consumption economy of
lazy speculation in commodities and property assets fueled by cheap money
inflow even in dynamic economies of east Asia. Well that has gone, Asian and
emerging economies in recent weeks saw huge outflow of funds, commodity prices
sinking as well as stronger US dollar causing most currencies in emerging
economics to depreciate worsening their inflation. IT SEEMS THAT EVERYBODY IS
GETTING OUT OF INVESTMENT from commodities to high quality corporate and
sovereign bonds to equities AND PARKING THEIR MONEY IN US DOLLAR NOW. There is
precious so little confidence in Bernanke, judging from the strong negative
reactions that financial market responded to Bernanke’s timeline cutback of
quantitative easing till now. IMF is already cautious of the budget cuts being
too soon, depressing 2013 GDP growth to 1.9% forecast compared to 2012 actual
of 2.2% growth. http://www.usatoday.com/story/money/business/2013/06/14/imf-forecast-us-economy/2422903/ The forward pullback of quantitative
easing will be an additional growth restraining factor.
If Ben Bernanke failed of his monetary experiment of QEs and
now its withdrawal, we are heading for the big unknowns of what else could evolve
from this point except that most would be most likely negative in the short
term. Yes, watch out China and the pace of bond yield escalation in the US. In
this worrying highly volatile outlook, taking on any significant debt load is
fearful to me. I have nothing to celebrate, hope the rest of you do – come what
may.
Zhen He
29 June 2013
